UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period ended: March 31, 2006
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[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from____________ to____________
Commission file number 0-50714
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Western Plains Energy, L.L.C.
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(Exact name of registrant as specified in its charter)
Kansas 48-1247506
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3022 County Road 18, Oakley, Kansas 67748
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(Address of principal executive offices)
(785) 672-8810
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(Issuer's telephone number)
N/A
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(Former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [] .
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and "large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [] Accelerated filer [] Non-accelerated filer [X].
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [] No[X].
As of May 15, 2006, 2,286 Class A Capital Units, 1,744 Class B Capital Units and
50 Class C Capital Units of the registrant were outstanding.
WESTERN PLAINS ENERGY, L.L.C.
Index
Page
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Part I - FINANCIAL INFORMATION
Item 1. Condensed Balance Sheets at March 31, 2006 (unaudited)
and September 30, 2005 1
Condensed Statements of Operations and Comprehensive Income
for the three and six months ended March 31, 2006 and
2005 (unaudited) 3
Condensed Statements of Cash Flow for the six months ended
March 31, 2006 and 2005 (unaudited) 4
Notes to Condensed Financial Statements (unaudited) 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Item 4. Controls and Procedures 15
Part II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits 16
SIGNATURES 17
References in this report to agreements to which Western Plains Energy, L.L.C.
is a party and the definition of certain terms from those agreements are not
necessarily complete and are qualified by reference to the agreements. Readers
should refer to the Company's Annual Report on Form 10-KSB for the fiscal year
ended September 30, 2005 and the exhibits listed therein.
PART I - FINANCIAL INFORMATION
Item 1.
WESTERN PLAINS ENERGY, L.L.C.
CONDENSED BALANCE SHEETS
March 31, September 30,
2006 2005
------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $ 1,726,400 $ 1,245,903
Accounts receivable 5,574,685 3,590,867
Accounts receivable - government subsidies 64,460 490,872
Inventory 1,899,564 1,514,260
Prepaid expense 182,664 32,390
Available-for-sale securities 526,643 319,967
------------ ------------
Total current assets 9,974,416 7,194,259
------------ ------------
PROPERTY AND EQUIPMENT
Land 701,872 605,872
Land improvements 679,743 660,280
Manufacturing equipment 38,174,455 37,808,670
Buildings 1,429,128 1,399,943
Vehicles & portable equipment 284,977 182,158
Office equipment, furniture, fixtures 152,721 211,629
Grain handling and other equipment 108,359 141,382
Spare parts 131,036 41,988
Construction-in-progress -- 180,000
------------ ------------
41,662,290 41,231,922
Less: Accumulated depreciation (13,029,230) (10,278,090)
------------ ------------
28,633,060 30,953,832
------------ ------------
OTHER ASSETS
Investment in Industrial Development
Revenue Bonds 32,000,000 32,000,000
Loan origination fees, net 280,925 297,779
Financing fees, net 184,083 187,449
Deposits 97,834 97,834
------------ ------------
32,562,842 32,583,062
------------ ------------
TOTAL ASSETS $ 71,170,318 $ 70,731,153
============ ============
The accompanying notes are an integral part of
these financial statements.
1
WESTERN PLAINS ENERGY, L.L.C.
CONDENSED BALANCE SHEETS
(continued)
March 31, September 30,
2006 2005
------------ ------------
(Unaudited)
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,241,646 $ 1,178,574
Accrued interest 710 6,058
Accrued expenses and liabilities 824,082 792,588
Current portion of long term debt 1,725,000 1,701,000
------------ ------------
Total current liabilities 3,791,438 3,678,220
------------ ------------
LONG TERM DEBT 1,454,000 4,480,000
------------ ------------
LEASE OBLIGATION 32,000,000 32,000,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
MEMBERS' EQUITY
Class A Capital Units, 2,286 issued 10,910,140 10,910,140
Class B Capital Units, 1,744 issued 8,640,895 8,640,895
Class C Capital Units, 50 issued 250,000 250,000
Membership distributions (19,216,800) (8,608,800)
Accumulated comprehensive income (loss) 485,563 (31,812)
Retained earnings 32,855,082 19,412,510
------------ ------------
Total members' equity 33,924,880 30,572,933
------------ ------------
TOTAL LIABILITIES AND MEMBERS' EQUITY $ 71,170,318 $ 70,731,153
============ ============
The accompanying notes are an integral part of
these financial statements.
2
WESTERN PLAINS ENERGY, L.L.C.
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2006 AND 2005
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
---------------------------- -----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
REVENUE $ 22,383,201 $ 15,368,438 $ 43,272,637 $ 29,342,177
COST OF SALES 12,732,351 9,549,370 26,029,331 20,127,029
------------ ------------ ------------ ------------
GROSS PROFIT 9,650,850 5,819,068 17,243,306 9,215,148
------------ ------------ ------------ ------------
EXPENSES
General and administrative expenses 475,013 432,539 879,529 955,800
Depreciation expense 1,412,568 1,506,780 2,810,505 3,231,470
Amortization expense 10,110 10,112 20,220 18,046
------------ ------------ ------------ ------------
Total expenses 1,897,691 1,949,431 3,710,254 4,205,316
------------ ------------ ------------ ------------
Income from operations 7,753,159 3,869,637 13,533,052 5,009,832
------------ ------------ ------------ ------------
Other income (expense)
Interest expense (88,085) (282,040) (196,662) (525,611)
Interest from Industrial Development Revenue Bonds 280,000 280,000 560,000 560,000
Plant lease expense (280,000) (280,000) (560,000) (560,000)
Grants and subsidies 85,878 128,892 205,382 1,227,539
Interest income 16,903 4,699 41,522 8,513
Other income (expense) (44,004) 9,995 (140,722) 60,621
------------ ------------ ------------ ------------
Total other income (expense) (29,308) (138,454) (90,480) 771,062
------------ ------------ ------------ ------------
NET INCOME 7,723,851 3,731,183 13,442,572 5,780,894
Other comprehensive income (loss)
Unrealized gain (loss) on grain hedging contracts 140,000 (14,825) 517,375 (13,413)
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME $ 7,863,851 $ 3,716,358 $ 13,959,947 $ 5,767,482
============ ============ ============ ============
NET COMPREHENSIVE INCOME PER UNIT
BASIC AND DILUTED $ 1,927.41 $ 910.87 $ 3421.56 $ 1,413.60
============ ============ ============ ============
WEIGHTED AVERAGE UNITS OUTSTANDING
BASIC AND DILUTED 4,080 4,080 4,080 4,080
============ ============ ============ ============
The accompanying notes are an integral part of
these financial statements.
3
WESTERN PLAINS ENERGY, L.L.C.
CONDENSED STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED MARCH 31, 2006 AND 2005
(UNAUDITED)
2006 2005
------------ ------------
OPERATING ACTIVITIES
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 14,727,541 $ 11,724,302
------------ ------------
INVESTING ACTIVITIES
Purchase of property, plant and equipment (430,368) (4,342,977)
(Purchase) Liquidation of available for
sale securities, net (206,676) 82,742
------------ ------------
NET CASH (USED IN) INVESTING ACTIVITIES (637,044) (4,260,235)
------------ ------------
FINANCING ACTIVITIES
Payments on notes payable (3,002,000) (1,830,434)
Member distributions (10,608,000) (2,856,000)
Proceeds from notes payable -- 687,500
------------ ------------
NET CASH (USED IN) FINANCING ACTIVITIES (13,610,000) (3,998,934)
------------ ------------
NET INCREASE IN CASH 480,497 3,465,133
CASH - BEGINNING OF PERIOD 1,245,903 3,243,020
CASH - END OF PERIOD $ 1,726,400 $ 6,708,153
============ ============
The accompanying notes are an integral part of
these financial statements.
4
WESTERN PLAINS ENERGY, LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
(1) Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles (GAAP) for interim financial
information and Article 10 of Regulation S-X. They do not include all of the
information and footnotes required by GAAP for complete financial statements. In
the opinion of management, all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation have been included.
The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the full year. For further
information, refer to the audited financial statements of the Company as of
September 30, 2005 including notes thereto included in the Company's Form
10-KSB.
Certain amounts from the March 31, 2005 financial statements have been
reclassified to conform to current period presentation.
(2) Inventory
Inventory is stated at the lower of cost, determined on a first in, first out
basis, or market value. Inventory consists principally of raw material,
work-in-process and finished goods.
Raw materials $ 521,726
Work-in-process 676,787
Finished goods 701,051
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$1,899,564
(3) Investments
Commodities trading accounts - futures and options contracts
We attempt to minimize the effects of changes in the price of agricultural
commodities by using exchange-traded futures and options contracts to minimize
net positions in these contracts. We account for changes in market value on
exchange-traded futures and option contracts at exchange values and account for
changes in value of forward purchase and sales contracts at local market prices
determined by grain terminals in the area where our plant is located. Changes
in the market value of all these contracts are recognized in operations as a
component of cost of revenues. During the period ended March 31, 2006, the
Company charged $857,091 to operations relating to margin calls in grain and
energy futures contracts which are included in the cost of sales. The unrealized
gains in open contracts of $517,375 are included as comprehensive income at
March 31, 2006.
(4) Sale/Leaseback Transaction
On October 3, 2003, the Company completed an industrial revenue bond financing
with Gove County, Kansas that will provide property tax savings for 10 years on
the plant site. The principal amount of the bonds is $32,000,000. The Company,
as holder of the industrial revenue bonds, is due interest at 3.5% per annum
with interest payable semi-annually on March 1st and September 1st. This
interest income is directly offset by the lease payments on the plant. The
Company and Gove County have agreed to waive the payment of both the lease
5
WESTERN PLAINS ENERGY, LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
payments and the interest income amounts since they offset; they are recorded
however for accounting purposes. Both the bond and the corresponding lease have
terms of 30 years. The lease qualifies as a capital lease. Interest income
recognized on the Industrial Revenue Bonds for the six month period ended March
31, 2006 was $560,000. This amount is equal to the lease expense of the plant.
(5) Related Party Transactions
During the period ended March 31, 2006, ICM, Inc., the general contractor for
the plant and an entity controlled by a former member of the board of managers,
submitted pay applications totaling $303,581 in connection with replacement of
the burner for the dryer unit, parts and repairs of the ethanol plant, and
premium for a safety and loss program. During the same period, ICM received
payments relating to these items of $302,237.
(6) Distribution to Members
During the period ended March 31, 2006, the Company made cash distributions to
its members aggregating $10,608,000 in accordance with the terms of its
Operating Agreement.
(7) Land Acquisition
On December 22, 2005, the Company purchased for $96,000, 80 acres of land
adjacent to land currently owned by it which included 95 acre feet water rights
and assumption of a railroad lease with Union Pacific Railroad. The terms of the
purchase agreement were $24,000 down and three equal annual payments of $24,000
payable January 2006, 2007, and 2008 with interest accruing at the rate of 6%
per annum commencing January 31, 2006. The down payment of $24,000 was paid
December 22, 2005, and the first installment of $24,000 was paid January 26,
2006.
(8) Financing
On March 27, 2006, AgCountry Farm Credit Services and the Company executed the
third amendment to the Credit Agreement dated July 29, 2003. The following
modifications were made:
1. To suspend all "additional payments" as defined in Section 2.10 of the
Credit Agreement dated July 29, 2003 which required quarterly payments
equal to 40% of the Free Cash Flow, as that term is defined in the
Credit Agreement, for said quarter not to exceed $2 million, until
further notice by lender.
2. To allow for pre-approved dividends up to 75% of net income with
distributions up to 100% of net income when the borrower maintains a
defined leverage ratio of .60/1 and defined working capital exceeds
$5,000,000.
6
WESTERN PLAINS ENERGY, LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
In addition to these modifications, the interest rate on the term loan was
reduced to an index of LIBOR plus 3.75% effective April 1, 2006
(9) Commitments
Effective March 27, 2006, the Company entered into an employment contract with
its new General Manager, Steven R. McNinch ("Employment Agreement"). The
Employment Agreement provides for payment of annual salary to Mr. McNinch in the
amount of $120,000 and certain other benefits, including a moving allowance. If
the Employment Agreement is terminated without "cause" as defined therein, Mr.
McNinch is entitled to severance pay equal to three months salary. The
Employment Agreement continues until February 21, 2007, unless sooner terminated
in accordance with its terms.
(10) Subsequent Events
The Company declared and paid a dividend to members of $1,400 per outstanding
membership unit for a total of $5,712,000 in April 2006, based on the Company's
performance during the second fiscal quarter. In May 2006, the Company made a
voluntary additional principal payment of $3,120,000 on the term loan with
AgCountry Farm Credit Services.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
Introduction
The following narrative describes the financial condition of Western Plains
Energy, L.L.C. ("we", "our" or the "Company") at March 31, 2006 and compares it
to our financial condition at fiscal year end September 30, 2005. It also
discusses our results of operations for the three and six month periods ended
March 31, 2006 and compares those results to the comparable periods ended March
31, 2005. This discussion and analysis should be read in conjunction with the
information contained in our annual report on Form 10-KSB for the fiscal year
ended September 30, 2005, including the audited financial statements and notes
included therein.
In view of the operating results reported in our annual report, we no
longer qualify as a "small business issuer" for purposes of reporting with the
Securities and Exchange Commission. Effective with the last quarterly report
filed for the fiscal quarter ended December 31, 2005, we began reporting on Form
10-Q.
Results of Operations
Overview. The following table highlights certain of our operating results
for the three and six month periods ended March 31, 2006 and 2005:
Three months ended Six months ended
March 31, March 31,
------------------------- -------------------------
2006 2005 2006 2005
------------ ---------- ----------- -----------
Revenue................................... $ 22,383,201 $15,368,438 $43,272,637 $29,342,177
Income from operations................. 7,753,159 3,869,637 13,533,052 5,009,832
Other income (expense)................. (29,308) (138,454) (90,480) 771,062
Net income........................ 7,723,851 3,731,183 13,442,572 5,780,894
Comprehensive income...................... 7,863,851 3,716,358 13,959,947 5,767,482
Net comprehensive income per unit......... $ 1,927 $ 911 $ 3,422 $ 1,414
Our operating results improved significantly for the second quarter of
fiscal 2006 compared to the second quarter of fiscal 2005 as well as for the six
months ended March 31, 2006 compared to the six months ended March 31, 2005,
primarily as a result of favorable ethanol prices prevailing during fiscal 2006.
For the three months ended March 31, 2006, we reported net income of $7,723,851
on revenue of $22,383,201 as compared to net income of $3,731,183 on revenue of
$15,368,438 for the same period in fiscal 2005. Gross profit for the three
months ended March 31, 2006 was $9,650,850, compared to $5,819,068 for the same
period in fiscal 2005. Gross profit was 43.1% of revenue for the three months
ended March 31, 2006, as compared to 37.9% for the same period in fiscal 2005.
For the six months ended March 31, 2006, we reported net income of
$13,442,572 on revenue of $43,272,637 as compared to net income of $5,780,894 on
revenue of $29,342,177 for the same period in fiscal 2005. The gross profit for
the six months ended March 31, 2006 was $17,243,306 compared to $9,215,148 for
the same period in fiscal 2005. Gross profit was 39.8% for the six months ended
March 31, 2006, compared to 31.4% for the same period in fiscal 2005.
8
Net income. Net income for the three months ended March 31, 2006 increased
$3,992,668 or 107% from the comparable period of fiscal 2005. Net income for the
six months ended March 31, 2006 increased $7,661,678 or 133% from the comparable
period of fiscal 2005. We attribute this increase to the following factors:
o An increased price per gallon received for ethanol of 19.3% for the
first quarter and 28.4% for the second quarter of fiscal 2006 as
compared to the first two quarters of fiscal 2005;
o Favorable grain prices during the first and second quarters of fiscal
2006;
o Increased production capacity resulting from our plant expansion
during calendar 2005 and the addition of a new boiler during the
second quarter of fiscal 2006; and
o A reduction in expenses during the first six months of fiscal 2006.
Due to a number of factors, discussed in further detail below, ethanol prices
continued to increase during our second quarter of 2006. As a result, both
operating income and net income for the second quarter of fiscal 2006 increased
dramatically from the comparable period of fiscal 2005.
Revenue. Revenue for the three months ended March 31, 2006 increased 45.6%
from the comparable period of fiscal 2005. This increase is attributable to an
increase in production commensurate with our plant expansion and higher market
prices for ethanol. We sold 21.4% more ethanol in the second quarter of 2006
than the comparable period of 2005. The remainder of the increase in revenue is
attributable to an increase in the price of ethanol and an increase in sales of
distillers grains.
Revenue for the six months ended March 31, 2006 increased 47.5% as compared
to fiscal 2005. This increase is attributable to an increase in production
commensurate with our plant expansion and higher market prices for ethanol. We
sold 26.4% more for the six month period ended March 31, 2006 than the
comparable period of 2005. The remainder of the increase in revenue is
attributable to an increase in the price of ethanol and an increase in sales of
distillers grains.
Our plant expansion was placed on line in the second quarter of fiscal
2005. Accordingly, we will be unable to make a meaningful comparison of
year-over-year revenue results until the third quarter of this fiscal year, when
our production capacity will be generally consistent.
We continued to enjoy very favorable ethanol prices during the second
quarter of fiscal 2006. The average price that we received for our ethanol rose
24% in the second quarter and 22% for the six months ended March 31, 2006 as
compared to the same periods last year. We believe the favorable prices result
from higher gasoline prices, an increase in demand for ethanol resulting from
the replacement of methyl tertiary butyl ether ("MTBE") with ethanol as a
gasoline additive and other voluntary blending, and the growing recognition of
ethanol as an alternative energy source. Based on these favorable market
conditions, we expect ethanol pricing to remain strong through the end of our
fiscal year. Historically, we, like other ethanol producers, have experienced a
decline in ethanol prices during the spring and summer months, when mandatory
blending ceases. Based on existing market conditions, however, we do not expect
to experience as significant a decrease during calendar 2006 as we experienced
in prior years. There can be no assurance that the price of ethanol will not
significantly decrease due to factors beyond our control.
In order to take advantage of what we perceive to be favorable ethanol
prices which existed in the winter and spring of 2006, we have pre-sold a
significant portion of our anticipated ethanol production for the balance of the
fiscal year. Historically, we have sold our ethanol at a combination of spot and
forward sales prices based on what we perceive to be prospective market
conditions. For the remainder of fiscal 2006, we have weighted sales more toward
9
forward sales. Based on forward sales and forward purchases of grain, and
barring any unforeseen interruption in production or delivery, we expect our
results of operations for the remainder of the year to be generally consistent
with our results for the second quarter of fiscal 2006.
Cost of Goods Sold. Our cost of goods sold as a percentage of revenue for
the three months ended March 31, 2006 totaled 56.9%. This compares to cost of
goods sold during the same period of fiscal 2005 of 62.1%.
Our cost of goods sold as a percentage of revenue for the six months ended
March 31, 2006 totaled 60.1% compared to cost of goods sold during the same
period of fiscal 2005 of 68.6%.
The decrease in cost of goods sold as a percentage of revenue during the
first two quarters of fiscal 2006 is attributable to the following factors:
o Grain prices for the first six months of fiscal 2006 were 4.2% lower
than the first six months of fiscal 2005; and
o Realized losses from grain hedging activities for the first six months
of fiscal 2006 totaled $411,261 as compared to $1,115,827 for fiscal
2005.
Our grain contracts through the end of fiscal 2006 will reflect approximately an
18% increase in cost as compared to the average grain cost at March 31, 2006.
This increase in cost is primarily due to a decrease in anticipated corn
planting in 2006 as compared to 2005.
Our contract for natural gas for the first six months of fiscal 2006 was
roughly double what it was for 2005 due to storm-related price increases and
seasonal demand. However, with the impact of Hurricane Katrina on U.S. gas
production mitigating with the passage of time, as well as the seasonal increase
in climatic temperature, natural gas prices have fallen in the second quarter of
fiscal 2006. This, coupled with our hedging strategies, makes us more optimistic
for the foreseeable future about the price of natural gas. During the first
quarter of fiscal 2006, natural gas (net of hedging activities) represented
approximately 20.5% of our cost of goods sold as compared to 10.5% for fiscal
2005. In the second quarter of fiscal 2006, this ratio declined slightly to
18.2% as compared to 12.8% for the second quarter of fiscal 2005. Energy hedge
losses realized for the three and six month periods ended March 31, 2006 were
$316,150 and $445,830, respectively, as compared to realized gains of $8,620 and
$434,578 for the same periods of fiscal 2005.
General and Administrative Expenses. General and administrative expenses
increased 9.8% for the second quarter of fiscal 2006 compared to second quarter
of fiscal 2005 while decreasing 8% for the six months ended March 31, 2006 from
the comparable period of fiscal 2005. The net decrease for the six months is
attributable to a decrease in insurance costs, office supplies and bank fees.
Bank fees were reduced by $65,225, insurance costs decreased by $53,270 and
office supplies decreased by $20,527.
Depreciation. Depreciation during the three month period ended March 31,
2006 decreased 6.3%, from the comparable periods of fiscal 2005, reflecting the
results of a cost segregation study on assets. Total depreciation expense for
the three month period decreased 2.7% from comparable period of fiscal 2005.
Depreciation during the six months ended March 31, 2006 decreased 10.0% from
comparable periods of fiscal 2005, reflecting the results of a cost segregation
study on assets. Overall, total depreciation expense for the six month period
decreased 11.8%, from the comparable periods of fiscal 2005. As a result of this
study, a greater portion of our assets have been assigned longer lives for
depreciation purposes than previously estimated.
10
Other Income (Expense). Total other expense decreased by $109,146 for the
three month period ended March 31, 2006 compared to the same period of fiscal
2005. Total other income decreased by $861,542 for the six month period ended
March 31, 2006 compared to the six month period ended March 31, 2005, which
resulted in net other expenses of $90,480 for the period. The information below
summarizes the significant increases (decreases) in items of other income and
expense for the three and six month periods ending March 31, 2006 as compared to
the same periods ending March 31, 2005:
Increase (Decrease) for
the Periods Ended March 31,
2006 Compared to March 31, 2005
------------------------------
3 Months 6 Months
------------ -------------
Income from grants and subsidies........ $ (43,014) $ (1,022,157)
Interest Income......................... 12,204 33,009
Interest Expense........................ (193,955) (328,949)
Other Expense........................... 53,999 201,343
The most significant impact on other income or expense for the six month
period ended March 31, 2006 was the decrease in grants and subsidies from
programs such as the federal bioenergy program, which provides incentive
payments for increased production of ethanol. We believe the decrease in
payments during fiscal 2006, as compared to 2005, is due to the smaller
incremental increase in our production this fiscal year as compared to the prior
year. We believe the decrease in federal bioenergy program payments also is
attributable to the significantly greater participation in the program by other
ethanol producers, which thereby reduces the amount of revenue available to any
single participant.
The most significant impact on other income or expense for the second
quarter of fiscal 2006 was the decrease in interest expense, which is
attributable to the significant reduction in outstanding debt from the prior
year. The increase in other expense during this quarter as compared to second
quarter of fiscal 2005 is primarily due to minor improvements to our plant site.
During the three months ended March 31, 2006, we reported $140,000, of
unrealized gains on hedging contracts as compared to unrealized losses of
$14,825 for the same period in fiscal 2005. This improved our comprehensive
income for the fiscal 2006 periods.
During the six months ended March 31, 2006, we reported $517,375, of
unrealized gains on hedging contracts as compared to unrealized losses of
$13,413 for the same periods in fiscal 2005. This improved our comprehensive
income for the fiscal 2006 periods.
Liquidity and Capital Resources
Overview. The following table highlights certain information relating to
our liquidity and capital resources at March 31, 2006 and September 30, 2005:
March 31, September 30,
2006 2005
------------ -------------
Working Capital.......................... $ 6,182,978 $ 3,516,039
Current Assets........................... 9,974,416 7,194,259
Current Liabilities...................... 3,791,438 3,678,220
Long-term Debt........................... 1,454,000 4,480,000
Members' Equity.......................... 33,924,880 30,572,934
11
Our working capital at March 31, 2006 increased 74.9% from year-end
September 30, 2005. This increase is attributable to an increase in cash flow
from operations, which in turn is attributable to higher prices received for
ethanol and a larger sales volume achieved this fiscal year. Our operations
continue to generate significant cash, providing more than sufficient resources
for our investing and financing activities. Our current ratio, representing
current assets divided by current liabilities, was 2.63:1 at March 31, 2006,
compared to 1.96:1 at September 30, 2005.
Working Capital. Current assets increased 38.6% from fiscal year end
September 30, 2005 to March 31, 2006. The increase during the six months of
fiscal 2006 is due to an increase in cash and accounts receivable. Current
liabilities remained generally constant, increasing only 3.1% from fiscal year
end September 30, 2005 to March 31, 2006.
We maintain a line of credit to finance short-term working capital
requirements. Subsequent to the 2005 fiscal year end, the amount of the line was
reduced from $5 million to $4.5 million in accordance with our lending
agreement. Notwithstanding this reduction, however, we believe we have
sufficient liquidity and capital resources for the foreseeable future.
Long-term debt, representing the remaining amounts borrowed to finance
construction of our plant, decreased from $4.4 million to $1.4 million from
fiscal year end to March 31, 2006. We believe our existing capital structure is
adequate for the foreseeable future.
Cash Flow. Cash generated from operating activities during the six months
ended March 31, 2006 was $14,727,541, which was a 26% increase from the same
period of fiscal 2005. The increase reflects our improved operating results, and
specifically higher ethanol prices received during fiscal 2006.
The amount of cash used in investing activities was reduced significantly
during the six months ended March 31, 2006, compared to the same period of
fiscal 2005, when we spent in excess of $4 million in expanding our plant. No
similar investment has taken place during the first two quarters of this fiscal
year.
Cash used in financing activities increased significantly from the first
six months of fiscal 2005 to the first six months of fiscal 2006. In both
periods, we significantly reduced our notes payable. The largest increase was
member distributions, which increased $7,752,000. Although not required to do
so, the Board of Managers has declared cash distributions to members each fiscal
quarter since the first quarter of fiscal 2005.
Forward-Looking Statements
This Form 10-Q contains or incorporates by reference "forward-looking
statements," as that term is used in federal securities laws, about our
financial condition, results of operations and business. These statements
include, among others:
o Statements concerning the benefits that we expect will result from our
business activities and certain transactions that we have completed,
such as increased revenues, decreased expenses and avoided expenses
and expenditures; and
o Statements of our expectations, beliefs, future plans and strategies,
anticipated developments and other matters that are not historical
facts.
These statements may be made expressly in this document or may be
incorporated by reference to other documents that we will file with the SEC. You
can find many of these statements by looking for words such as "believes,"
"expects," "anticipates," "estimates" or similar expressions used in this report
or incorporated by reference in this report.
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These forward-looking statements are subject to numerous assumptions, risks
and uncertainties that may cause our actual results to be materially different
from any future results expressed or implied by us in those statements. Because
the statements are subject to risks and uncertainties, actual results may differ
materially from those expressed or implied. We caution you not to put undue
reliance on these statements, which speak only as of the date of this report.
Further, the information contained in this document or incorporated herein by
reference is a statement of our present intention, based on present facts and
assumptions and may change at any time and without notice based on changes in
such facts or assumptions.
A few of the uncertainties that could affect the accuracy of
forward-looking statements, in addition to the specific "Risk Factors"
identified in our Annual Report on Form 10-KSB and other filings with the SEC,
include:
a. The state of the United States economy and how it affects the desire
for automobile travel;
b. The relative price of gasoline and other competing fuels;
c. Changes in government regulations for air and water quality or
subsidies for production of ethanol and other fossil fuel
alternatives;
d. Technological advances in the process for producing ethanol;
e. Drought and other environmental conditions; and
f. Changes in our business plan.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to the impact of market fluctuations associated with
interest rates and commodity prices as discussed below. We have no exposure to
foreign currency risk as all of our business is conducted in U.S. Dollars. We
use derivative financial instruments as part of an overall strategy to manage
market risk. We use cash, futures and option contracts to hedge changes in the
commodity prices of grain and natural gas. We do not enter into these derivative
financial instruments for trading or speculative purposes, nor do we designate
these contracts as hedges for accounting purposes pursuant to the requirements
of SFAS 133, Accounting for Derivative Instruments and Hedging Activities.
Interest Rate Risk
We are exposed to market risk from changes in interest rates. Exposure to
interest rate risk results from holding a revolving promissory note and a term
note which bear variable interest rates. Specifically, we have $3,129,000
outstanding in variable-rate debt as of March 31, 2006.
We have not entered into any hedging transactions in connection with our
notes, although we may consider such an arrangement in the future if
appropriate.
Commodity Price Risk
We are also exposed to market risk from changes in commodity prices.
Exposure to commodity price risk results from our dependence on grain and
natural gas in the ethanol production process. We seek to minimize the risks
from fluctuations in the prices of grain and natural gas through the use of
hedging instruments. In practice, as markets move, we actively manage our risk
and adjust hedging strategies as we believe appropriate. Although we believe
our hedge positions accomplish an economic hedge against our future purchases,
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they are not designated as such for hedge accounting purposes, which would match
the gain or loss on our hedge positions to the specific commodity purchase being
hedged. We are marking to market our hedge positions, which means as the
current market price of our hedge positions changes, the gains and losses are
immediately recognized in our cost of goods sold. For example, it is likely and
we would generally expect that a 10% increase in the cash price of grain and
natural gas would produce an increase in the fair value of our derivative
instruments equal to approximately $52,664 based on our positions at March 31,
2006.
The immediate recognition of hedging gains and losses can cause net income
to be volatile from quarter to quarter due to the timing of the change in value
of the derivative instruments relative to the cost and use of the commodity
being hedged. As of March 31, 2006, the fair value of our derivative instruments
for grain is an asset in the amount of $526,643. There are several variables
that could affect the extent to which our derivative instruments are impacted by
price fluctuations in the cost of grain or natural gas. However, it is likely
that commodity cash prices will have the greatest impact on the derivatives
instruments with delivery dates nearest the current cash price.
To manage our grain price risk, our hedging strategy is designed to
establish a price ceiling and floor for our purchases. We have taken a net long
position on our exchange traded futures and options contracts, which allows us
to offset increases or decreases in the market price of grain. The upper limit
of loss on our futures contracts is the difference between the contract price
and the cash market price of corn and milo at the time of the execution of the
contract. The upper limit of loss on our exchange traded and over-the-counter
option contracts is limited to the amount of the premium we paid for the option.
We estimate that our expected grain usage is approximately 16.6 million
bushels per year for the production of 44.8 million gallons of ethanol. We have
price protection for approximately 50% of our expected grain usage for fiscal
year ended September 30, 2006 using CBOT futures and options and over the
counter option contracts. As we move forward, additional protection may be
necessary. As grain prices move in reaction to market trends and information,
our income statement will be affected depending on the impact such market
movements have on the value of our derivative instruments. As we move forward,
additional price protection may be required to solidify our margins into fiscal
year 2007. Depending on market movements, crop prospects and weather, these
price protection positions may cause immediate adverse effects, but are expected
to produce long-term positive growth for us.
To manage our natural gas price risk, we entered into a natural gas
purchase agreement with our supplier to supply us with natural gas. This
purchase agreement fixes the price at which we purchase natural gas. We estimate
that we have forward contracts in place for approximately 100% of our natural
gas needs through September 2006, 50% for October through December 2006, and 25%
for January through March 2007.
At the time we purchased price protection for natural gas, the market was
experiencing a great deal of price uncertainty. Due to this uncertainty, we
purchased amounts of gas for most of the plant's needs and implemented
derivative instruments on a portion of our requirements to allow us to benefit
in the event natural gas prices declined. Energy sector prices have increased
and natural gas, as a portion of the total energy market, has responded with
higher prices to be cost competitive with its alternatives. In the future, we
may not be able to secure natural gas for prices less than current market price
and we may not recover high costs of production resulting from high natural gas
prices, which may raise our costs of production.
A sensitivity analysis has been prepared to estimate our exposure to grain
and natural gas price risk. The table presents the fair value of our derivative
instruments as of March 31, 2006 and March 31, 2005 and the potential loss in
fair value resulting from a hypothetical 10% adverse change in such prices. The
fair value of the positions is a summation of the fair values calculated by
valuing each net position at quoted market prices as of the applicable date. The
results of this analysis, which may differ from actual results, are as follows:
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Effect of Hypothetical Adverse
Period Ended Fair Value Change - Market Risk
--------------- ----------- ------------------------------
March 31, 2006 $526,643 $ 52,664
March 31, 2005 $346,063 $ 34,606
The Company is also exposed to market risk from changes in ethanol prices.
These price fluctuations are minimized in part by advanced contract pricing of
our ethanol, which is designed to establish a price floor for our ethanol sales.
Currently, the Company has entered into priced contracts for the entire amount
of our anticipated ethanol production through the remainder of our fiscal year
ending September 30, 2006, and a small portion of our anticipated production for
the first quarter of fiscal 2007. The Company may continue to sell ethanol using
advanced contract pricing into fiscal 2007 to attempt to further reduce the
Company's risk related to price decreases. While this strategy minimizes the
risk associated with downward price fluctuations of ethanol, it may also prevent
us from realizing the full benefit of upward price movements. Although using
priced contracts makes our revenue more predictable, the Company cannot predict
the extent to which other factors such as inflation, government regulation or
changing prices may affect our financial performance.
Item 4. Controls and Procedures
(a) We maintain a system of controls and procedures designed to provide
reasonable assurance as to the reliability of the financial statements and other
disclosures included in this report. As of March 31, 2006, under the supervision
and with the participation of our Chief Executive Officer and Principal
Financial Officer, management has evaluated the effectiveness of the design and
operation of our disclosure controls and procedures. Based on that evaluation,
the Chief Executive Officer and the Principal Financial Officer concluded that
our disclosure controls and procedures were effective in timely alerting them to
the requirements to be included in our periodic filing with the SEC.
(b) No significant changes were made to internal controls or other factors
that could significantly affect those controls subsequent to the date of their
evaluation.
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PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its annual meeting of members on March 13, 2006. At the
meeting, both of the nominees for election to the Board of Managers by the
holders of the Class A Capital Units and the nominee for election to the Board
of Managers by the holders of the Class B and Class C Capital Units were
elected. The members also ratified the appointment of Stark Winter Schenkein &
Co., LLP as the Company's independent accountant for the fiscal year ending
September 30, 2006.
Election results for the managers elected by the holders of the Class A
Capital Units are as follows:
Name of Nominee Votes For Votes Withheld
- --------------- --------- --------------
Gary Johnson 265 2
Richard Sterrett 260 7
Election results for the manager elected by the holders of the Class B and
Class C Capital Units are as follows:
Name of Nominee Votes For Votes Withheld
- --------------- --------- --------------
Scott Foote 1,069 0
Election results for the ratification of appointment of independent
accountants are as follows:
For Against Abstain
----- ------- -------
Class A members 251 6 8
Class B and C members 1,069 0 0
Item 6. Exhibits
(a) Exhibits
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 for Jeff Torluemke.
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 for Richard Sterrett.
32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 for Jeff Torluemke and Richard Sterrett.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
WESTERN PLAINS ENERGY, L.L.C.
By: /s/ Jeff Torluemke
-----------------------------
Jeff Torluemke
Chief Executive Officer
Date: May 16, 2006 By: /s/ Richard Sterrett
-----------------------------
Richard Sterrett,
Principal Financial Officer
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