ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains forward-looking statements that involve future events, our future performance and our expected future operations and actions. In some cases you can identify forward-looking statements by the use of words such as “may,” “will,” “should,” “anticipate,” “believe,” “expect,” “plan,” “future,” “intend,” “could,” “estimate,” “predict,” “hope,” “potential,” “continue,” or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions and involve numerous assumptions, risks and uncertainties. Our actual results or actions may differ materially from these forward-looking statements for many reasons, including the reasons described in this report. We are not under any duty to update the forward-looking statements contained in this report. We cannot guarantee future results, levels of activity, performance or achievements. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits, completely and with the understanding that our actual future results may be materially different from what we currently expect. We qualify all of our forward-looking statements by these cautionary statements.
Overview
Cardinal Ethanol, LLC is an Indiana limited liability company. It was formed on February 7, 2005 with the name of Indiana Ethanol, LLC. On September 27, 2005, we changed our name to Cardinal Ethanol, LLC. We were formed for the purpose of raising capital to develop, construct, own and operate a 100 million gallon per year ethanol plant in east central Indiana near Union City, Indiana. We began producing ethanol, distillers grains and corn oil at the plant in November 2008. We are currently operating at above our 100 million gallons per year nameplate capacity. During the fiscal year ended 2012, the ethanol plant processed approximately 38 million bushels of corn per year into 108 million gallons of denatured fuel grade ethanol, 303,000 tons of dried distillers grains with solubles, and 21 million pounds of corn oil.
Our revenues are derived from the sale of our ethanol, distillers grains and corn oil. We market and sell our products primarily in the continental United States using third party marketers. Murex, N.A., Ltd. markets all of our ethanol. Our distillers grains are marketed by CHS, Inc. We market and distribute all of the corn oil we produce directly to end users and third party brokers.
Effective November 20, 2012, we entered into an Eleventh Amendment of Construction Loan Agreement which amended our Construction Loan Agreement originally dated December 19, 2006 with First National Bank of Omaha. The amendment waived our violation for the fiscal quarter ended
September 30, 2012
of the fixed charge coverage ratio covenant in the Construction Loan Agreement. In addition, the amendment amended the calculation of the covenant measuring the fixed charge coverage ratio for three fiscal quarters beginning October 1, 2012 through June 30, 2013. It will now be measured on a stand alone quarterly basis, reverting to the rolling twelve month basis for the year ending September 30, 2013.
We expect to fund our operations during the next 12 months using cash flow from our continuing operations and our current credit facilities. However, based on volatility in the cost of corn and potentially tight or even negative margins throughout the period, we may need to seek additional funding.
Comparison of the Fiscal Years Ended
September 30, 2012
and
2011
Results of Operations
The following table shows the results of our operations and the percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our statement of operations for the
fiscal years
ended
September 30, 2012
and
2011
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
Fiscal Year Ended
|
|
September 30, 2012
|
|
September 30, 2011
|
Statement of Operations Data
|
Amount
|
|
%
|
|
Amount
|
|
%
|
Revenue
|
$
|
321,194,387
|
|
|
100.0
|
|
|
$
|
337,019,930
|
|
|
100.0
|
|
Cost of Goods Sold
|
311,971,054
|
|
|
97.1
|
|
|
302,690,475
|
|
|
89.8
|
|
Gross Profit
|
9,223,333
|
|
|
2.9
|
|
|
34,329,455
|
|
|
10.2
|
|
Operating Expenses
|
4,680,729
|
|
|
1.5
|
|
|
4,250,752
|
|
|
1.3
|
|
Operating Income
|
4,542,604
|
|
|
1.4
|
|
|
30,078,703
|
|
|
8.9
|
|
Other Expense, net
|
(2,690,624
|
)
|
|
(0.8
|
)
|
|
(4,569,566
|
)
|
|
(1.4
|
)
|
Net Income
|
$
|
1,851,980
|
|
|
0.6
|
|
|
$
|
25,509,137
|
|
|
7.6
|
|
Our revenues from operations come from three primary sources: sales of fuel ethanol, distillers grains and corn oil. The following table shows the sources of our revenue for the
fiscal years
ended
September 30, 2012
and
2011
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
September 30, 2012
|
|
Fiscal Year Ended
September 30, 2011
|
Revenue Source
|
Amount
|
% of Revenues
|
|
Amount
|
% of Revenues
|
Ethanol Sales
|
$
|
250,212,033
|
|
77.9
|
%
|
|
$
|
276,082,661
|
|
81.9
|
%
|
Dried Distillers Grains Sales
|
61,772,969
|
|
19.2
|
|
|
53,681,618
|
|
15.9
|
|
Wet Distillers Grains Sales
|
176,074
|
|
0.1
|
|
|
161,035
|
|
—
|
|
Corn Oil Sales
|
8,749,940
|
|
2.7
|
|
|
6,475,079
|
|
1.9
|
|
Other Revenue
|
283,371
|
|
0.1
|
|
|
619,537
|
|
0.2
|
|
Total Revenues
|
$
|
321,194,387
|
|
100
|
%
|
|
$
|
337,019,930
|
|
100
|
%
|
The following table shows additional data regarding production and price levels for our primary inputs and products for the
fiscal years
ended
September 30, 2012
and
2011
.
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
September 30, 2012
|
Fiscal Year Ended
September 30, 2011
|
Production:
|
|
|
|
Ethanol sold (gallons)
|
|
108,253,779
|
|
114,661,886
|
|
Distillers grains sold (tons)
|
|
302,835
|
|
318,785
|
|
Corn oil sold (pounds)
|
|
21,443,120
|
|
13,934,980
|
|
|
|
|
|
Revenues:
|
|
|
|
Ethanol average price per gallon
|
|
$
|
2.41
|
|
$
|
2.40
|
|
Distillers grains average price per ton
|
|
$
|
209
|
|
$
|
169
|
|
Corn oil average price per pound
|
|
$
|
0.41
|
|
$
|
0.46
|
|
|
|
|
|
Primary Inputs:
|
|
|
|
Corn ground (bushels)
|
|
38,476,033
|
|
39,356,259
|
|
Natural gas purchased (MMBTU)
|
|
3,032,069
|
|
3,120,976
|
|
|
|
|
|
Costs of Primary Inputs:
|
|
|
|
Corn average price per bushel ground
|
|
$
|
6.96
|
|
$
|
6.63
|
|
Natural gas average price per MMBTU
|
|
$
|
3.26
|
|
$
|
4.59
|
|
|
|
|
|
Other Costs:
|
|
|
|
Chemical and additive costs per gallon of ethanol sold
|
|
$
|
0.071
|
|
$
|
0.073
|
|
Denaturant cost per gallon of ethanol sold
|
|
$
|
0.053
|
|
$
|
0.056
|
|
Electricity cost per gallon of ethanol sold
|
|
$
|
0.032
|
|
$
|
0.030
|
|
Direct Labor cost per gallon of ethanol sold
|
|
$
|
0.021
|
|
$
|
0.019
|
|
Revenues
Our revenues are derived from the sale of our ethanol, distillers grains and corn oil. For the
fiscal year
ended
September 30, 2012
, we received approximately
78%
of our revenue from the sale of fuel ethanol, approximately
19%
of our revenue from the sale of distillers grains and approximately
3%
of our revenue from sale of corn oil. Sales of carbon dioxide represented less than 1% of our total sales. Comparatively, for the
fiscal year
ended
September 30, 2011
, we received approximately
82%
of our revenue from the sale of fuel ethanol, approximately
16%
of our revenue from the sale of distillers grains and approximately
2%
of total sales from corn oil. Sales of carbon dioxide represented less than 1% of our total sales for the
fiscal year
ended
September 30, 2011
.
Ethanol
Our revenues from ethanol significantly decreased for our
fiscal year
ended
September 30, 2012
as compared to our
fiscal
year
ended
September 30, 2011
. Our decrease in revenues for our
fiscal year
ended
September 30, 2012
as compared to
2011
was the result of lower ethanol production rates in the
fiscal year
ended
September 30, 2012
as compared to the same period in
2011
. We are currently operating at approximately 8% above our nameplate capacity.
During the
fiscal year
ended
September 30, 2012
, the market price of ethanol varied between
$1.96
per gallon and
$3.13
per gallon. Our average price per gallon of ethanol sold, including the effects of our risk management/hedging, was
$2.41
for the
fiscal year
ended
September 30, 2012
. During the
fiscal year
ended
September 30, 2011
, the market price of ethanol varied between
$2.07
per gallon and
$3.07
per gallon. Our average price per gallon of ethanol sold was
$2.40
per gallon, for the
fiscal year
ended
September 30, 2011
.
In the ordinary course of business, we enter into forward contracts for our commodity purchases and sales. At
September 30, 2012
, we have no forward ethanol sales contracts. As of
September 30, 2012
, we have open short (selling) positions for
19,572,000
gallons of ethanol and open long (buying) position for
19,152,000
gallons of ethanol on the Chicago Board of Trade and the New York Mercantile Exchange to hedge our forward corn contracts and ethanol inventory. Our ethanol derivatives are forecasted to settle through December 2012. For the
fiscal years
ended
September 30, 2012
and
2011
, we recorded net gains on our ethanol derivative contracts of
$974,555
and net losses of
$116,899
, respectively. These gains and losses were recorded with our revenues in the statement of operations.
Ethanol prices trended slightly downward throughout the fourth quarter rising subsequent to year end. Management anticipates that ethanol prices will continue to change in relation to changes in corn and energy prices. Ethanol prices could potentially rise in correlation with corn prices if the price of corn rises as a result of a short 2012 crop due to drought conditions experienced in the Midwestern United States. An increase in ethanol prices may also be supported by decreased ethanol production due to shut downs in the industry. However, the correlation between the price of ethanol and corn prices has been less reliable in calendar year 2012 and management believes that lower gasoline and export demand along with excess ethanol supply and increased imports from Brazil could negatively impact ethanol prices.
While operating margins were positive early in the fiscal year 2012, a substantial downturn in operating conditions resulted in negative operating margins in the third and fourth fiscal quarters. Management expects that operating margins will remain tight and perhaps negative throughout our fiscal year 2013.
We experienced a decrease in the gallons of ethanol sold for the
fiscal year
ended
September 30, 2012
as compared to the same period in
2011
due primarily to low corn quality and unscheduled maintenance shutdowns at the plant. We sold approximately
108,254,000
gallons of ethanol during the
fiscal year
ended
September 30, 2012
compared to approximately
114,662,000
, for the same period in
2011
.
Management anticipates that ethanol sales will remain relatively consistent during our 2013 fiscal year. However, drought conditions experienced in much of the Midwestern United States may result in our inability to secure corn at prices that allow us to operate the ethanol plant profitably. If that occurs, we may be required to decrease or halt production for a period of time.
Distillers Grains
Our revenues from distillers grains increased in the
fiscal year
ended
September 30, 2012
as compared to the same period in
2011
. This increase was primarily the result of an increase in the average price per ton of distillers grains in the
fiscal year
ended
September 30, 2012
as compared to the same period in
2011
which offset a decrease in the amount of distillers grains sold.
During the
fiscal year
ended
September 30, 2012
, the market price of distillers grains varied between
$149
per ton of distillers grains and
$290
per ton of distillers grains. Our average price per ton of distillers grains sold was
$209
per ton for the
fiscal year
ended
September 30, 2012
as compared to an average price of
$169
for the
fiscal year
ended
September 30, 2011
. The amount of distillers grains sold in the
fiscal year
ended
September 30, 2012
decreased as compared to the same period in
2011
due to a decrease in ethanol production levels.
Management believes that the market prices for distillers grains change in relation to the prices of other animal feeds, such as corn and soybean meal. We primarily sell dried distillers grains nationally through our marketer. Distillers grains prices have been increasing throughout our fourth fiscal quarter in relation to strong corn prices which have faced pressure from a poor crop caused by the drought experienced in the Midwestern United States. Typically, distillers grain prices as a percentage of corn value are approximately 80% or better. During our fourth quarter, distillers grain prices were significantly higher as a percentage of corn value than expected. Management believes that distillers grains prices will generally continue to follow corn; however we expect distillers grains prices to revert closer to traditional levels as a percentage of corn value. In addition, management believes that a decrease in export demand and concerns related to aflatoxin could negatively impact distiller grain prices.
We sold approximately
303,000
tons and
319,000
tons of distillers grains during the
fiscal year
ended
September 30, 2012
and
2011
, respectively.
Corn Oil
Our corn oil sales increased in the
fiscal year
ended
September 30, 2012
as compared to the same period in
2011
which was primarily a result of higher yields of corn oil production in the
fiscal year
ended
September 30, 2012
as compared to the same period in
2011
. Corn oil yields increased during our fourth fiscal quarter as compared to the previous fiscal quarter and management expects yields to continue at a similar rate. However, management continues to refine the operation of our corn oil extraction equipment and investigate ways to improve production levels.
The average price per pound of corn oil was
$0.41
per pound for the
fiscal year
ended
September 30, 2012
as compared to
$0.46
for the same period in
2011
. Management expects corn oil prices will remain relatively steady in the near term but could decrease due to the elimination of the biodiesel tax credit and the fact that the 2012 RFS for biodiesel was reached in late September or early October 2012 which resulted in a decrease in biodiesel production. Also, additional plants entering into the market and producing corn oil could result in an oversupply negatively affecting prices unless additional demand can be created.
Cost of Goods Sold
Our cost of goods sold as a percentage of revenues was
97%
for the
fiscal year
ended
September 30, 2012
as compared to
90%
for the same period in
2011
. This increase in cost of goods sold as a percentage of revenues was primarily the result of an increase in the price of corn relative to the price of ethanol and distillers grains for the
fiscal year
ended
September 30, 2012
as compared to the same period in
2011
. Our two largest costs of production are corn and natural gas.
Corn Costs
Our largest cost associated with the production of ethanol, distillers grains and corn oil is corn cost. During the
fiscal year
ended
September 30, 2012
, our average price paid per bushel of corn increased as compared to the same period in
2011
.
During the
fiscal year
ended
September 30, 2012
, we used approximately
38,476,000
bushels of corn to produce our ethanol, distillers grain and corn oil as compared to approximately
39,356,000
bushels for the same period in
2011
. During the
fiscal year
ended
September 30, 2012
, we sold less gallons of ethanol and tons of distillers grains as compared to the same period in
2011
. During the
fiscal year
ended
September 30, 2012
, the market price of corn varied between
$5.14
per bushel and
$8.80
per bushel. Our average price per bushel of corn ground was
$6.96
, including the effects of our risk management/hedging. During the
fiscal year
ended
September 30, 2011
, the market price of corn varied between
$4.24
and
$8.34
per bushel. Our average price per bushel of corn ground was
$6.63
, including the effects of our risk management/hedging. Corn prices rose substantially during our fourth quarter in response to drought conditions and concerns regarding the effects on the 2012 corn crop. Corn prices trended downwards slightly subsequent to our fiscal year end. Management expects that corn prices will remain volatile through the winter of 2012 as a result of an increase in demand for corn and a limited supply. High corn prices will have a negative effect on our operating margins unless the price of ethanol and distillers grains out paces rising corn prices.
In the ordinary course of business, we entered into forward purchase contracts for our commodity purchases. At
September 30, 2012
, we have forward corn purchase contracts for various delivery periods through
February 2014
for a total commitment of approximately
$17,653,000
. Approximately
$2,137,000
of the forward corn purchases were with a related party. As of
September 30, 2012
, we also have open short (selling) positions for
2,855,000
bushels of corn on the Chicago Board of Trade and long (buying) positions for
85,000
bushels of corn on the Chicago Board of Trade to hedge our forward corn contracts and corn inventory. Our corn derivatives are forecasted to settle through March 2014. For the
fiscal years
ended
September 30, 2012
and
2011
, we recorded net losses on our corn derivative contracts of
$7,004,120
and
$5,008,132
, respectively. These losses were recorded against cost of goods sold in the statement of operations. Volatility in the price of corn could significantly impact our cost of goods sold.
Natural Gas Costs
Our natural gas costs were lower during our
fiscal year
ended
September 30, 2012
as compared to the
fiscal year
ended
September 30, 2011
. This decrease in cost of natural gas for the
fiscal year
ended
September 30, 2012
as compared to the same period in
2011
was primarily the result of a decrease in the average price per MMBTU of our natural gas.
During our
fiscal year
ended
September 30, 2012
, we purchased approximately
3,032,000
MMBTU's of natural gas as compared to
3,121,000
MMBTU's for the
fiscal year
ended
September 30, 2011
. Management attributes this decrease in natural gas to the increased efficiency of some of the plant's mechanical systems as well as lower production during the year. During the
fiscal year
ended
September 30, 2012
the market price of natural gas varied between
$2.23
per MMBTU and
$4.41
per MMBTU. Our average price per MMBTU of natural gas for the
fiscal year
ended
September 30, 2012
was
$3.26
after considering the effects of our risk management/hedging. During the
fiscal year
ended
September 30, 2011
the market price of natural gas varied between
$3.66
per MMBTU and
$5.39
per MMBTU. Our average price per MMBTU of natural gas was
$4.59
. For the
fiscal years
ended
September 30, 2012
and
2011
, we recorded net losses of
$60,224
and
$6,536,843
, respectively on our natural gas derivative contracts. These net losses were recorded in our cost of good sold in our statement of operations.
Natural gas prices have remained at historically low levels although they trended upward slightly during our fourth fiscal quarter. Management anticipates higher natural gas prices during the winter months but expects that natural gas prices will remain relatively low throughout our coming fiscal year unless we experience a catastrophic weather event that would cause problems related to the supply of natural gas. Should the economy continue to improve, we believe that increased industrial production could also result in increased energy demand which could result in an increase in natural gas prices.
Operating Expense
Our operating expenses as a percentage of revenues were approximately
1%
for the
fiscal year
s ended
September 30, 2012
and 2011. Operating expenses include salaries and benefits of administrative employees, insurance, taxes, professional fees and other general administrative costs. We experienced an increase in actual operating expenses of approximately $430,000 for the
fiscal year
ended
September 30, 2012
as compared to the same period in
2011
primarily due to our E15 registration, donations to the Growth Energy E15 campaign and increases in our property taxes. Our efforts to optimize efficiencies and maximize production may result in a decrease in our operating expenses on a per gallon basis. However, because these expenses generally do not vary with the level of production at the plant, we expect our operating expenses to remain steady.
Operating Income
Our income from operations for the
fiscal year
ended
September 30, 2012
was approximately
1%
of our revenues compared to an operating income of
9%
of our revenues for the same period in
2011
. The decrease in operating income for the
fiscal year
ended
September 30, 2012
compared to the same period in
2011
was primarily the result of decreased ethanol production levels and increases in the price of corn relative to the price of ethanol which resulted in negative operating margins in our third and fourth fiscal quarters.
Other Expense
Our other expense for the
fiscal year
ended
September 30, 2012
was approximately
0.8%
of our revenues compared to other expense of approximately
1.4%
of revenues for the same period in
2011
. Our other expense for the
fiscal year
ended
September 30, 2012
and
2011
consisted primarily of interest expense.
Changes in Financial Condition
The following table highlights the changes in our financial condition for the fiscal years ended
September 30, 2012
and
2011
:
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
September 30, 2011
|
Current Assets
|
$
|
35,973,410
|
|
|
$
|
49,830,340
|
|
Current Liabilities
|
$
|
16,662,886
|
|
|
$
|
18,628,361
|
|
Member's Equity
|
$
|
109,294,546
|
|
|
$
|
112,327,133
|
|
We experienced a decrease in our total current assets at
September 30, 2012
compared to our fiscal year ended
September 30, 2011
. We had cash of approximately
$683,000
at
September 30, 2012
as compared to
$10,802,000
at
September 30, 2011
. This decrease in cash is because of substantial debt reduction and the payment of distributions to members. Commodity derivative instruments decreased approximately $4,651,000 at
September 30, 2012
compared to
September 30, 2011
. This decrease is the result of a smaller volume of hedged positions in the futures markets. We also experienced a decrease of approximately $2,403,000 in the value of our inventory at
September 30, 2012
compared to
September 30, 2011
. At
September 30, 2012
, we had trade accounts receivable of approximately
$21,786,000
compared to trade accounts receivable at
September 30, 2011
of
approximately
$19,101,000
.
We experienced a decrease in our total current liabilities at
September 30, 2012
compared to
September 30, 2011
. The decrease is primarily due to a decrease in our current maturities of long term debt to approximately $3,634,000 at
September 30, 2012
as compared to approximately $9,228,000 at
September 30, 2011
as result of paying off the variable rate and corn oil notes. We experienced an increase in our accounts payable related to corn of approximately $6,862,000 at
September 30, 2012
as compared to approximately $4,060,000 at
September 30, 2011
. The increase in corn payables is due to the increase in producers deferring payment on corn until the first of the year. Our commodity derivative instruments also increased to approximately $1,111,000 at
September 30, 2012
as compared to approximately $88,000 at
September 30, 2011
.
We experienced a decrease in our long-term liabilities as of
September 30, 2012
compared to
September 30, 2011
. At
September 30, 2012
we had approximately
$27,944,000
outstanding in the form of long-term loans, compared to approximately
$42,960,000
at
September 30, 2011
. The decrease is primarily due to scheduled principal repayments made on our term loans, the payoff of the variable rate note in October 2011 and the payoff of the corn oil extraction note in February 2012.
Comparison of Fiscal Years Ended September 30, 2011 and 2010
Results of Operation
The following table shows the results of our operations and the approximate percentage of revenues, costs of goods sold, operating expenses and other items to total revenues in our statements of operations for the fiscal years ended
September 30, 2011
and
2010
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
September 30, 2011
|
Fiscal Year Ended September 30, 2010
|
Statement of Operations Data
|
Amount
|
Percent
|
Amount
|
Percent
|
Revenues
|
$
|
337,019,930
|
|
100.0
|
%
|
$
|
224,807,338
|
|
100.0
|
%
|
Cost of Goods Sold
|
302,690,475
|
|
89.8
|
|
195,880,762
|
|
87.1
|
|
Gross Profit
|
34,329,455
|
|
10.2
|
|
28,926,576
|
|
12.9
|
|
Operating Expenses
|
4,250,752
|
|
1.3
|
|
3,735,530
|
|
1.7
|
|
Operating Income
|
30,078,703
|
|
8.9
|
|
25,191,046
|
|
11.2
|
|
Other Expense, net
|
(4,569,566
|
)
|
(1.4
|
)
|
(4,740,467
|
)
|
(2.1
|
)
|
Net Income
|
$
|
25,509,137
|
|
7.6
|
%
|
$
|
20,450,579
|
|
9.1
|
%
|
The following table shows the sources of our revenue for the fiscal years ended
September 30, 2011
and
September 30, 2010
.
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
September 30, 2011
|
Fiscal Year Ended
September 30, 2010
|
Revenue Source
|
Amount
|
% of Revenues
|
Amount
|
% of Revenues
|
Ethanol Sales
|
$
|
276,082,661
|
|
81.9
|
%
|
$
|
191,276,457
|
|
85.1
|
%
|
Dried Distillers Grains Sales
|
53,681,618
|
|
15.9
|
|
31,163,445
|
|
13.9
|
|
Wet Distillers Grains Sales
|
161,035
|
|
—
|
|
107,211
|
|
—
|
|
Corn Oil Sales
|
6,475,079
|
|
1.9
|
|
1,789,945
|
|
0.8
|
|
Other Revenue
|
619,537
|
|
0.2
|
|
470,280
|
|
0.2
|
|
Total Revenues
|
$
|
337,019,930
|
|
100
|
%
|
$
|
224,807,338
|
|
100
|
%
|
The following table shows additional data regarding production and price levels for our primary inputs and products for the fiscal years ended
September 30, 2011
and
2010
:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
September 30, 2011
|
Fiscal Year Ended
September 30, 2010
|
Production:
|
|
|
|
Ethanol sold (gallons)
|
|
114,661,886
|
|
109,986,252
|
|
Distillers grains sold (tons)
|
|
318,785
|
|
321,087
|
|
Corn oil sold (pounds)
|
|
13,934,980
|
|
6,796,940
|
|
|
|
|
|
Revenues:
|
|
|
|
Ethanol average price per gallon
|
|
$
|
2.40
|
|
$
|
1.74
|
|
Distillers grains average price per ton
|
|
$
|
168.90
|
|
$
|
97.39
|
|
Corn oil average price per pound
|
|
$
|
0.46
|
|
$
|
0.26
|
|
|
|
|
|
Primary Inputs:
|
|
|
|
Corn ground (bushels)
|
|
39,356,259
|
|
39,408,254
|
|
Natural gas purchased (MMBTU)
|
|
3,120,976
|
|
3,126,888
|
|
|
|
|
|
Costs of Primary Inputs:
|
|
|
|
Corn average price per bushel ground
|
|
$
|
6.63
|
|
$
|
3.85
|
|
Natural gas average price per MMBTU
|
|
$
|
4.59
|
|
$
|
5.01
|
|
|
|
|
|
Other Costs:
|
|
|
|
Chemical and additive costs per gallon of ethanol sold
|
|
$
|
0.073
|
|
$
|
0.062
|
|
Denaturant cost per gallon of ethanol sold
|
|
$
|
0.056
|
|
$
|
0.042
|
|
Electricity cost per gallon of ethanol sold
|
|
$
|
0.030
|
|
$
|
0.031
|
|
Direct Labor cost per gallon of ethanol sold
|
|
$
|
0.019
|
|
$
|
0.018
|
|
Revenues
For the
fiscal year
ended
September 30, 2011
, ethanol sales comprised approximately
82%
of our revenues and distillers grains sales comprised approximately
16%
of our revenues, while corn oil and carbon dioxide sales comprised approximately
2%
of our revenues. For the
fiscal year
ended
September 30, 2010
, ethanol sales comprised approximately
85%
of our revenue and distillers grains sales comprised approximately
14%
of our revenue, while corn oil comprised approximately
1%
of our revenues.
Ethanol
Our revenues from ethanol increased for our
fiscal year
ended
September 30, 2011
as compared to the
fiscal year
ended
September 30, 2010
primarily as a result of an increase in our ethanol production and higher ethanol prices on average per gallon in the
fiscal year
ended
September 30, 2011
.
During the
fiscal year
ended
September 30, 2011
, the market price of ethanol varied between
$2.07
per gallon and
$3.07
per gallon. Our average price per gallon of ethanol sold, including the effects of risk management/hedging, was
$2.40
per gallon for the
fiscal year
ended
September 30, 2011
. During the
fiscal year
ended
September 30, 2010
, the market price of ethanol varied between
$1.57
and
$2.43
per gallon. Our average price per gallon of ethanol sold was
$1.74
. During the
fiscal year
ended
September 30, 2011
, we sold approximately
114,662,000
gallons of ethanol as compared to our sales of approximately
109,986,000
gallons of ethanol for the same period in
2010
. For the
fiscal year
ended
September 30, 2011
, we recorded net losses on our ethanol derivative contracts of
$116,899
. These losses were recorded against our revenues in the statement of operations. We recorded net gains on our ethanol derivative contracts of
$33,217
during the
fiscal year
ended
September 30, 2010
.
Distillers Grains
Our revenues from distillers grains increased in the
fiscal year
ended
September 30, 2011
as compared to the same period in
2010
. This increase was primarily the result of an increase in the average price per ton of distillers grains in the
fiscal year
ended
September 30, 2011
as compared to the same period in
2010
.
During the
fiscal year
ended
September 30, 2011
the market price of distillers grains varied between approximately
$105
and
$220
per ton. Our average price per ton of distillers grains sold was approximately
$169
. During the
fiscal year
ended
September 30, 2010
, the market price of distillers grains varied between approximately
$93
per ton and
$140
per ton. Our average price per ton of distillers grains sold was approximately
$97
. During our
fiscal year
ended
September 30, 2011
we sold approximately
319,000
tons of distillers grains compared to approximately
321,000
for the same period in
2010
.
Cost of Goods Sold
Our costs of goods sold as a percentage of revenues were approximately
90%
for the
fiscal year
ended
September 30, 2011
compared to
87%
for the same period of
2010
. Our two largest costs of production are corn and natural gas.
Corn Costs
During the
fiscal year
ended
September 30, 2011
we used approximately
39,356,000
bushels of corn to produce our ethanol, distillers grain and corn oil as compared to approximately
39,408,000
bushels for the same period in
2010
. During the
fiscal year
ended
September 30, 2011
, the market price of corn varied between
$4.24
per bushel and
$8.34
per bushel. Our average price per bushel of corn ground was
$6.63
after considering the effects of our risk management/hedging. During the
fiscal year
ended
September 30, 2010
, the market price of corn varied between
$3.40
and
$4.81
per bushel. Our average price per bushel of corn ground was
$3.85
after considering the effects of our risk management/hedging. For the
fiscal year
ended
September 30, 2011
and
2010
, we recorded net losses on our corn derivative contracts of
$5,008,132
and
$2,424,135
, respectively. These net losses were recorded in our costs of goods sold in our statement of operations.
Natural Gas
During our
fiscal year
ended
September 30, 2011
, we purchased approximately
3,121,000
MMBTU's of natural gas as compared to approximately
3,127,000
MMBTU's for the same period in
2010
. During the
fiscal year
ended
September 30, 2011
, the market price of natural gas varied between
$3.66
per MMBTU and
$5.39
per MMBTU. Our average price per MMBTU of natural gas was
$4.59
. During the
fiscal year
ended
September 30, 2010
, the market price of natural gas varied between
$3.70
per MMBTU and
$6.10
per MMBTU. Our average price per MMBTU of natural gas was
$5.01
.
Operating Expense
Our operating expenses were higher for the
fiscal year
ended
September 30, 2011
than they were for the same period ended
September 30, 2010
. This increase in operating expenses is primarily due to an increase in general and administrative expenses. These increased expenses are the result of increased salaries and property taxes.
Operating Income
Our income from operations for the
fiscal year
ended
September 30, 2011
was approximately
9%
of our revenues compared to operating income of approximately
11%
of our revenues for the
fiscal year
ended
September 30, 2010
. This decrease in our profitability was primarily the result of the extremely favorable market conditions and resulting operating margins we experienced in the
fiscal year
ended
2010
compared with more modest conditions and margins in the
fiscal year
ended 2011. Higher prices have resulted in higher profits that are lower percentage-wise relative to revenues.
Other Expense
Other expense for the
fiscal year
ended
September 30, 2011
was approximately
1.4%
of our revenue and totaled approximately
$4,570,000
. Other expense for the
fiscal year
ended
September 30, 2010
was approximately
2.1%
of our revenue and totaled approximately
$4,740,000
. Other expense consisted primarily of interest expense.
Critical Accounting Estimates
Management uses various estimates and assumptions in preparing our financial statements in accordance with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Accounting estimates that are the most important to the presentation of our results of operations and financial condition, and which require the greatest use of judgment by management, are designated as our critical accounting estimates. We have the following critical accounting estimates:
We enter into derivative instruments to hedge the variability of expected future cash flows related to interest rates. We
do not typically enter into derivative instruments other than for economic hedging purposes. All derivative instruments are recognized on the
September 30, 2012
balance sheet at their fair market value. Changes in the fair value of a derivative instrument that is designated as and meets all of the required criteria for a cash flow hedge are recorded in accumulated other comprehensive income and reclassified into earnings as the underlying hedged items affect earnings.
At
September 30, 2012
, we had an interest rate swap with a fair value of
$2,086,757
recorded as derivative instruments in the current and long-term liabilities section of the balance sheet and as a deferred loss in accumulated other comprehensive loss. We have an interest rate swap with a fair value of
$3,482,770
for the same period ended in
2011
. The interest rate swap is designated as a cash flow hedge.
As of
September 30, 2012
, we have open short positions for
2,855,000
bushels of corn and long positions of
85,000
for corn on the Chicago Board of Trade and short positions of
19,572,000
gallons of ethanol and long positions of
19,152,000
gallons of ethanol on the New York Mercantile Exchange. These derivatives have not been designated as an effective hedge for accounting purposes. Corn and ethanol positions are forecasted to settle through March 2014 and December 2012, respectively. There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding as disclosed above.
We carry our long-lived assets at the original acquisition cost as required by current generally accepted accounting principles. Due to business conditions and the business environment in which our industry operates, the fair market value of those assets could, theoretically, fall below the amount which we carry them in our financial statements. In such cases, those assets would be known as impaired. Thus, we periodically perform an assessment of the fair value of these assets. Given the significant assumptions required and the possibility that actual conditions will differ, we consider the assessment of the useful lives of property and equipment to be a critical accounting estimate. Our assessment shows us that the fair value of our long-lived assets as a group is substantially in excess of its carrying value.
We value our inventory at the lower of cost or market. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management's assumptions which do not reflect unanticipated events and circumstances that may occur. In our analysis, we consider future corn costs and ethanol prices, break-even points for our plant and our risk management strategies in place through our derivative instruments and forward contracts. Given the significant assumptions required and the possibility that actual conditions will differ, we consider the valuation of the lower of cost or market on inventory to be a critical accounting estimate.
We enter forward contracts for corn purchases to supply the plant. These contracts represent firm purchase commitments which must be evaluated for potential losses. We have determined that there are no losses that are required to be recognized on these firm purchase commitments related to corn contracts in place at
September 30, 2012
. Our estimates include various assumptions including the future prices of ethanol, distillers grains and corn.
Liquidity and Capital Resources
Based on financial forecasts performed by our management, we anticipate that we will have sufficient cash from our current credit facilities and cash from our operations to continue to operate the ethanol plant for the next 12 months. We do not anticipate seeking additional equity financing during our 2013 fiscal year.
However, while operating margins were positive early in the fiscal year 2012, a substantial downturn in operating conditions resulted in negative operating margins in the third and fourth fiscal quarters. Management believes that this is the result of decreasing ethanol prices along with rising commodity markets due to ongoing drought conditions experienced in much of the Midwestern United States. Management expects that operating margins will remain tight and perhaps negative throughout our fiscal year 2013. A short corn supply could substantially increase corn prices putting pressure on liquidity or resulting in unavailability of corn which could require us to decrease production for a period of time. In addition, an over supply of ethanol could also negatively impact ethanol prices. While we have reduced our reliance on our revolving lines of credit and paid off the balance on our variable rate note and our corn oil extraction note, should we continue to experience unfavorable operating conditions in the ethanol industry that prevent us from profitably operating the ethanol plant, we could have difficulty maintaining our liquidity and may need to rely on our revolving lines of credit for operations.
The following table shows cash flows for the
fiscal year ended
September 30, 2012
and
2011
:
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
Net cash provided by operating activities
|
|
$
|
18,003,110
|
|
|
$
|
21,649,488
|
|
Net cash used in investing activities
|
|
(1,231,316
|
)
|
|
(770,137
|
)
|
Net cash used for financing activities
|
|
(26,890,923
|
)
|
|
(13,395,099
|
)
|
Net increase (decrease) in cash
|
|
(10,119,129
|
)
|
|
7,484,252
|
|
Cash, beginning of period
|
|
10,802,072
|
|
|
3,317,820
|
|
Cash, end of period
|
|
682,943
|
|
|
10,802,072
|
|
Cash Flow from Operations
We experienced a decrease in our cash flow from operations for the
fiscal year
ended
September 30, 2012
as compared to the same period in
2011
. Approximately
$18,003,000
of cash was provided by operating activities for the
fiscal year ended
September 30, 2012
as compared to approximately
$21,649,000
provided by operating activities for the
fiscal year ended
September 30, 2011
. Our net income from operations for the
fiscal year ended
September 30, 2012
was approximately
$1,852,000
as compared to net income of approximately
$25,509,000
for the same period in
2011
.
The change in the fair value of our derivative instruments decreased by approximately $6,090,000 for the
fiscal year ended
September 30, 2012
as compared to decreasing by $11,662,000 for the same period in
2011
. Our restricted cash also increased by approximately $1,245,000 for the
fiscal year
ended
September 30, 2012
as compared to decreasing $2,192,000 for the same period in
2011
and our inventory decreased by approximately $2,403,000 for the
fiscal year
ended
September 30, 2012
as compared to increasing by $3,400,000 for the same period in
2011
. During the
fiscal year
ended
September 30, 2012
, corn prices have been less volatile than in the same period ended
2011
. We also held a smaller hedge position in the
fiscal year
ended
September 30, 2012
as compared to the same period in
2011
. These two factors are the primary reasons in the variation in the changes in these accounts for the two periods.
Finally, our trade accounts receivable decreased $2,685,000 for the
fiscal year
ended
September 30, 2012
as compared to decreasing $5,874,000 for the same period in
2011
. This is mainly a reflection of the timing of ethanol shipments and collections between the two periods.
Cash Flow Used in Investing Activities
Cash used in investing activities was approximately
$1,231,000
for the
fiscal year ended
September 30, 2012
as compared to approximately
$770,000
for the same period in
2011
. Cash used in investing activities increased due to an increase in payments for construction in process and capital expenditures for the
fiscal year ended
September 30, 2012
as compared to the same period in
2011
.
Cash Flow Used in Financing Activities
Cash used in financing activities was approximately
$26,891,000
for the
fiscal year ended
September 30, 2012
as compared to cash used in financing activities of approximately
$13,395,000
for the same period in
2011
. We had net payments of approximately
$20,608,000
on our long term debt for the
fiscal year ended
September 30, 2012
as compared to approximately
$13,389,000
for the
fiscal year ended
September 30, 2011
. We also received proceeds of approximately $29,800,000 from our line of credit and long-term debt facilities for the
fiscal year ended
September 30, 2011
. We also paid a dividend to our members in the amount of approximately $6,281,000 in the
fiscal year ended
September 30, 2012
.
Our liquidity, results of operations and financial performance will be impacted by many variables, including the market price for commodities such as, but not limited to, corn, ethanol and other energy commodities, as well as the market price for any co-products generated by the facility and the cost of labor and other operating costs. Assuming future relative price levels for corn, ethanol and distillers grains remain consistent with the relative price levels as of
September 30, 2012
, we expect operations to generate adequate cash flows to maintain operations. This expectation assumes that we will be able to sell all the ethanol that is produced at the plant.
The following table shows cash flows for the fiscal years ended September 30, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
Net cash provided by operating activities
|
|
$
|
21,649,488
|
|
|
$
|
19,940,794
|
|
Net cash used in investing activities
|
|
(770,137
|
)
|
|
(3,765,300
|
)
|
Net cash used for financing activities
|
|
(13,395,099
|
)
|
|
(20,122,799
|
)
|
Net increase (decrease) in cash
|
|
7,484,252
|
|
|
(3,947,305
|
)
|
Cash, beginning of period
|
|
3,317,820
|
|
|
7,265,125
|
|
Cash, end of period
|
|
10,802,072
|
|
|
3,317,820
|
|
Cash Flow from Operations
Approximately $21,649,000 of cash was provided by operating activities for the fiscal year ended September 30, 2011
as compared to approximately $19,941,000 provided by operating activities for the fiscal year ended September 30, 2010. Our
net income from operations for the fiscal year ended September 30, 2011 was approximately $25,509,000 as compared to net
income of approximately $20,451,000 for the same period in 2010.
Cash Flow Used in Investing Activities
Cash used in investing activities was approximately $770,000 for the fiscal year ended September 30, 2011 as compared to approximately $3,765,000 for the same period in 2010. Cash used in investing is for our capital expenditures.
Cash Flow Used in Financing Activities
Cash used in financing activities was approximately $13,395,000 for the fiscal year ended September 30, 2011 as compared to cash used in financing activities of approximately $20,123,000 for the same period in 2010. This change in cash used in financing activities was the result of payments made on our long term debt financing.
Short and Long Term Debt Sources
On December 19, 2006, we entered into a loan agreement with First National Bank of Omaha establishing a senior credit facility for the construction of our plant. The credit facility was in the amount of $96,000,000, consisting of an $83,000,000 construction note, a $10,000,000 revolving line of credit and a $3,000,000 letter of credit. We also entered into an interest rate swap agreement for $41,500,000 of the construction term loan in order to achieve a fixed rate on a portion of this loan.
In April 2009, the construction loan was converted into multiple term loans one of which was a $41,500,000 Fixed Rate Note, which will be applicable to the interest rate swap agreement, a $31,500,000 Variable Rate Note, and a $10,000,000 Long Term Revolving Note. The term loans have a maturity of five years with a ten-year amortization.
Effective February 14, 2012, we entered into a Tenth Amendment of Construction Loan Agreement and a Seventh Amended and Restated Revolving Promissory Note which amended our Construction Loan Agreement originally dated December 19, 2006 and the Sixth Amended and Restated Revolving Promissory Note executed in May 2011 with First National Bank of Omaha.
Subsequent to the end of the period covered by this report, we entered into an Eleventh Amendment of Construction Loan Agreement which amended our Construction Loan Agreement originally dated December 19, 2006 with First National Bank of Omaha. The amendment waived our violation for the fiscal quarter ended
September 30, 2012
of the fixed charge coverage ratio. In addition, the amendment amends the calculation of the covenant measuring the fixed charge coverage ratio for three quarters beginning October 1, 2012 through June 30, 2013. It will now be measured on a stand alone quarterly basis, reverting to the rolling quarter basis for the year ending September 30, 2013.
Line of Credit
Our revolving line of credit in the amount of $15,000,000 expires on February 13, 2013. The interest rate is the 30-day LIBOR rate plus 350 basis points with no minimum interest rate. At
September 30, 2012
and at
September 30, 2011
there were no outstanding borrowings on the revolving line of credit.
Fixed Rate Note
As indicated above, we have an interest rate swap agreement in connection with the Fixed Rate Note payable to our senior lender. This interest rate swap helps protect our exposure to increases in interest rates and the swap effectively fixes the rate on the loan at 8.11% until April 2014. As of
September 30, 2012
and
September 30, 2011
we had an interest rate swap liability with a fair value of
$2,086,757
and
$3,482,770
respectively, recorded in current and long term liabilities.
The Fixed Rate Note will accrue interest at a rate equal to the 3-month LIBOR rate plus 300 basis points. We began repaying principal on the Fixed Rate Note in July 2009. The outstanding balance on this note was
$31,577,979
and
$34,920,938
at
September 30, 2012
and
September 30, 2011
, respectively, and is included in current liabilities and long-term debt.
Variable Rate Note and Long Term Revolving Note
At
September 30, 2012
and
September 30, 2011
, the balance on the variable rate note was
$0
and
$14,464,452
, respectively. We have no ability to draw upon the variable rate note.
At
September 30, 2012
and
September 30, 2011
there were no outstanding borrowings on the long term revolving note. If we were to draw upon the long term revolving note, interest would accrue at the 90-Day LIBOR plus 350 basis points with no minimum interest rate. At
September 30, 2012
, the interest rate was 4.01%. The maximum availability on the long term revolving note at
September 30, 2012
was
$6,750,000
, which reduces by $250,000 each quarter.
Corn Oil Extraction Note
Effective July 31, 2008, we amended our construction loan agreement to include a new loan up to the maximum amount of $3,600,000 for the purchase and installation of a corn oil extraction system and related equipment. On April 8, 2009, the corn oil extraction note converted into a Corn Oil Extraction Term Note, which accrued interest at a rate equal to 3-month LIBOR plus 300 basis points, or 5%, whichever was greater. As of
September 30, 2012
and
September 30, 2011
, we had
$0
and
$2,790,000
outstanding on our corn oil extraction loan respectively. In January 2012, we paid the Corn Oil Extraction Term Note in full.
Covenants
Our loans are secured by our assets and material contracts. In addition, during the term of the loans, we will be subject to certain financial covenants.
We were in compliance with all loan covenants at
September 30, 2012
except for the fixed charge coverage ratio. We subsequently received a waiver of this violation from First National Bank of Omaha. Our fixed charge coverage ratio is no less than 1.15:1.00 and is calculated by comparing our “adjusted” EBITDA, meaning EBITDA less taxes, capital expenditures and allowable distributions, to our scheduled payments of the principal and interest on our obligations to our lender, other than principal repaid on our revolving loan and long term revolving note. It was previously measured on a rolling twelve month basis but has now been amended for three quarters beginning October 1, 2012 through June 30, 2013. It is currently measured on a stand alone quarterly basis, reverting to the rolling twelve month for the year ending September 30, 2013.
Our minimum working capital is $15,000,000, which is calculated as our current assets plus the amount available for drawing under our long term revolving note, less current liabilities.
Our loan agreement also requires us to obtain prior approval from our lender before making, or committing to make, capital expenditures exceeding an aggregate amount of $4,000,000 in any single fiscal year. We may make distributions to our members to cover their respective tax liabilities. In addition, we may also distribute up to 70% of net income provided we maintain certain leverage ratios and are in compliance with all financial ratio requirements and loan covenants before and after any such distributions are made to our members.
We are currently meeting our liquidity needs and complying with our financial covenants, as revised, and the other terms of our loan agreements. Based on current management projections, we anticipate that future operations will be sufficient to generate enough cash flow to maintain operations, service our debt and comply with our revised financial covenants in our loan agreements through September 30, 2013. However, we are currently operating at narrow to negative margin levels. Should market conditions deteriorate further in the future, circumstances may develop which could result in us violating the financial covenants or other terms of our loan agreements. We will continue to evaluate our liquidity needs for the upcoming months and work with our lenders to try to ensure that the terms of the loan agreements, including the financial covenants, are met going forward. However, we cannot provide any assurance that our actions will result in sustained profitable operations or that we will not be in violation of
our revised loan covenants or other terms of our loan agreements. Should we violate the terms or revised covenants of our loan or fail to obtain a waiver of any such term or covenant, our primary lender could deem us in default of our loans and require us to immediately repay a significant portion or possibly the entire outstanding balance of our loans. Our lender could also elect to proceed with a foreclosure action on our plant.
Tax Abatement
In October 2006, the real estate that our plant was constructed on was determined to be an economic revitalization area, which qualified us for tax abatement. The abatement period is for a ten year term, with an effective date beginning calendar year end 2009 for the property taxes payable in calendar year 2010. The program allows for 100% abatement of property taxes beginning in year 1, and then decreases on a ratable scale so that in year 11 the full amount of property taxes are due and payable. We must apply annually and meet specified criteria to qualify for the abatement program.
Capital Improvements
During the first quarter of fiscal year 2012 we conducted a bottlenecking analysis of our facility and operations in order to find ways to improve production efficiency. At the present time, we continue to evaluate projects identified by that analysis to determine whether we will proceed. These projects may be deferred until market conditions improve.
Contractual Cash Obligations
In addition to our long-term debt obligations, we have certain other contractual cash obligations and commitments. The following tables provide information regarding our contractual obligations and approximate commitments as of
September 30, 2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due By Period
|
Contractual Cash Obligations
|
Total
|
|
Less than
One Year
|
|
One to
Three
Years
|
|
Three to
Five
Years
|
|
After Five
Years
|
Long-Term Debt Obligations
|
$
|
31,577,979
|
|
|
$
|
3,634,004
|
|
|
$
|
27,943,975
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Operating Lease Obligations
|
1,193,624
|
|
|
1,071,804
|
|
|
109,786
|
|
|
12,034
|
|
|
—
|
|
Purchase Obligations
|
17,653,000
|
|
|
17,345,808
|
|
|
307,192
|
|
|
—
|
|
|
—
|
|
Total Contractual Cash Obligations
|
$
|
50,424,603
|
|
|
$
|
22,051,616
|
|
|
$
|
28,360,953
|
|
|
$
|
12,034
|
|
|
$
|
—
|
|
The long-term debt obligations in the table above include both principal and interest payments, and payments on the interest rate swap agreement at the interest rates applicable to the obligations as of
September 30, 2012
. These long term debt obligations exclude interest on the operating line of credit.
Subsequent Events
Effective November 20, 2012, we entered into an Eleventh Amendment of Construction Loan Agreement which amended our Construction Loan Agreement originally dated December 19, 2006 with First National Bank of Omaha. The amendment waived our violation for the fiscal quarter ended
September 30, 2012
of the fixed charge coverage ratio covenant in the Construction Loan Agreement. In addition, the amendment amended the calculation of the covenant measuring the fixed charge coverage ratio for three fiscal quarters beginning October 1, 2012 through June 30, 2013. It will now be measured on a stand alone quarterly basis, reverting to the rolling quarter basis for the year ending September 30, 2013.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Members of Cardinal Ethanol, LLC
We have audited the accompanying balance sheets of Cardinal Ethanol, LLC as of September 30, 2012 and 2011, and the related statements of operations and comprehensive income, cash flows, and changes in members' equity for each of the fiscal years in the three year period ended September 30, 2012. Cardinal Ethanol, LLC's management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (PCAOB). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cardinal Ethanol, LLC as of September 30, 2012 and 2011, and the results of its operations and its cash flows for each of the fiscal years in the three year period ended September 30, 2012, in conformity with accounting principles generally accepted in the United States of America.
/s/ Boulay, Heutmaker, Zibell & Co. P.L.L.P
Minneapolis, Minnesota
December 11, 2012
CARDINAL ETHANOL, LLC
Balance Sheets
|
|
|
|
|
|
|
|
|
ASSETS
|
September 30, 2012
|
|
September 30, 2011
|
|
|
|
|
Current Assets
|
|
|
|
Cash
|
$
|
682,943
|
|
|
$
|
10,802,072
|
|
Restricted cash
|
3,603,580
|
|
|
2,358,802
|
|
Trade accounts receivable, net of an allowance of $0 and $23,500, respectively
|
21,785,960
|
|
|
19,100,842
|
|
Miscellaneous receivables
|
192,514
|
|
|
471,403
|
|
Inventories
|
9,329,684
|
|
|
11,732,998
|
|
Deposits
|
—
|
|
|
192,250
|
|
Prepaid and other current assets
|
293,259
|
|
|
435,282
|
|
Commodity derivative instruments
|
85,470
|
|
|
4,736,691
|
|
Total current assets
|
35,973,410
|
|
|
49,830,340
|
|
|
|
|
|
Property, Plant, and Equipment
|
|
|
|
Land and land improvements
|
21,124,597
|
|
|
21,105,097
|
|
Plant and equipment
|
122,149,377
|
|
|
121,310,752
|
|
Building
|
6,996,908
|
|
|
6,991,721
|
|
Office equipment
|
529,507
|
|
|
356,516
|
|
Vehicles
|
31,928
|
|
|
31,928
|
|
Construction in process
|
99,461
|
|
|
—
|
|
|
150,931,778
|
|
|
149,796,014
|
|
Less accumulated depreciation
|
(33,106,415
|
)
|
|
(24,626,303
|
)
|
Net property, plant, and equipment
|
117,825,363
|
|
|
125,169,711
|
|
|
|
|
|
Other Assets
|
|
|
|
Deposits
|
80,000
|
|
|
80,000
|
|
Investment
|
474,837
|
|
|
453,676
|
|
Financing costs, net of amortization
|
176,155
|
|
|
343,023
|
|
Total other assets
|
730,992
|
|
|
876,699
|
|
|
|
|
|
Total Assets
|
$
|
154,529,765
|
|
|
$
|
175,876,750
|
|
Notes to Financial Statements are an integral part of this Statement.
CARDINAL ETHANOL, LLC
Balance Sheets
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS' EQUITY
|
September 30, 2012
|
|
September 30, 2011
|
|
|
|
|
Current Liabilities
|
|
|
|
Accounts payable
|
$
|
2,390,221
|
|
|
$
|
2,081,140
|
|
Accounts payable-corn
|
6,861,610
|
|
|
4,059,970
|
|
Construction retainage payable
|
—
|
|
|
101,928
|
|
Accrued expenses
|
1,207,414
|
|
|
1,547,097
|
|
Commodity derivative instruments
|
1,111,238
|
|
|
88,390
|
|
Derivative instruments - interest rate swap
|
1,458,399
|
|
|
1,521,531
|
|
Current maturities of long-term debt and capital lease obligations
|
3,634,004
|
|
|
9,228,305
|
|
Total current liabilities
|
16,662,886
|
|
|
18,628,361
|
|
|
|
|
|
Long-Term Debt and Capital Lease Obligations
|
27,943,975
|
|
|
42,960,017
|
|
|
|
|
|
Derivative Instruments - interest rate swap
|
628,358
|
|
|
1,961,239
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
Members’ Equity
|
|
|
|
Member contributions, net of cost of raising capital, 14,606 units authorized, issued and outstanding
|
70,912,213
|
|
|
70,912,213
|
|
Accumulated other comprehensive loss
|
(2,086,758
|
)
|
|
(3,482,769
|
)
|
Distributions to members
|
(6,280,580
|
)
|
|
—
|
|
Retained earnings
|
46,749,671
|
|
|
44,897,689
|
|
Total members' equity
|
109,294,546
|
|
|
112,327,133
|
|
|
|
|
|
Total Liabilities and Members’ Equity
|
$
|
154,529,765
|
|
|
$
|
175,876,750
|
|
Notes to Financial Statements are an integral part of this Statement.
CARDINAL ETHANOL, LLC
Statements of Operations and Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
Fiscal Year Ended
|
|
Fiscal Year Ended
|
|
|
September 30, 2012
|
|
September 30, 2011
|
|
September 30, 2010
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
321,194,387
|
|
|
$
|
337,019,930
|
|
|
$
|
224,807,338
|
|
|
|
|
|
|
|
|
Cost of Goods Sold
|
|
311,971,054
|
|
|
302,690,475
|
|
|
195,880,762
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
9,223,333
|
|
|
34,329,455
|
|
|
28,926,576
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
4,680,729
|
|
|
4,250,752
|
|
|
3,735,530
|
|
|
|
|
|
|
|
|
Operating Income
|
|
4,542,604
|
|
|
30,078,703
|
|
|
25,191,046
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
Interest income
|
|
2,808
|
|
|
3,891
|
|
|
2,792
|
|
Interest expense
|
|
(2,824,100
|
)
|
|
(4,412,755
|
)
|
|
(4,797,649
|
)
|
Miscellaneous income (expense)
|
|
130,668
|
|
|
(160,702
|
)
|
|
54,390
|
|
Total
|
|
(2,690,624
|
)
|
|
(4,569,566
|
)
|
|
(4,740,467
|
)
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
1,851,980
|
|
|
$
|
25,509,137
|
|
|
$
|
20,450,579
|
|
|
|
|
|
|
|
|
Weight Average Units Outstanding - basic and diluted
|
|
14,606
|
|
|
14,606
|
|
|
14,606
|
|
|
|
|
|
|
|
|
Net Income Per Unit - basic and diluted
|
|
$
|
126.80
|
|
|
$
|
1,746.48
|
|
|
$
|
1,400.15
|
|
|
|
|
|
|
|
|
Distributions Per Unit
|
|
$
|
430.00
|
|
|
$
|
—
|
|
|
$
|
60.00
|
|
|
|
|
|
|
|
|
Comprehensive Income:
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,851,980
|
|
|
$
|
25,509,137
|
|
|
$
|
20,450,579
|
|
Interest rate swap fair value change and reclassification, net
|
|
1,396,011
|
|
|
1,167,948
|
|
|
(519,168
|
)
|
Comprehensive Income
|
|
$
|
3,247,991
|
|
|
$
|
26,677,085
|
|
|
$
|
19,931,411
|
|
Notes to Financial Statements are an integral part of this Statement.
CARDINAL ETHANOL, LLC
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
Fiscal Year Ended
|
|
Fiscal Year Ended
|
|
September 30, 2012
|
|
September 30, 2011
|
|
September 30, 2010
|
|
|
|
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
Net income
|
$
|
1,851,980
|
|
|
$
|
25,509,137
|
|
|
$
|
20,450,579
|
|
Adjustments to reconcile net income to net cash from operations:
|
|
|
|
|
|
Depreciation and amortization
|
8,657,575
|
|
|
8,542,898
|
|
|
8,451,832
|
|
Change in fair value of commodity derivative instruments
|
6,089,789
|
|
|
11,661,874
|
|
|
2,424,135
|
|
(Gain) Loss on disposal of fixed asset
|
562
|
|
|
—
|
|
|
(266,583
|
)
|
Non-cash dividend income
|
(21,161
|
)
|
|
(187,093
|
)
|
|
—
|
|
Provision for uncollectible accounts
|
—
|
|
|
35,847
|
|
|
—
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
Restricted cash
|
(1,244,778
|
)
|
|
2,191,863
|
|
|
—
|
|
Trade accounts receivables
|
(2,685,118
|
)
|
|
(5,874,049
|
)
|
|
(7,317,494
|
)
|
Miscellaneous receivable
|
278,889
|
|
|
558,794
|
|
|
(8,718
|
)
|
Inventories
|
2,403,314
|
|
|
(3,399,858
|
)
|
|
(2,541,838
|
)
|
Prepaid and other current assets
|
142,023
|
|
|
529,817
|
|
|
(118,328
|
)
|
Deposits
|
192,250
|
|
|
217,690
|
|
|
923,947
|
|
Derivative instruments
|
(415,720
|
)
|
|
(18,889,962
|
)
|
|
(4,260,000
|
)
|
Accounts payable
|
309,081
|
|
|
(73,230
|
)
|
|
824,585
|
|
Accounts payable-corn
|
2,801,640
|
|
|
793,190
|
|
|
1,709,592
|
|
Construction retainage payable
|
—
|
|
|
(249,772
|
)
|
|
—
|
|
Accrued expenses
|
(357,216
|
)
|
|
282,342
|
|
|
(330,915
|
)
|
Net cash provided by operating activities
|
18,003,110
|
|
|
21,649,488
|
|
|
19,940,794
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
Capital expenditures
|
(1,131,855
|
)
|
|
(770,137
|
)
|
|
(284,978
|
)
|
Payments for construction in process
|
(99,461
|
)
|
|
—
|
|
|
(3,480,322
|
)
|
Net cash used for investing activities
|
(1,231,316
|
)
|
|
(770,137
|
)
|
|
(3,765,300
|
)
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
Distributions paid
|
(6,280,580
|
)
|
|
—
|
|
|
(876,360
|
)
|
Payments for capital lease obligations
|
(2,010
|
)
|
|
(6,113
|
)
|
|
(7,770
|
)
|
Proceeds from long-term debt
|
—
|
|
|
29,800,000
|
|
|
—
|
|
Payments on long-term debt
|
(20,608,333
|
)
|
|
(43,188,986
|
)
|
|
(19,238,669
|
)
|
Net cash used for financing activities
|
(26,890,923
|
)
|
|
(13,395,099
|
)
|
|
(20,122,799
|
)
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash
|
(10,119,129
|
)
|
|
7,484,252
|
|
|
(3,947,305
|
)
|
|
|
|
|
|
|
Cash – Beginning of Period
|
10,802,072
|
|
|
3,317,820
|
|
|
7,265,125
|
|
|
|
|
|
|
|
Cash – End of Period
|
$
|
682,943
|
|
|
$
|
10,802,072
|
|
|
$
|
3,317,820
|
|
Notes to Financial Statements are an integral part of this Statement.
CARDINAL ETHANOL, LLC
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
Fiscal Year Ended
|
|
Fiscal Year Ended
|
|
September 30, 2012
|
|
September 30, 2011
|
|
September 30, 2010
|
|
|
|
|
|
|
Supplemental Cash Flow Information
|
|
|
|
|
|
Interest paid
|
$
|
3,115,561
|
|
|
$
|
4,559,126
|
|
|
$
|
5,067,484
|
|
|
|
|
|
|
|
Supplemental Disclosure of Noncash Investing and Financing Activities
|
|
|
|
|
|
Construction costs in construction retainage and accounts payable
|
$
|
—
|
|
|
$
|
101,928
|
|
|
—
|
|
Gain (Loss) on derivative instruments included in other comprehensive income
|
$
|
1,396,011
|
|
|
$
|
1,167,948
|
|
|
$
|
(519,168
|
)
|
Equipment purchase price adjustment included in accounts payable
|
$
|
107,213
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Capital expenditures included in accrued expenses and accounts receivable
|
$
|
17,533
|
|
|
$
|
66,264
|
|
|
$
|
62,497
|
|
Notes to Financial Statements are an integral part of this Statement.
CARDINAL ETHANOL, LLC
Statements of Changes in Members' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
Retained
|
|
Other
|
|
|
Member
|
|
Earnings
|
|
Comprehensive
|
|
|
Contributions
|
|
(Deficit)
|
|
Loss
|
Balance - September 30, 2009
|
|
70,912,213
|
|
|
(185,667
|
)
|
|
(4,131,549
|
)
|
|
|
|
|
|
|
|
Net income for year ended September 30, 2010
|
|
—
|
|
|
20,450,579
|
|
|
—
|
|
|
|
|
|
|
|
|
Members Distributions
|
|
|
|
(876,360
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
Unrealized loss on derivative contracts, net
|
|
—
|
|
|
—
|
|
|
(519,168
|
)
|
|
|
|
|
|
|
|
Balance - September 30, 2010
|
|
70,912,213
|
|
|
19,388,552
|
|
|
(4,650,717
|
)
|
|
|
|
|
|
|
|
Net income for year ended September 30, 2011
|
|
—
|
|
|
25,509,137
|
|
|
—
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
Unrealized gain on derivative contracts, net
|
|
—
|
|
|
—
|
|
|
1,167,948
|
|
|
|
|
|
|
|
|
Balance - September 30, 2011
|
|
70,912,213
|
|
|
44,897,689
|
|
|
(3,482,769
|
)
|
|
|
|
|
|
|
|
Net income for year ended September 30, 2012
|
|
—
|
|
|
1,851,980
|
|
|
—
|
|
|
|
|
|
|
|
|
Members Distributions
|
|
—
|
|
|
(6,280,580
|
)
|
|
—
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
Unrealized gain on derivative contracts, net
|
|
—
|
|
|
—
|
|
|
1,396,011
|
|
|
|
|
|
|
|
|
Balance - September 30, 2012
|
|
$
|
70,912,213
|
|
|
$
|
40,469,089
|
|
|
$
|
(2,086,758
|
)
|
Notes to Financial Statements are an integral part of this Statement.
CARDINAL ETHANOL, LLC
Notes to Audited Financial Statements
September 30, 2012 and 2011
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Cardinal Ethanol, LLC, (the “Company”) is an Indiana limited liability company currently producing fuel-grade ethanol, distillers grains, corn oil and carbon dioxide near Union City, Indiana and sells these products throughout the continental United States. During the fiscal years ended September 30, 2012 and 2011, the Company produced approximately
108 million
and
115 million
gallons of ethanol, respectively.
Fiscal Reporting Period
The Company has adopted a fiscal year ending September 30 for reporting financial operations.
Accounting Estimates
Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. The Company uses estimates and assumptions in accounting for the following significant matters, among others; the useful lives of fixed assets, allowance for doubtful accounts, the valuation of basis and delay price contracts on corn purchases, derivatives, inventory, patronage dividends, long-lived assets and inventory purchase commitments. Actual results may differ from previously estimated amounts, and such differences may be material to the financial statements. The Company periodically reviews estimates and assumptions, and the effects of revisions are reflected in the period in which the revision is made.
Cash
The Company maintains its accounts primarily at two financial institutions. At times throughout the year the Company's cash balances may exceed amounts insured by the Federal Deposit Insurance Corporation.
Restricted Cash
As a part of its commodities hedging activities, the company is required to maintain cash balances with our commodities trading companies for initial and maintenance margins on a per futures contract basis. Changes in the market value of contracts may increase these requirements. As the futures contracts expire, the margin requirements also expire. Accordingly, we record the cash maintained with the traders in the margin accounts as restricted cash. Since this cash is immediately available to us upon request when there is a margin excess, we consider this restricted cash to be a current asset.
Accounts Receivable
Credit terms are extended to customers in the normal course of business. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral. Accounts receivable are recorded at their estimated net realizable value. Accounts are considered past due if payment is not made on a timely basis in accordance with the Company's credit terms. Amounts considered uncollectible are written off. The Company's estimate of the allowance for doubtful accounts is based on historical experience, its evaluation of the current status of receivables, and unusual circumstances, if any. At
September 30, 2012
and
2011
, the Company had an allowance for doubtful accounts of
$0
and
$23,500
, respectively.
Inventories
Inventories are stated at the lower of cost or market. Inventories consist of raw materials, work in process, finished goods and parts. Corn is the primary raw material. Finished goods consist of ethanol, dried distiller grains and corn oil. Cost for substantially all inventory is determined using the lower of (average) cost or market. Market is based on current replacement values except that it does not exceed net realizable values and it is not less than net realizable values reduced by allowances from normal profit margins.
CARDINAL ETHANOL, LLC
Notes to Audited Financial Statements
September 30, 2012 and 2011
Property, Plant and Equipment
Property, plant, and equipment are stated at cost. Depreciation is provided over estimated useful lives by use of the straight line depreciation method. Maintenance and repairs are expensed as incurred; major improvements and betterments are capitalized. Construction in progress expenditures will be depreciated using the straight-line method over their estimated useful lives once the assets are placed into service.
|
|
|
|
|
Minimum years
|
Maximum years
|
Land improvements
|
15
|
20
|
Office building
|
10
|
40
|
Office equipment
|
5
|
5
|
Process and grain handling equipment
|
10
|
20
|
Plant buildings
|
15
|
40
|
Long-Lived Assets
The Company reviews its long-lived assets, such as property, plant and equipment and financing costs, subject to depreciation and amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.
Financing Costs
Costs associated with the issuance of loans are classified as financing costs. Financing costs are amortized over the term of the related debt by use of the effective interest method, beginning when Company draws on the loans. Amortization for the years ended
September 30, 2012
,
2011
and
2010
was approximately
$167,000
,
$162,000
and
$195,000
, respectively.
Grants
The Company recognizes grant proceeds as other income upon complying with the conditions of the grant. For reimbursements of incremental expenses (expenses the Company otherwise would not have incurred had it not been for the grant), the grant proceeds are recognized as a reduction of the related expense. For reimbursement of capital expenditures, the grants are recognized as a reduction of the basis of the asset upon complying with the conditions of the grant.
Investments
Investments consist of the capital stock and patron equities of the Company's distillers grains marketer. The investments are stated at the lower of cost or fair value and adjusted for non cash patronage equities received.
Interest income is recognized as earned. Patronage dividends are recognized when received.
Revenue Recognition
The Company generally sells ethanol and related products pursuant to marketing agreements. Revenues from the production of ethanol and the related products are recorded when the customer has taken title and assumed the risks and rewards of ownership, prices are fixed or determinable and collectability is reasonably assured. The Company believes that there are no ethanol sales, during any given month, which should be considered contingent and recorded as deferred revenue. The Company's products are sold FOB shipping point.
CARDINAL ETHANOL, LLC
Notes to Audited Financial Statements
September 30, 2012 and 2011
In accordance with the Company's agreements for the marketing and sale of ethanol and related products, marketing fees, commissions and freight due to the marketers are deducted from the gross sales price at the time incurred. Commissions were approximately
$2,841,000
,
$3,388,000
and
$2,500,000
for the years ended
September 30, 2012
,
2011
and
2010
, respectively. Freight was approximately
$8,493,000
,
$9,929,000
and
$10,280,000
for the years ended
September 30, 2012
,
2011
and
2010
, respectively. Revenue is recorded net of these commissions and freight as they do not provide an identifiable benefit that is sufficiently separable from the sale of ethanol and related products.
Derivative Instruments
From time to time the Company enters into derivative transactions to hedge its exposures to commodity price fluctuations. The Company is required to record these derivatives in the balance sheet at fair value.
In order for a derivative to qualify as a hedge, specific criteria must be met and appropriate documentation maintained. Gains and losses from derivatives that do not qualify as hedges, or are undesignated, must be recognized immediately in earnings. If the derivative does qualify as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will be either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Changes in the fair value of undesignated derivatives are recorded in the statement of operations, depending on the item being hedged.
Additionally, the Company is required to evaluate its contracts to determine whether the contracts are derivatives. Certain contracts that literally meet the definition of a derivative may be exempted as “normal purchases or normal sales”. Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. Contracts that meet the requirements of normal purchases or sales are documented as normal and exempted from accounting and reporting requirements, and therefore, are not marked to market in our financial statements.
Fair Value of Financial Instruments
The Company follows guidance for accounting for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements on a recurring and nonrecurring basis. The guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
|
|
•
|
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
|
|
|
•
|
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
|
|
|
•
|
Level 3 inputs are unobservable inputs for the asset or liability.
|
The level in the fair value hierarchy within which a fair measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
The carrying value of cash, accounts receivable, accounts payable and accrued liabilities approximates fair value at
September 30, 2012
and
2011
due to the short maturity nature of these instruments. The fair value of derivative instruments and debt is disclosed in Note 7.
Except for those assets and liabilities which are required by authoritative accounting guidance to be recorded at fair value on our balance sheets, the Company has elected not to record any other assets or liabilities at fair value. No events occurred during the fiscal years ended
September 30, 2012
or
2011
that required adjustment to the recognized balances of assets or liabilities, which are recorded at fair value on a nonrecurring basis.
CARDINAL ETHANOL, LLC
Notes to Audited Financial Statements
September 30, 2012 and 2011
Environmental Liabilities
The Company's operations are subject to environmental laws and regulations adopted by various governmental entities in the jurisdiction in which it operates. These laws require the Company to investigate and remediate the effects of the release or disposal of materials at its location. Accordingly, the Company has adopted policies, practices and procedures in the areas of pollution control, occupational health, and the production, handling, storage and use of hazardous materials to prevent material environmental or other damage, and to limit the financial liability, which could result from such events. Environmental liabilities are recorded when the liability is probable and the costs can be reasonably estimated. No liabilities were recorded at
September 30, 2012
or
2011
.
Cost of Goods Sold
We include corn procurement costs including inbound freight, warehousing, inspection and hedging costs in our cost of goods sold. We also include ethanol and co-product conversion costs such as costs of denaturant, chemicals, natural gas and other utilities, wages and benefits, repairs and maintenance, other production costs and an allocation for production related depreciation in cost of goods sold.
General and Administrative Expenses
General and administrative costs are administrative and non-production related costs of running the business. These include executive and administrative salaries, wages and benefits, advertising, insurance, taxes, fees, subscriptions and other similar expenses. We include an allocation for depreciation related to non-production long-lived assets in this category. Also included is amortization of financing costs incurred prior to the start of operations.
Net Income per Unit
Basic net income per unit is computed by dividing net income by the weighted average number of members' units outstanding during the period. Diluted net income per unit is computed by dividing net income by the weighted average number of members' units and members' unit equivalents outstanding during the period. There were no member unit equivalents outstanding during the periods presented; accordingly, the Company's basic and diluted net income per unit are the same.
Income Taxes
Cardinal Ethanol LLC is treated as a partnership for federal and state income tax purposes and generally does not incur income taxes. Instead, their income or losses are included in the income tax returns of the members and partners. Accordingly, no provision or liability for federal or state income taxes has been included in these financial statements. The Company had no significant uncertain tax positions as of
September 30, 2012
or
2011
. Differences between the financial statement basis of assets and tax basis of assets is related to capitalization and amortization of organization and start-up costs for tax purposes, whereas these costs are expensed for financial statement purposes. In addition, the Company uses the modified accelerated cost recovery system method (MACRS) for tax depreciation instead of the straight-line method that is used for book depreciation, which also causes temporary differences. For years before 2009, the Company is no longer subject to U.S. Federal income tax examinations.
2. CONCENTRATIONS
One major customer accounted for approximately
86%
and
92%
of the outstanding accounts receivable balance at
September 30, 2012
and
September 30, 2011
, respectively. This same customer also accounted for approximately
78%
and
82%
of revenue for the year ended
September 30, 2012
and
2011
, respectively.
CARDINAL ETHANOL, LLC
Notes to Audited Financial Statements
September 30, 2012 and 2011
3. INCOME TAXES
The differences between financial statement basis and tax basis of assets and liabilities at
September 30, 2012
and
2011
are as follows:
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
Financial statement basis of assets
|
$
|
154,529,765
|
|
|
$
|
175,876,750
|
|
Organization and start-up costs
|
1,976,610
|
|
|
1,976,610
|
|
Book to tax depreciation and amortization
|
(80,123,774
|
)
|
|
(65,044,844
|
)
|
Book to tax derivative instruments
|
(85,470
|
)
|
|
(4,648,301
|
)
|
Capitalized Inventory
|
80,000
|
|
|
250,000
|
|
Income tax basis of assets
|
$
|
76,377,131
|
|
|
$
|
108,410,215
|
|
|
|
|
|
Financial statement basis of liabilities
|
$
|
45,235,219
|
|
|
$
|
63,549,617
|
|
Interest rate swap
|
(2,086,758
|
)
|
|
(3,482,770
|
)
|
Book to tax derivative instruments
|
$
|
(1,111,238
|
)
|
|
$
|
—
|
|
Income tax basis of liabilities
|
$
|
42,037,223
|
|
|
$
|
60,066,847
|
|
4. MEMBERS' EQUITY
The Company has one class of membership units, which include certain transfer restrictions as specified in the operating agreement and pursuant to applicable tax and securities laws. Income and losses are allocated to all members based upon their respective percentage of units held.
On January 17, 2012, the board of directors approved a distribution of
$430
per unit, for a total distribution of
$6,280,580
, for members of record as of that date. The distribution was paid in February 2012.
5. INVENTORIES
Inventories consist of the following as of
September 30, 2012
and
September 30, 2011
:
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
September 30, 2011
|
Raw materials
|
$
|
2,035,607
|
|
|
$
|
6,061,116
|
|
Work in progress
|
2,536,420
|
|
|
2,409,106
|
|
Finished goods
|
3,258,153
|
|
|
2,065,407
|
|
Spare parts
|
1,499,504
|
|
|
1,197,369
|
|
Total
|
$
|
9,329,684
|
|
|
$
|
11,732,998
|
|
For the
fiscal year ended
ended
September 30, 2012
, the Company recorded losses of approximately
$104,000
related to ethanol inventory where the market value was less than the cost basis, attributable primarily to decrease in market price of ethanol for the inventory on hand. The loss was recorded in cost of goods sold in the statement of operations.
In the ordinary course of business, the Company enters into forward purchase contracts for its commodity purchases and sales. At
September 30, 2012
, the Company had forward corn purchase contracts at various fixed prices for various delivery periods through
February 2014
for a total commitment of approximately
$17,653,000
. Approximately
$2,137,000
of the forward corn purchases were with a related party. Given the uncertainty of future ethanol and corn prices, the Company could incur a loss on the outstanding corn purchase contracts in future periods. Management has evaluated these forward contracts using a methodology similar to that used in the lower of cost or market evaluation with respect to inventory valuation, and has determined that no impairment existed at
September 30, 2012
. At
September 30, 2012
, the Company has
no
forward, fixed price ethanol sales contracts. In addition, the Company has forward dried distiller grains sales contracts of approximately
32,880
tons at various fixed prices for various delivery periods.
CARDINAL ETHANOL, LLC
Notes to Audited Financial Statements
September 30, 2012 and 2011
6. DERIVATIVE INSTRUMENTS
The Company enters into corn, ethanol and natural gas derivative instruments and interest rate swap agreements, which are required to be recorded as either assets or liabilities at fair value in the balance sheet. Derivatives qualify for treatment as hedges when there is a high correlation between the change in fair value of the derivative instrument and the related change in value of the underlying hedged item. The Company must designate the hedging instruments based upon the exposure being hedged as a fair value hedge, a cash flow hedge or a hedge against foreign currency exposure. The Company formally documents, designates, and assesses the effectiveness of transactions that receive hedge accounting initially and on an on-going basis.
Commodity Contracts
The Company enters into commodity-based derivatives, for corn, ethanol and natural gas in order to protect cash flows from fluctuations caused by volatility in commodity prices and to protect gross profit margins from potentially adverse effects of market and price volatility on commodity based purchase commitments where the prices are set at a future date. These derivatives are not designated as effective hedges for accounting purposes. For derivative instruments that are not accounted for as hedges, or for the ineffective portions of qualifying hedges, the change in fair value is recorded through earnings in the period of change. The changes in the fair market value of ethanol derivative instruments are included as a component of revenue. The changes in the fair market value of corn and natural gas derivative instruments are included as a component of cost of goods sold
The table below shows the underlying quantities of corn, ethanol and natural gas resulting from the short (selling) positions and long (buying) positions that the Company had to hedge its forward corn contracts, corn inventory, ethanol sales and natural gas purchases. Corn positions are traded on the Chicago Board of Trade and ethanol and natural gas positions are traded on the New York Mercantile Exchange. These derivatives have not been designated as an effective hedge for accounting purposes. Corn and ethanol derivatives are forecasted to settle for various delivery periods through March 2014 and December 2012, respectively, as of
September 30, 2012
.
The following table indicates the bushels of corn under derivative contract as of
September 30, 2012
and
September 30, 2011
:
|
|
|
|
|
|
|
|
September 30, 2012
|
|
September 30, 2011
|
Short
|
2,855,000
|
|
|
5,910,000
|
|
Long
|
85,000
|
|
|
5,235,000
|
|
The following table indicates the gallons of ethanol under derivative contract as of
September 30, 2012
and
September 30, 2011
:
|
|
|
|
|
|
|
|
September 30, 2012
|
|
September 30, 2011
|
Short
|
19,572,000
|
|
|
29,431,000
|
|
Long
|
19,152,000
|
|
|
840,000
|
|
The following table indicates the MMBTUs of natural gas under derivative contract as of
September 30, 2012
and
September 30, 2011
:
|
|
|
|
|
|
|
|
September 30, 2012
|
|
September 30, 2011
|
Long
|
—
|
|
|
210,000
|
|
Interest Rate Contract
The Company manages part of its floating rate debt using an interest rate swap associated with the "Fixed Rate Note" as defined in our loan agreement. Please see Note 8 below. The Company entered into a fixed rate swap to alter its exposure to the impact of changing interest rates on its results of operations and future cash outflows for interest. Fixed rate swaps are used to reduce the Company's risk of the possibility of increased interest costs. Interest rate swap contracts are therefore used by the Company to separate interest rate risk management from the debt funding decision.
At
September 30, 2012
, the Company had approximately
$31,578,000
of notional amount outstanding in the swap agreement that exchange variable interest rates (LIBOR) for fixed interest rates over the terms of the agreements and are designated as cash flow
CARDINAL ETHANOL, LLC
Notes to Audited Financial Statements
September 30, 2012 and 2011
hedges of the interest rate risk attributable to forecasted variable interest payments. The effective portion of the fair value gains or losses on this swap is included as a component of accumulated other comprehensive income.
The interest rate swaps held by the Company as of
September 30, 2012
qualified as a cash flow hedge. For this qualifying hedge, the effective portion of the change in fair value is recognized through earnings when the underlying transaction being hedged affects earnings, allowing a derivative's gains and losses to offset related results from the hedged item on the income statement.
The following table provides balance sheet details regarding the Company's derivative financial instruments at
September 30, 2012
:
|
|
|
|
|
|
|
|
|
|
|
Instrument
|
Balance Sheet Location
|
|
Assets
|
|
Liabilities
|
|
|
|
|
|
|
Interest rate swap
|
Derivative Instruments - Current
|
|
$
|
—
|
|
|
$
|
1,458,399
|
|
Interest rate swap
|
Derivative Instruments - Long Term
|
|
$
|
—
|
|
|
$
|
628,358
|
|
Ethanol derivative contracts
|
Commodity Derivative Instruments - Current
|
|
$
|
85,470
|
|
|
$
|
—
|
|
Corn derivative contracts
|
Commodity Derivative Instruments - Current
|
|
$
|
—
|
|
|
$
|
1,111,238
|
|
As of
September 30, 2012
the Company had approximately
$3,604,000
of cash collateral (restricted cash) related to ethanol and corn derivatives held by two brokers.
The following table provides balance sheet details regarding the Company's derivative financial instruments at
September 30, 2011
:
|
|
|
|
|
|
|
|
|
|
|
Instrument
|
Balance Sheet Location
|
|
Assets
|
|
Liabilities
|
|
|
|
|
|
|
Interest rate swap
|
Derivative Instruments - Current
|
|
$
|
—
|
|
|
$
|
1,521,531
|
|
Interest rate swap
|
Derivative Instruments - Long Term
|
|
$
|
—
|
|
|
$
|
1,961,239
|
|
Ethanol derivative contracts
|
Commodity Derivative Instruments - Current
|
|
$
|
2,418,028
|
|
|
$
|
—
|
|
Corn derivative contracts
|
Commodity Derivative Instruments - Current
|
|
$
|
2,318,663
|
|
|
$
|
—
|
|
Natural gas derivative contracts
|
Commodity Derivative Instruments - Current
|
|
$
|
—
|
|
|
$
|
88,390
|
|
As of
September 30, 2011
the Company had approximately
$2,359,000
of cash collateral (restricted cash) related to ethanol and corn derivatives held by two brokers.
The following tables provide details regarding the gains and (losses) from the Company's derivative instruments in other comprehensive income and statement of operations for the
fiscal years
ended
September 30, 2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in Cash Flow Hedging Relationship
|
Amount of Loss Recognized In OCI on Derivative - for the year ended
September 30, 2012
|
Location of Loss Reclassified From Accumulated OCI into Income
|
Amount of Gain Reclassified From Accumulated OCI into Income on Derivative - for the year ended September 30, 2012
|
Location of Gain Recognized in Income
|
Amount of Gain or (Loss) Recognized in Income on Derivative (ineffective portion) year ended September 30, 2012
|
Interest rate swap
|
$
|
(211,339
|
)
|
Interest expense
|
$
|
1,607,350
|
|
Interest expense
|
$
|
—
|
|
The following tables provide details regarding the gains and (losses) from the Company's derivative instruments in other comprehensive income and statement of operations for the
fiscal years
ended
September 30, 2011
:
CARDINAL ETHANOL, LLC
Notes to Audited Financial Statements
September 30, 2012 and 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in Cash Flow Hedging Relationship
|
Amount of Loss Recognized In OCI on Derivative - for the year ended September 30, 2011
|
Location of Loss Reclassified From Accumulated OCI into Income
|
Amount of Gain Reclassified From Accumulated OCI into Income on Derivative - for the year ended September 30, 2011
|
Location of Gain Recognized in Income
|
Amount of Gain or (Loss) Recognized in Income on Derivative (ineffective portion) year ended September 30, 2011
|
Interest rate swap
|
$
|
(623,344
|
)
|
Interest expense
|
$
|
1,791,291
|
|
Interest expense
|
$
|
—
|
|
The following table provides details regarding the gains and (losses) from the Company's derivative instruments in the statements of operations, none of which are designated as hedging instruments for the
fiscal years
ended
September 30, 2012
:
|
|
|
|
|
|
Instrument
|
Statement of Operations Location
|
Amount
|
Corn Derivative Contracts
|
Cost of Goods Sold
|
$
|
(7,004,120
|
)
|
Ethanol Derivative Contracts
|
Revenues
|
974,555
|
|
Natural Gas Derivative Contracts
|
Cost of Goods Sold
|
(60,224
|
)
|
Totals
|
|
$
|
(6,089,789
|
)
|
The following table provides details regarding the losses from the Company's derivative instruments in the statements of operations, none of which are designated as hedging instruments for the
fiscal year ended
ended
September 30, 2011
:
|
|
|
|
|
|
Instrument
|
Statement of Operations Location
|
Amount
|
Corn Derivative Contracts
|
Cost of Goods Sold
|
$
|
(5,008,132
|
)
|
Ethanol Derivative Contracts
|
Revenues
|
(116,899
|
)
|
Natural Gas Derivative Contracts
|
Cost of Goods Sold
|
(6,536,843
|
)
|
Totals
|
|
$
|
(11,661,874
|
)
|
7. FAIR VALUE MEASUREMENTS
The following table provides information on those assets and liabilities measured at fair value on a recurring basis as of
September 30, 2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
Carrying Amount
|
Fair Value
|
Level 1
|
Level 2
|
Level 3
|
Interest Rate Swap Liability
|
$
|
(2,086,757
|
)
|
$
|
(2,086,757
|
)
|
$
|
—
|
|
$
|
(2,086,757
|
)
|
$
|
—
|
|
Corn Derivative Contracts
|
$
|
(1,111,238
|
)
|
$
|
(1,111,238
|
)
|
$
|
(1,111,238
|
)
|
$
|
—
|
|
$
|
—
|
|
Ethanol Derivative Contracts
|
$
|
85,470
|
|
$
|
85,470
|
|
$
|
85,470
|
|
$
|
—
|
|
$
|
—
|
|
Natural Gas Derivative Contracts
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
The following table provides information on those assets and liabilities measured at fair value on a recurring basis as of
September 30, 2011
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
Carrying Amount
|
Fair Value
|
Level 1
|
Level 2
|
Level 3
|
Interest Rate Swap Liability
|
$
|
(3,482,770
|
)
|
$
|
(3,482,770
|
)
|
$
|
—
|
|
$
|
(3,482,770
|
)
|
$
|
—
|
|
Corn Derivative Contracts
|
$
|
2,318,663
|
|
$
|
2,318,663
|
|
$
|
2,318,663
|
|
$
|
—
|
|
$
|
—
|
|
Ethanol Derivative Contracts
|
$
|
2,418,028
|
|
$
|
2,418,028
|
|
$
|
2,418,028
|
|
$
|
—
|
|
$
|
—
|
|
Natural Gas Derivative Contracts
|
$
|
(88,390
|
)
|
$
|
(88,390
|
)
|
$
|
(88,390
|
)
|
$
|
—
|
|
$
|
—
|
|
CARDINAL ETHANOL, LLC
Notes to Audited Financial Statements
September 30, 2012 and 2011
We determine the fair value of the interest rate swap shown in the table above by using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each instrument. The analysis reflects the contractual terms of the swap agreement, including the period to maturity and uses observable market-based inputs and uses the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. We determine the fair value of commodity derivative instruments by obtaining fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the Chicago Board of Trade market and New York Mercantile Exchange.
Financial Instruments Not Measured at Fair Value
The estimated fair value of the company's long-term debt, including the short-term portion, at
September 30, 2012
and
2011
approximated the carrying value of approximately
$31.6 million
and
$52.2 million
, respectively. Fair value was estimated using estimated market interest rates at
September 30, 2012
and
2011
, which are level 2 inputs. The fair values and carrying values consider the terms of the related debt and exclude the impacts of discounts and derivative/hedging activity.
8. BANK FINANCING
On December 19, 2006, the Company entered into a definitive loan agreement with a financial institution for a construction loan of up to
$83,000,000
, a short-term revolving line of credit of
$10,000,000
and letters of credit of
$3,000,000
. In connection with this agreement, the Company also entered into an interest rate swap agreement fixing the interest rate on
$41,500,000
of debt. In April 2009, the construction loan was converted into
three
separate term loans: a fixed rate note, a variable rate note, and a long term revolving note. The fixed rate note is applicable to the interest rate swap agreement. The term loans have a maturity of five years with a ten-year amortization.
Line of Credit
In February 2012, the Company amended the
$15,000,000
short-term line of credit through February 2013 and adjusted the interest rate to the 30-day LIBOR rate plus 350 basis points with no minimum interest rate. Prior to this Amendment, the interest rate was calculated as the greater of the 3-month LIBOR rate plus 400 basis points or
4.0%
and a minimum rate of
5%
. This short-term line of credit is also subject to certain borrowing base limitations. The fixed charge coverage ratio covenant is reduced from 1.25:1.0 to 1.15:1.0, and the tangible net worth covenant is eliminated. The working capital covenant is increased from
$10,000,000
to
$15,000,000
, and the capital expenditures covenant is raised to allow the Company
$4,000,000
of expenditures per year instead of
$1,000,000
without prior approval. There were
no
borrowings outstanding on the line of credit at
September 30, 2012
or
September 30, 2011
.
Fixed Rate Note
The Company has an interest rate swap contract in connection with the note payable to its bank that contains a variable rate. The agreement requires the Company to hedge this original note principal balance, up to
$41,500,000
, and matures on April 8, 2014. The variable interest rate is determined quarterly based on the 3-month LIBOR rate plus 300 basis points. The fixed interest rate set by the swap is
8.11%
.
The fair value of the interest rate swap at
September 30, 2012
was
$2,086,757
and was
$3,482,770
at
September 30, 2011
and is included in current and long term liabilities on the balance sheet (Note 6). The Company is required to make quarterly principal and accrued interest payments through April 2014. The outstanding balance of this note was
$31,577,979
and
$34,920,938
at
September 30, 2012
and
September 30, 2011
, respectively, and is included in current liabilities and long-term debt.
Variable Rate Note and Long Term Revolving Note
At
September 30, 2012
and
September 30, 2011
the balance on the variable rate note was
$0
and
$14,464,452
, respectively. We have no ability to draw upon the variable rate note.
At
September 30, 2012
and
September 30, 2011
there were
no
outstanding borrowings on the long term revolving note. If we were to draw upon the long term revolving note, interest would accrue at the 90-day LIBOR rate plus 350 basis points with no
CARDINAL ETHANOL, LLC
Notes to Audited Financial Statements
September 30, 2012 and 2011
minimum rate. At
September 30, 2012
, the interest rate was
3.86%
. The maximum availability on the long term revolving note at
September 30, 2012
was
$6,750,000
, which reduces by
$250,000
each quarter.
Corn Oil Extraction Note
In July 2008, the Company and the financial institution amended the construction loan for an additional
$3,600,000
to be used for the installation of a corn oil extraction system and related equipment. At
September 30, 2012
and
September 30, 2011
the balance on the corn oil extraction note was
$0
and
$2,790,000
, respectively. We have no ability to draw upon the corn oil note.
These loans are subject to protective covenants, which restrict distributions and require the Company to maintain various financial ratios, are secured by all business assets, and require additional loan payments based on excess cash flow. The covenants went into effect in April 2009.
Subsequent to the end of the period covered by this report, we entered into an Eleventh Amendment of Construction Loan Agreement which amended our Construction Loan Agreement originally dated December 19, 2006 with First National Bank of Omaha. The amendment waived our violation for the fiscal quarter ended
September 30, 2012
of the fixed charge coverage ratio. In addition, the amendment amends the calculation of the covenant measuring the fixed charge coverage ratio for three quarters beginning October 1, 2012 through June 30, 2013. It will now be measured on a stand alone quarterly basis, reverting to the rolling quarter basis for the year ending September 30, 2013.
Long-term debt, as discussed above, consists of the following at
September 30, 2012
:
|
|
|
|
|
Fixed rate loan
|
$
|
31,577,979
|
|
Totals
|
31,577,979
|
|
Less amounts due within one year
|
3,634,004
|
|
Net long-term debt
|
$
|
27,943,975
|
|
The estimated maturities of long-term debt at
September 30, 2012
are as follows:
|
|
|
|
|
October 1, 2012 to September 30, 2013
|
$
|
3,634,004
|
|
October 1, 2013 to September 30, 2014
|
27,943,975
|
|
Total long-term debt
|
$
|
31,577,979
|
|
9. LEASES
At
September 30, 2012
, the Company had the following commitments for payments of rentals under operating leases which at inception had a non-cancellable term of more than one year:
|
|
|
|
|
|
|
|
Total
|
October 1, 2012 to September 30, 2013
|
|
$
|
1,071,804
|
|
October 1, 2013 to September 30, 2014
|
|
96,658
|
|
October 1, 2014 to September 30, 2015
|
|
6,564
|
|
October 1, 2015 to September 30, 2016
|
|
6,564
|
|
October 1, 2016 to September 30, 2017
|
|
6,564
|
|
Thereafter
|
|
5,470
|
|
Total minimum lease commitments
|
|
1,193,624
|
|
CARDINAL ETHANOL, LLC
Notes to Audited Financial Statements
September 30, 2012 and 2011
10. COMMITMENTS AND CONTINGENCIES
Corn Procurement
In July 2008, the Company entered into an agreement with an unrelated party to procure 100% of the corn to be used as feedstock at the Company's ethanol production facility. The Company pays a monthly agency fee equal to an amount per bushel of corn delivered subject to an annual minimum amount. These fees totals
$421,000
,
$400,000
and
$500,000
, for the years ended September 30, 2012, 2011 and 2010. We have given notice to Bunge indicating that we will not be renewing the term of the agreement and that term is now set to expire on or about October 15, 2013 unless the parties mutually agree to an earlier termination. After the agreement has terminated, we plan to directly procure the corn we need for our feedstock from suppliers.
Marketing Agreement
The Company entered into an agreement with an unrelated company for the purpose of marketing and selling all the distillers grains the Company is expected to produce. The buyer agrees to remit a fixed percentage rate of the actual selling price to the Company for distiller's dried grain solubles and wet distiller grains. The agreement may be terminated by either party at its unqualified option, by providing written notice of not less than 120 days to the other party.
The Company entered into an agreement with an unrelated company to sell all of the ethanol the Company produces at the plant. The Company agrees to pay a commission of a fixed percent of the net purchase price for marketing and distribution. In July 2009, the initial term of the agreement was extended to eight years and the commission increased in exchange for reducing the payment terms from 20 days to 7 days after shipment. Subsequent to year end, the Company amended this agreement to extend the initial term of the agreement to eleven years, expiring in 2019, in exchange for capping the commissions at
$1,750,000
per year.
Utility Agreement
The Company entered into a natural gas services contract with an initial term of ten years and automatic renewals for up to three consecutive one year periods. Under the contract, the Company agrees to pay a fixed transportation charge per therm delivered for the first five years. For the remaining five years, the fixed transportation charge will be increased by the compounded inflation rate (as determined by the Consumer Price Index). The contract commenced in November 2008 when plant operations began.
The Company has a commitment to buy electricity from a utility. The Company pays the utility company monthly pursuant to their standard rates.
Development Agreement
In September 2007, the Company entered into a development agreement with Randolph County Redevelopment Commission (“the Commission”) to promote economic development in the area. Under the terms of this agreement, beginning in January 2008 through December 2028, the money the Company pays toward property tax expense is allocated to an expense and an acquisition account. The funds in the acquisition account can be used by the Commission to purchase equipment, at the Company's direction, for the plant. At September 30, 2012, there is approximately
$187,000
in this account. However, as the Company does not have title to or control over the funds in the acquisition account, no amounts have been recorded in the balance sheet relating to this account.
Tax abatement
In October 2006, the real estate that the plant was developed on was determined to be an economic revitalization area, which qualified the Company for tax abatement. The abatement period is for a
10 year term
, with an effective date beginning calendar year end 2009 for the property taxes payable in calendar year 2011. The program allows for
100%
abatement of property taxes beginning in year 1, and then decreases on a ratable scale so that in year 11 the full amount of property taxes are due and payable. The Company must apply annually and meet specified criteria to qualify for the abatement program.
Carbon Dioxide Agreement
In March 2010, the Company entered into an agreement with an unrelated party to sell the raw carbon dioxide gas produced as a
CARDINAL ETHANOL, LLC
Notes to Audited Financial Statements
September 30, 2012 and 2011
byproduct at the Company's ethanol production facility. As part of the agreement, the unrelated company leased a portion of the Company's property to construct a carbon dioxide liquefaction plant. The Company shall supply raw carbon dioxide to the plant at a rate sufficient for production of 150 tons of liquid carbon dioxide per day and will receive a price of
$5.00
per ton of liquid carbon dioxide shipped, with price incentives for increased production levels specified in the contract. The Company shall be paid for a minimum of
40,000
tons each year or approximately
$200,000
annually. The initial term of the agreement is for a period of ten years commencing on the start-up date of the plant, but no later than June 1, 2010 and will automatically renew for two additional five year terms thereafter unless otherwise terminated pursuant to the agreement. The carbon dioxide liquefaction plant began operations in June 2010. In November 2011, the Company amended this agreement to allow for an expansion of the carbon dioxide liquefaction plant. Under the amendment, the Company shall be paid for a new minimum of
98,700
tons each year or approximately
$493,500
annually. The amendment took effect in September 2012.
Legal Proceedings and Contingencies
The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. While the ultimate outcome of these matters is not presently determinable, it is in the opinion of management that the resolution of outstanding claims will not have a material adverse effect on the financial position or results of operations of the Company. Due to the uncertainties in the settlement process, it is at least reasonably possible that management's view of outcomes will change in the near term.
In February 2010, a lawsuit against the Company was filed by another unrelated party claiming the Company's operation of the oil separation system in a patent infringement. In connection with the lawsuit, in February 2010, the agreement for the construction and installation of the tricanter oil separation system was amended. In this amendment the manufacturer and installer of the tricanter oil separation system indemnifies the Company against all claims of infringement of patents, copyrights or other intellectual property rights from the Company's purchase and use of the tricanter oil system and agrees to defend the Company in the lawsuit filed at no expense to the Company. The Company is not currently able to predict the outcome of this litigation with any degree of certainty. The manufacturer has, and the Company expects it will continue, to vigorously defend itself and the Company in these lawsuits. The Company estimates that damages sought in this litigation if awarded would be based on a reasonable royalty to, or lost profits of, the plaintiff. If the court deems the case exceptional, attorney's fees may be awarded and are likely to be
$1,000,000
or more. The manufacturer has also agreed to indemnify the Company for these fees. However, in the event that damages are awarded, if the manufacturer is unable to fully indemnify the Company for any reason, the Company could be liable. In addition, the Company may need to cease use of its current oil separation process and seek out a replacement or cease oil production altogether.
11. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan available to all of its qualified employees. The Company contributes up to
100%
of the contributions of the employee up to
3%
of the eligible salary of each employee and an additional
50%
of the contributions of the employee for percentages 4% and
5%
. In order to receive a contribution, the employee must have worked
1,000
hours in the plan year and be employed as of the last day of the calendar year. The Company contributed approximately
$73,000
and
$34,000
to the defined contribution plan during the years ended
September 30, 2012
and
2011
, respectively.
12. ACCUMULATED OTHER COMPREHENSIVE LOSS AND COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive loss consists of changes in the fair value of derivative instruments that are designated as and meet all of the required criteria for a cash flow hedge. Changes in accumulated other comprehensive loss all related to the interest rate swap for the fiscal year ended
September 30, 2012
and
2011
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
Balance at beginning of year
|
|
$
|
3,482,769
|
|
|
$
|
4,650,717
|
|
Unrealized loss on derivative instruments
|
|
211,339
|
|
|
623,343
|
|
Amount reclassified into income
|
|
(1,607,350
|
)
|
|
(1,791,291
|
)
|
Balance at end of year
|
|
$
|
2,086,758
|
|
|
$
|
3,482,769
|
|
CARDINAL ETHANOL, LLC
Notes to Audited Financial Statements
September 30, 2012 and 2011
The statement of comprehensive income for the fiscal year ended
September 30, 2012
and
2011
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
Net income
|
|
$
|
1,851,980
|
|
|
$
|
25,509,137
|
|
Interest rate swap fair value change, net
|
|
1,396,011
|
|
|
1,167,948
|
|
Comprehensive income
|
|
$
|
3,247,991
|
|
|
$
|
26,677,085
|
|
13. UNCERTAINTIES IMPACTING THE ETHANOL INDUSTRY AND OUR FUTURE OPERATIONS
The Company has certain risks and uncertainties that it experiences during volatile market conditions, which can have a severe impact on operations. The Company's revenues are derived from the sale and distribution of ethanol, distillers grains and corn oil to customers primarily located in the U.S. Corn for the production process is supplied to the plant primarily from local agricultural producers and from purchases on the open market. Ethanol sales average approximately
80%
of total revenues and corn costs average
84%
of total cost of goods sold.
The Company's operating and financial performance is largely driven by prices at which the Company sells ethanol, distillers grains and corn oil, and the related cost of corn. The price of ethanol is influenced by factors such as supply and demand, weather, government policies and programs, and the unleaded gasoline markets and the petroleum markets, although, since 2005, the prices of ethanol and gasoline began a divergence with ethanol selling for less than gasoline at the wholesale level. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol. The Company's largest cost of production is corn. The cost of corn is generally impacted by factors such as supply and demand, weather, government policies and programs. The Company's risk management program is used to protect against the price volatility of these commodities.
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summary quarterly results are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
Fiscal year ended September 30, 2012
|
|
|
|
|
|
|
|
Revenues
|
$
|
87,476,615
|
|
|
$
|
77,692,498
|
|
|
$
|
69,530,510
|
|
|
$
|
86,494,764
|
|
Gross profit (loss)
|
8,834,094
|
|
|
3,457,382
|
|
|
(872,970
|
)
|
|
(2,195,173
|
)
|
Operating income (loss)
|
7,677,558
|
|
|
2,406,546
|
|
|
(2,333,749
|
)
|
|
(3,207,751
|
)
|
Net income (loss)
|
6,899,308
|
|
|
1,827,743
|
|
|
(3,011,583
|
)
|
|
(3,863,488
|
)
|
Basic and diluted earnings (loss) per unit
|
$
|
472.36
|
|
|
$
|
125.14
|
|
|
$
|
(206.19
|
)
|
|
$
|
(264.51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
Fiscal year ended September 30, 2011
|
|
|
|
|
|
|
|
Revenues
|
$
|
73,394,639
|
|
|
$
|
81,258,148
|
|
|
$
|
92,284,735
|
|
|
$
|
90,082,408
|
|
Gross profit
|
1,434,050
|
|
|
9,853,448
|
|
|
15,669,998
|
|
|
7,371,959
|
|
Operating income
|
365,177
|
|
|
8,826,508
|
|
|
14,536,024
|
|
|
6,350,994
|
|
Net income (loss)
|
(789,985
|
)
|
|
7,652,667
|
|
|
13,452,114
|
|
|
5,194,341
|
|
Basic and diluted earnings (loss) per unit
|
$
|
(54.09
|
)
|
|
$
|
523.94
|
|
|
$
|
921.00
|
|
|
$
|
355.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
Fiscal year ended September 30, 2010
|
|
|
|
|
|
|
|
Revenues
|
$
|
63,549,871
|
|
|
$
|
54,805,570
|
|
|
$
|
47,654,811
|
|
|
$
|
58,797,086
|
|
Gross profit
|
12,951,536
|
|
|
8,610,842
|
|
|
3,462,355
|
|
|
3,901,843
|
|
Operating income
|
12,047,683
|
|
|
7,652,759
|
|
|
2,499,980
|
|
|
2,990,624
|
|
Net income
|
10,786,825
|
|
|
6,456,611
|
|
|
1,330,075
|
|
|
1,877,068
|
|
Basic and diluted earnings per unit
|
$
|
738.52
|
|
|
$
|
442.05
|
|
|
$
|
91.06
|
|
|
$
|
128.51
|
|
CARDINAL ETHANOL, LLC
Notes to Audited Financial Statements
September 30, 2012 and 2011
The above quarterly financial data is unaudited, but in the opinion of management, all adjustments necessary for a fair presentation of the selected data for these periods presented have been included.