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EX-31.1 - EXHIBIT 31.1 - Central Iowa Energy, LLC | c94156exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - Central Iowa Energy, LLC | c94156exv31w2.htm |
EX-32.1 - EXHIBIT 32.1 - Central Iowa Energy, LLC | c94156exv32w1.htm |
EX-32.2 - EXHIBIT 32.2 - Central Iowa Energy, LLC | c94156exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ | Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the fiscal year ended September 30, 2009
o | Transition report under Section 13 or 15(d) of the Exchange Act. |
For the transition period from to
Commission file number 000-52429
CENTRAL IOWA ENERGY, LLC
(Name of small business issuer in its charter)
Iowa | 71-0988301 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
3426 EAST 28TH STREET N. | ||
NEWTON, IOWA (Address of principal executive offices) |
50208 (Zip Code) |
(641) 791-1010
(Issuers telephone number)
(Issuers telephone number)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
26,672
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. o Yes þ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. o Yes þ No
Note Checking the box above will not relieve any registrant required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulations S-T (§ 229.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
o Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filed, an accelerated filed, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). o Yes þ No
As of December 1, 2009, the aggregate market value of the membership units held by non-affiliates
(computed by reference to the issuers offering price of such membership units in its 2006 state
registered offering, as no current trading market exists for such membership units) was
$23,559,000.
As of December 1, 2009, there were 26,672 membership units outstanding.
Table of Contents
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Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
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AVAILABLE INFORMATION
Our website address is www.centraliowaenergy.com. Our annual report on Form 10-K, quarterly
reports on Form 10-Q current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the Exchange
Act), are available, free of charge, on our website under the link SEC Compliance, as soon as
reasonably practicable after we electronically file such materials with, or furnish such materials
to, the Securities and Exchange Commission. The contents of our website are not incorporated by
reference in this annual report on Form 10-K.
PART I
ITEM 1. BUSINESS
Business Development
Central Iowa Energy, LLC was formed as an Iowa limited liability company on March 31, 2005 for
the purpose of developing, constructing, owning and operating a 30 million gallon per year
biodiesel production plant and engaging in the production of biodiesel and crude glycerin near
Newton, Iowa. References to Central Iowa Energy, we, us, our and the Company refer to
the entity and business known as Central Iowa Energy, LLC. Since April 2007, we have been engaged
in the production of biodiesel and its primary co-product, glycerin.
On April 5, 2007, our biodiesel production plant was substantially complete, and we commenced
operations of the plant. Our plant is capable of producing biodiesel from both vegetable oil,
including soybean oil and corn oil, and animal fats. We sold our first shipment of biodiesel on
April 20, 2007. On June 20, 2007, construction of our plant and pretreatment systems was 100%
complete and we were issued a certificate of completion from our design-builder, Renewable Energy
Group, Inc. (REG). Our plant has a nameplate production capacity of 30 million gallons of
biodiesel per year and is able to pretreat crude vegetable oil, including soybean oil and corn oil,
and crude animal fats for use in the biodiesel production process. This ability provides us
flexibility to produce biodiesel from lower-cost feedstock in place of higher-cost feedstock to
optimize our profits when engaging in ordinary biodiesel production.
We have earned BQ-9000 Accreditation from the National Biodiesel Board and National Biodiesel
Accreditation Committee. BQ-9000 is a voluntary quality assurance program which demonstrates that
the quality control processes in place at a plant provide confidence that the biodiesel produced at
the facility will consistently meet applicable American Society of Testing and Materials (ASTM)
biodiesel specifications.
We have engaged REG to manage and direct the general operations of our plant pursuant to our
Management and Operational Services Agreement (MOSA) executed in August 2006. Pursuant to the
MOSA, REG is required to manage our plant, acquire feedstock and chemicals necessary for the
plants operation, sell and market our products and perform certain administrative functions in
exchange for a fixed fee per gallon of biodiesel produced at our plant. However, REG previously
delivered notice of intent to terminate the MOSA on approximately May 1, 2010. Due to our
significant reliance on REG for the management of our plant, the procurement of our inputs, and the
sale and marketing of our biodiesel, this could have a material adverse affect on our ability to
operate and generate revenues in the event we are not able to negotiate a new MOSA with REG or
enter into an agreement for similar services with another third party.
During periods in which we are engaged in ordinary biodiesel production (meaning that we are
not producing pursuant to tolling arrangements, but rather ordinary biodiesel sales contracts), our
revenues are derived primarily from the sale and distribution by REG of our biodiesel throughout
the United States and abroad. However, for fiscal year 2009, most of our revenues were derived
from our production of biodiesel pursuant to a tolling arrangement with REG Marketing and
Logistics, LLC (REG Marketing), an entity affiliated with REG, pursuant to which REG Marketing
orders biodiesel production from certain types of feedstock supplied by REG Marketing, in exchange
for which we are entitled to receive a fixed fee per gallon of biodiesel produced. See ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The fixed
fee per gallon of biodiesel payable under the MOSA does not apply to biodiesel
produced under the tolling agreement with REG Marketing. For the fiscal year ended September
30, 2009, we had produced a total of 5,014,686 gallons of biodiesel at our plant, of which
3,988,292 gallons of biodiesel were produced pursuant to tolling arrangement with REG Marketing and
1,026,394 gallons were produced pursuant to ordinary biodiesel sales contracts. Based upon our
nameplate production capacity of 30,000,000 gallons of biodiesel per year (or 2,500,000 gallons per
month), we produced approximately 17% of our production capacity for the fiscal year ended
September 30, 2009. For the first and second quarters of fiscal year 2010, we expect that we will
continue to operate substantially below our nameplate capacity and that most, if not all, of any
biodiesel production at our plant will be pursuant to tolling arrangements.
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On November 20, 2009 we entered into a Second Amended and Restated Asset Purchase Agreement
with REG, REG Newco, Inc., a Delaware corporation (Newco), and REG Newton, LLC, a wholly-owned
subsidiary of Newco and an Iowa limited liability company (REG Newton) pursuant to which we
anticipate consolidating our business and operations with REG under Newco. The proposed
consolidation will occur through the acquisition by REG Newton of substantially all of our assets
and certain liabilities. The Second Amended and Restated Asset Purchase Agreement also contemplates
the potential consolidation under Newco of the business and operations of two other biodiesel
plants, Western Iowa Energy, LLC and Blackhawk Biofuels, LLC. Please see ITEM 7. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Proposed
Consolidation with REG for more information regarding this proposed transaction.
We are subject to industry-wide factors that affect our operating and financial performance.
These factors include, but are not limited to, the available supply and cost of soybean oil, animal
fats and corn oil from which our biodiesel and glycerin are produced; dependence on our biodiesel
and glycerin marketer to market and distribute our products; the timely expansion of infrastructure
in the biodiesel industry; the intensely competitive nature of the biodiesel industry; current and
future legislation at the federal, state and/or local level; changes in biodiesel supports and tax
incentives and the cost of complying with extensive environmental laws that regulate our industry.
We are also affected by domestic and global economic conditions, such as the current U.S. economic
recession and the unfavorable credit environment.
Principal Products, Demand and Market
The principal products that we produce at our plant are biodiesel and crude glycerin. Our
plant located near Newton, Iowa in Jasper County is designed to have an annual capacity to produce
approximately 30,000,000 gallons of biodiesel.
Biodiesel
According to the National Biodiesel Board, biodiesel is a high-lubricity, clean-burning
alternative fuel produced from domestic, renewable resources and is primarily used in compression
ignition (diesel) engines and may also be used as home heating oil. Biodiesel provides
environmental benefits over petroleum-based diesel, including reduced emissions of carbon dioxide,
carbon monoxide, particulate matter, and sulfur. Biodiesel is comprised of mono-alkyl esters of
long chain fatty acids derived from vegetable oils or animal fats. A chemical process called
transesterification removes the free fatty acids from the base oil and creates the desired esters.
Transesterification is the reaction of vegetable oil or animal fat with an alcohol, such as
methanol or ethanol, in the presence of a catalyst. The process yields four products: mono-alkyl
ester (biodiesel), glycerin, feed-quality fat and soapstock, a by-product of refining the incoming
oil. Biodiesel can be used in neat (pure) form or blended with petroleum-based diesel.
Biodiesel that is in neat form is typically designated in the marketplace as B100. The 100
indicates that the fuel is 100% biodiesel. Biodiesel is frequently blended with petroleum-based
diesel. When biodiesel is blended, it is typically identified in the marketplace according to the
percentage of biodiesel in the blend. For example, B20 indicates that 20% of the fuel is
biodiesel and 80% is petroleum-based diesel.
Biodiesels physical and chemical properties, as they relate to operations of diesel engines,
are similar to
petroleum-based diesel fuel. As a result, B20 biodiesel may be used in most standard diesel
engines without requiring any engine modifications. Biodiesel demonstrates greater lubricating
properties, referred to as lubricity, than petroleum-based diesel. This could lead to less
long-term engine wear as biodiesel creates less friction in engine components than petroleum-based
diesel. Biodiesel also demonstrates greater solvent properties. With higher percentage blends of
biodiesel, this may cause breakdowns in certain rubber engine components such as seals. The solvent
properties of biodiesel also can cause accumulated deposits from petroleum-based diesel in fuel
systems to break down. This could lead to clogged fuel filters in the short-term, so fuel filters
should be checked more frequently when first using biodiesel blends. These problems are less
prevalent in blends that utilize lower concentrations of biodiesel.
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General Demand for Biodiesel
The biodiesel industry is still relatively new and unknown especially when compared to the
ethanol industry. In 2008, the Renewable Fuels Association reported that a record 9.2 billion
gallons of ethanol were produced in the United States. However, the biodiesel industry only
produced approximately 700 million gallons of biodiesel in 2008, constituting only a small part of
the 60 billion gallon per year U.S. diesel fuel market and a fraction of the amount of 2008 ethanol
production. Total 2008 biodiesel production was also significantly less than current national
biodiesel production capacity. The National Biodiesel Board estimates that as of June 22, 2009 (the
latest date for which information is available), national biodiesel production capacity totaled
approximately 2.69 billion gallons per year. Some plants are currently closed and some do not
currently operate at full capacity due to this excess production capacity and other economic and
market factors. The National Biodiesel Board estimates that production capacity could increase by
another 427.8 million gallons once the plants currently under construction or engaged in expansion,
if completed, begin production.
Several factors could lead to an increase in biodiesel demand. Biodiesel has received
attention from consumers and policymakers in recent years for several reasons. Biodiesel is made
from renewable sources and provides environmental benefits over petroleum-based diesel, including
reduced emissions of carbon dioxide, carbon monoxide, particulate matter and sulfur. In addition,
a 2007 study by the U.S. Department of Energy (DOE) and the U.S. Department of Agriculture (USDA)
found that biodiesel has a positive energy balance: for every 3.5 units of energy produced, only
1.0 unit of energy is consumed in the production process. Biodiesel mixes easily with diesel fuel
at rates between 2% and 100%, and it improves the lubricity of petroleum-based diesel fuel at
levels as low as 3%. The increased lubricity reduces friction of petroleum-based diesel fuel and
may result in longer equipment life and protection of fuel injectors. Further, the Environmental
Protection Agency (EPA) Ultra Low Sulfur Diesel Mandate seeks to reduce sulfur emissions through
regulations that take effect over the next several years. Because low-sulfur diesel and
ultra-low-sulfur diesel have lubricity problems, biodiesel may be an attractive alternative to
satisfying the requirements of the mandate. However, EPA regulations are subject to change. If
the mandate was cancelled or suspended, or if waiver of the mandate requirements were allowed,
future biodiesel demand may be less than expected.
We also anticipate that the Renewable Fuel Standard may increase demand for biodiesel, as it
provides for a minimum usage requirement for biodiesel and other types of biomass-based diesel.
See Federal Biodiesel Supports below.
Historically, the demand for biodiesel follows a seasonal trend. Due to its cold flow
properties, demand for biodiesel is typically lower in colder climates and typically declines in
the colder fall and winter months and increases in the warmer spring and summer months. See The
Effect of Cold Flow on Biodiesel Markets below.
We also believe that the recent economic recession and the disruption of credit markets has
depressed demand for biodiesel and fuel in general.
Biodiesel Markets
Biodiesel is primarily used as fuel for compression ignition (diesel) engines. It is produced
using renewable resources and provides environmental advantages over petroleum-based diesel fuel,
such as reduced vehicle emissions. Our ability to market our biodiesel is heavily dependent upon
the price of petroleum-based diesel
fuel as compared to the price of biodiesel, in addition to the availability of economic incentives
to produce and use biodiesel.
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Biodiesel is frequently used as fuel in transport trucks, ships, trains, in farming activities
and in many government vehicles. Government legislation that seeks to encourage the use of
renewable fuels could lead to an expansion of the market for biodiesel in the future. Biodiesel
has been identified as a potentially good substitute for diesel fuel in underground mining
operations because it burns cleaner and leads to less air pollution, a feature that is very
important in confined places such as mines. Further, biodiesel may be safer to handle in a mine
setting where fire can be disastrous. Additional markets may become available as a result of
growing environmental concerns by American consumers as well as an increased awareness of energy
security and the United States ability to supply its own fuel needs. However, biodiesel still
only accounts for a very small percentage of the diesel fuel market as a whole. The biodiesel
industry will need to continue to grow demand in order to sustain the price of biodiesel into the
future.
Wholesale Market/Biodiesel Marketers. The wholesale market involves selling biodiesel
directly to fuel blenders or through biodiesel marketers. Fuel blenders purchase B100 biodiesel
from biodiesel production plants, mix it with petroleum diesel fuel according to specifications,
and deliver a final product to retailers. There are few wholesale biodiesel marketers in the
United States. Three examples are World Energy of Chelsea, Massachusetts; Eco-Energy, Inc. of
Franklin, Tennessee; and REG of Ames, Iowa. These companies use their existing marketing
relationships to market the biodiesel of individual plants to end users for a fee. Under the MOSA,
REG has agreed to market the biodiesel we produce at our facility.
Retail Market. The retail biodiesel market consists of biodiesel distribution primarily
through fueling stations to transport trucks and jobbers, which are individuals that buy products
from manufacturers and sell them to retailers, for the purpose of supplying farmers, maritime
customers and home heating oil users. Retail level distributors include oil companies, independent
station owners, marinas and railroad operators. The biodiesel retail market is still in its very
early stages as compared to other types of fuel. If biodiesel demand were to increase, present
marketing and transportation network must expand significantly in order for our company to
effectively market our biodiesel to retail users. Areas that would require expansion include, but
are not limited to:
| additional rail capacity; |
| additional storage facilities for biodiesel; |
| increases in truck fleets capable of transporting biodiesel within localized
markets; |
| expansion in refining and blending facilities to handle biodiesel; and |
| growth in service stations equipped to handle biodiesel fuels. |
The substantial investments required for these infrastructure changes and expansions may not
be made or they may not occur on a timely basis. Any delay or failure in making the changes to or
expansion of infrastructure could hurt the demand or prices for our products, impede our delivery
of products, impose additional costs on us or otherwise have a material adverse effect on our
results of operations or financial position.
International Markets. Through our marketer, REG, a portion of any biodiesel produced
pursuant to ordinary production may be sold abroad to international markets, including Europe. We
are unable, however, to track precisely where such biodiesel is delivered or how much of it is
exported to Europe or other international markets. The European Union has, as a result of its
investigation into alleged unfair trade practices engaged in by the U.S. biodiesel industry,
imposed tariffs and duties on biodiesel produced in the U.S. that is exported to Europe. See RISK
FACTORS. This is expected to significantly reduce REGs ability to market our biodiesel in the
European market at a profit.
Government/Public Sector. The government has increased its use of biodiesel since the
implementation of the Energy Policy Act (EPACT) of 1992, amended in 1998, which authorized
federal, state and public agencies to use biodiesel to meet the alternative fuel vehicle
requirements of EPACT. Although it is possible that individual plants could sell directly to
various government entities, it is unlikely our plant could successfully market our biodiesel
through such channels. Government entities have very long sales cycles based on the intricacies of
their decision making and budgetary processes.
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The Effect of Cold Flow on Biodiesel Markets. Biodiesel has different cold flow properties
depending on the type of feedstock used in its manufacture. Cold flow refers to a fuels ability
to flow easily at colder temperatures and is an important consideration in producing and blending
biodiesel for use in colder climates. The pour point for a fuel is the temperature at which the
flow of the fuel stops. Therefore, a lower pour point temperature means the fuel is more flowable
in colder temperatures. The pour point of 100% soy-based biodiesel is approximately 30ºF. The
pour point for No. 2 petroleum diesel fuel, the non-biodiesel fuel currently used in machines, is
approximately -30ºF. When diesel is mixed with soy-based biodiesel to make a 2% biodiesel blend,
the pour point is approximately -25ºF. To provide biodiesel with an acceptable pour point in cold
weather, we will need to blend our biodiesel with petroleum-based diesel. Generally, biodiesel that
is used in blends of 2% to 20% will provide an acceptable pour point for the Iowa market. Cold
flow additives can also be used seasonally to provide a higher level of cold weather protection,
similar to the current practice with conventional diesel fuel. Demand for our biodiesel typically
diminishes in colder climates and during the colder fall and winter months as a result of cold flow
concerns. Animal fat-based biodiesel has a higher pour point temperature than other types of
biodiesel. For example, the pour point of 100% tallow-based biodiesel is approximately 61ºF
compared to approximately 30ºF for 100% soy-based biodiesel. Accordingly, demand for animal
fat-based biodiesel may fluctuate by season more than demand for biodiesel made from other types of
feedstock.
Crude Glycerin
Crude glycerin is the primary co-product of the biodiesel production process and equals
approximately 10% of the quantity of biodiesel produced. It is highly stable under typical storage
conditions, compatible with a wide variety of other chemicals and comparatively non-toxic.
Glycerin possesses a unique combination of physical and chemical properties that are used in a
large variety of products. It is an ingredient or processing aid in cosmetics, toiletries,
personal care, pharmaceuticals and food products. In addition, new uses for glycerin are frequently
being discovered and developed due to its versatility. Many of these uses, however, require
refined glycerin. Our plant only produces crude glycerin and does not have the capability to
refine glycerin. This could therefore limit the potential uses for glycerin produced at our plant.
Glycerin Demand and Markets
Under our MOSA, REG is required to market the glycerin produced at our plant. However,
oversupply of glycerin and low glycerin prices may limit our ability to generate revenues through
the sale of our primary co-product. This may negatively affect the profitability of our business.
We are not capable of refining crude glycerin produced at our plant. Prices for refined
glycerin are typically higher than prices for crude glycerin, which is the type produced by our
plant. As of late December 2009, according to the Jacobsen Biodiesel Bulletin, average refined
glycerin prices were approximately 32 to 36 cents per pound whereas crude glycerin prices were
approximately 5 to 6 cents per pound. Relatively higher refined glycerin prices have prompted some
of our competitors, such as Cargill Inc. and Archer Daniels Midland Co., to expand their glycerin
refining capacities. These biodiesel producers may therefore have a competitive advantage over
plants like ours that do not have glycerin refining capabilities.
Additional uses for glycerin are being researched. Research has been underway to develop
technology that converts glycerin, a byproduct of biodiesel production, into ethanol. Ethanol made
from glycerin may be cheaper to produce than ethanol made from corn, as glycerin does not require
the extensive pre-processing steps required for corn. Research has also been underway to develop
methods of converting glycerin into propylene glycol, which is a compound used in a variety of
industrial products, including paints, polyester resins, lubricants, antifreeze and cosmetics.
More recently, researchers have commenced development of processes that would convert the byproduct
to chemicals such as butane, acetone, and acrolein, the latter being used as a base in acrylic
acid. Accordingly, development of these technologies could increase the demand for glycerin.
However, such technologies are still currently under development and there is no assurance that
such technologies will become readily available or that they would increase demand for glycerin.
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Distribution of Principal Products
Under the MOSA, REG must utilize its best efforts to market all biodiesel, glycerin and fatty
acids produced at our plant at established prices. With respect to such services, REG agrees to
provide:
| Market analysis of biodiesel supply and demand; |
| Market access to REGs developed biodiesel distribution channels; |
| Analysis and audit of biodiesel customers, including for creditworthiness, and
bulk transportation providers; |
| Marketing specialists and sales representatives to attain and establish sales
opportunities and relationships for our products; |
| Arrangements for transportation, logistics, and scheduling of biodiesel
shipments; |
| Arrangements for leased tankers for rail shipments, where advantageous; |
| Oversight and reconciliation of shipments, invoicing and payments on a weekly
basis; and |
| Invoicing and accounts receivable management for biodiesel shipments. |
Under the terms of the agreement, REG takes title to our products when loaded for delivery FOB
the plant. REG previously delivered notice of its intent to terminate the MOSA and we therefore
expect that it will terminate on or about May 1, 2010. Due to our significant reliance on REG for
the management of our plant and other services, including the sale, marketing and distribution of
our products, this could have a material adverse affect on our ability to operate and generate
revenues in the event we are not able to negotiate a new MOSA with REG or enter into an agreement
for similar services with another third party.
Our products can be delivered by truck or rail. Our property is located northeast of Newton,
Iowa and is situated approximately 4.75 miles north of U.S. Interstate 80. Rail service is also
available near our site by the Iowa Interstate Railroad (IAIR). We installed track to establish
rail service directly to the plant so that we are able to ship biodiesel to our customers. We have
entered into an industrial track agreement with the IAIR for the use, operation, and maintenance of
track to serve the plant. Under such agreement, we will bear the cost and expense of maintenance of
the railroad track extending from the point of switch and ending at our plant.
Sources and Availability of Raw Materials
Feedstock Cost and Supply
The cost of feedstock is the largest single component of the cost of biodiesel production,
accounting for 70% to 90% of the overall cost of producing biodiesel. As a result, increased prices
for feedstock greatly impact the biodiesel industry. Soybean oil is the most abundant and widely
used feedstock available in the United States. Our plant is capable of pretreating crude
vegetable oil, including soybean oil and corn oil, and animal fats and utilizing the same to
produce biodiesel. Refined animal fats and alternative vegetable oils have generally been available
to us at better prices than soybean oil. Accordingly, we have typically used these alternative
feedstocks when, based on prevailing feedstock prices and market conditions, such use would
generate greater profit margins. We expect to continue to be susceptible to changes in the price
of feedstock when we engage in ordinary biodiesel production.
Our inability to obtain adequate supplies of feedstock at affordable prices for sustained
periods of time may materially impair our ability to operate profitably and could force us to shut
down our plant temporarily or permanently. When we operate pursuant to tolling arrangements,
however, the third party ordering biodiesel production is typically responsible for supplying
feedstock. Therefore, feedstock costs do not typically impact our revenues from toll processing
biodiesel production, pursuant to which we only receive a fixed fee per gallon of biodiesel
produced.
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Soybean Oil
The ten-year average price for soybean oil is approximately 26 cents per pound. However, in
June 2008, the price of soybean oil reached a new record high of
62 cents per pound. Soybean oil
prices have fallen since then, but remain volatile. The USDA December 2009 Oil Crops Outlook
report provides that the average November 2009
soybean oil price was approximately 36.59 cents per pound, which is significantly below the
2008 peak price. The drop in soybean oil prices were likely caused by the changing global economic
conditions triggered by the sharp decline in petroleum prices, the failure of various major U.S.
financial institutions, the passage of the federal governments $700 billion bailout plan, the
tightening of credit markets and the economic recession experienced by the U.S. and other
countries. According to the USDAs National Weekly Ag Energy Round-Up report, crude soybean oil
prices in Iowa for the week of December 11, 2009 were approximately the same, ranging from 35.59 to
38.15 cents per pound. The USDA forecasted that these soybean oil prices during the 2009/2010
marketing season will range from 35.5 to 38.55 cents per pound. The charts below show average U.S.
soybean oil prices over the past ten years and for each month in the 2008/2009 marketing year to
November 2009:
Average U.S. Soybean Oil Prices for the Past 10 Years
Marketing Year | Price (cents) | |||
1998/99 |
19.90 | |||
1999/00 |
15.60 | |||
2000/01 |
14.15 | |||
2001/02 |
16.46 | |||
2002/03 |
22.04 | |||
2003/04 |
29.97 | |||
2004/05 |
23.01 | |||
2005/06 |
23.41 | |||
2006/07 |
31.02 | |||
2007/08 |
52.03 | |||
2008/09 |
32.16 | |||
2009-10(1) |
35.5-38.5 | (1) |
Average U.S. Soybean Oil Prices for 2008-2009
Marketing Year
Marketing Year
Month | Price (cents) | |||
November |
31.55 | |||
December |
29.30 | |||
January |
32.16 | |||
February |
28.93 | |||
March |
28.23 | |||
April |
32.76 | |||
May |
36.06 | |||
June |
35.66 | |||
July |
31.08 | |||
August |
33.69 | |||
September |
30.96 | |||
October |
33.15 | |||
November(1) |
36.59(1) |
(1) | Preliminary Price |
Data provided by USDA, Oil Crops Outlook Report, December 11, 2009
Because it takes more than seven pounds of soybean oil to make a gallon of biodiesel,
continued increases in soybean oil costs significantly reduce the potential profit margin on each
gallon of biodiesel produced from soybean oil and sold. Any increase in the price of soybean oil
without a corresponding increase in the price of biodiesel will negatively impact our ability to
generate revenues and profits from soybean oil-based biodiesel. Conversely, if soybean oil prices
drop, this would have a positive impact on revenues generated from
ordinary biodiesel production of soybean oil-based biodiesel.
Increased competition with other biodiesel plants may result in increased prices for soybean
oil. Accordingly, the number of acres of soybeans planted and harvested can impact the price of and
competition for soybean oil. In its December 2009 Oil Crops Outlook report, the USDA reported that
74.7 million soybean acres were harvested in the 2008-2009 crop year. The portion of that used to
make biodiesel is not expected to increase significantly due to the competition from other
vegetable oils and animal fats being used as alternative sources of feedstock.
Animal Fats and Other Alternative Feedstocks
Due to the volatility of soybean oil prices, we also use alternative forms of feedstock,
including animal fat and, to a lesser extent, corn oil. However, prices for these alternative
feedstocks have tended to correlate with the cost of soybean oil. Like soybean oil prices, animal
fat prices peaked in 2008 and declined thereafter as domestic and global economic conditions
worsened. Nonetheless, animal fat prices remain volatile. The USDA December 2009 Oil Crops Outlook
report provides that the average November 2009 prices for lard and edible tallow were 30.07 and
29.65 per pound, respectively. The USDA predicted lard and edible tallow prices could increase
slightly for 2009/2010, ranging from 28.5 to 31.5 cents per pound for lard and 29.5 to 32.5 cents
per pound for edible tallow. Increases in animal fat prices would have a negative impact on
revenues generated from ordinary production of animal fat-based biodiesel.
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The charts below show average U.S. lard and edible tallow prices over the past ten years and
for each month in the 2008/2009 marketing year:
Average Lard & Edible Tallow Prices for Past Ten Years
Lard | Edible Tallow | |||||||
Marketing Year | (cents) | (cents) | ||||||
1998/99 |
14.66 | 15.14 | ||||||
1999/00 |
13.64 | 13.21 | ||||||
2000/01 |
14.61 | 13.43 | ||||||
2001/02 |
13.55 | 13.87 | ||||||
2002/03 |
18.13 | 17.80 | ||||||
2003/04 |
26.13 | 22.37 | ||||||
2004/05 |
21.80 | 18.48 | ||||||
2005/06 |
21.74 | 18.16 | ||||||
2006/07 |
28.43 | 27.32 | ||||||
2007/08 |
40.85 | 41.68 | ||||||
2008/09 |
26.72 | 25.47 | ||||||
2009/10(1) |
28.5-31.5 | (1) | 29.5-32.5 | (1) |
Average Lard & Edible Tallow Prices for 2008-2009
Marketing Year
Marketing Year
Lard | Edible Tallow | |||||||
Month | (cents) | (cents) | ||||||
November |
26.40 | 18.13 | ||||||
December |
20.00 | 17.50 | ||||||
January |
25.36 | 23.36 | ||||||
February |
20.31 | 21.40 | ||||||
March |
19.49 | 19.42 | ||||||
April |
23.36 | 23.77 | ||||||
May |
29.00 | 28.92 | ||||||
June |
30.06 | 30.14 | ||||||
July |
27.63 | 27.64 | ||||||
August |
32.20 | 34.14 | ||||||
September |
29.73 | 34.21 | ||||||
October |
25.75 | 27.63 | ||||||
November(1) |
30.07 | (1) | 29.65 | (1) |
(1) | Preliminary Price |
Data provided by USDA, Oil Crops Outlook Report, December 11, 2009
We expect that corn oil may from time to time be a less costly feedstock alternative to
soybean oil. The USDA December 2009 Oil Crops Outlook report provides that the preliminary
average November 2009 price for corn oil was 38.12 cents per pound, which was higher than the
November 2009 price for soybean oil. The National Weekly Ag Energy Round-Up for the week of
December 11, 2009 indicates that crude corn oil prices in the Midwest were slightly higher ranging
from 39.5 cents to 40.5 cents per pound. Corn oil-based biodiesel has similar cold flow properties
to those of soybean oil-based biodiesel and, accordingly, corn oil may be an acceptable alternative
feedstock in the fall and winter months when demand for animal fat-based biodiesel tends to
decrease. Corn oil, however, tends to cause a waxy substance to build-up during the production
process. The unique characteristic of corn oil could cause corn oil to be a less desirable
feedstock than soybean oil and animal fat. The available supply of corn oil will likely depend upon
the number of ethanol plants that install corn oil extraction equipment at their plants and the
extent to which such ethanol plants market their corn oil.
Hedging
Due to fluctuations in the price and supply of feedstock, we may utilize forward contracting
and hedging strategies to manage our commodity risk exposure and optimize finished product pricing
and supply. Hedging means protecting the price at which we buy feedstock and the price at which we
will sell our products in the future. It is a way to attempt to reduce the risk caused by price
fluctuations. The effectiveness of such hedging activities is dependent upon, among other things,
the cost of feedstock and our ability to sell sufficient amounts of biodiesel. Although we attempt
to link hedging activities to sales plans and pricing activities, such hedging activities can
themselves result in costs because price movements in feedstock contracts are highly volatile and
are influenced by many factors that are beyond our control. We may incur such costs and they may
be significant. The market for soybean oil trades 18 months into the future. The animal grease
market has no futures trade. However, there is a quoting system through the USDA that provides for
price discovery for animal grease. There is not enough volume of biodiesel produced to currently
justify a futures market. As such, there is no spot biodiesel price, making current price
discovery limited.
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Feedstock Procurement.
We expect to utilize various types of feedstock in the production of biodiesel. Under the
MOSA, REG is responsible for arranging the purchase and procurement of the feedstock and chemical
inputs necessary to produce biodiesel at our plant. These services include, without limitation,
analysis and audit of feedstock suppliers, purchase of feedstock meeting specifications and in
adequate quantities to fill our plants production facility, negotiation of discounts, and
providing transportation, logistics and scheduling of feedstock deliveries. REG previously
delivered notice of its intent to terminate the MOSA and we therefore expect that it will terminate
on or about May 1, 2010. Due to our significant reliance on REG for the procurement of our
feedstock at economical prices, this could have a material adverse affect on our ability to operate
and generate revenues in the event we are not able to negotiate a new MOSA with REG or enter into
an agreement for similar services with another third party. When we operate pursuant to tolling
arrangements, however, the third party ordering biodiesel production is typically responsible for
supplying feedstock and, accordingly, we are not responsible for feedstock procurement in such
circumstances.
Pretreatment Costs
Crude vegetable oils, such as crude soybean oil and corn oil, and all animal fats need to be
pretreated before being processed into biodiesel. Pretreatment takes crude soybean oil, corn oil
and any animal fat or grease, removes the impurities and prepares the feedstock to go through the
biodiesel production process. Some types of feedstock need more treatment than others. The cost of
the process is driven by the structure of the feedstock and the impurities in the feedstock.
For soybean oil, the pretreatment process results in refined and bleached (RB) oil. The price
differential between RB soy oil and crude soy oil is ordinarily 5 cents per pound. Our processing
plant has pretreatment capabilities allowing us to utilize crude vegetable oil and many types of
fat or grease as feedstock in our facility. This added flexibility allows us to choose the
feedstock that will produce biodiesel in the most cost-effective manner possible.
Utilities, Energy & Infrastructure
Electricity. Our plant requires a significant supply of electricity to operate our plant. In
May 2006 we contracted with Interstate Power and Light Company, a wholly-owned subsidiary of
Alliant Energy Corporation, to install a new primary electric service at our facility, including an
overhead metering location, transformers, cabling, and switchgear. We also entered into a separate
agreement with Interstate Power and Light Company to supply our electricity needs, which is still
in effect.
Water. Our plant requires approximately 120 gallons of water per minute. We entered into an
agreement with Central Iowa Water Association in June 2006 to supply our water needs at a minimum
of 50,000 gallons per month. The fee to connect to the Associations existing water distribution
system was $4,000 and we pay a minimum price of $246.91 per 50,000 gallons per month.
Natural Gas. Our plant requires a significant supply of natural gas to operate. We estimate
that our plant requires approximately 1,750,320 therms of natural gas per year. In August 2007, we
entered into a Natural Gas Transportation Service Agreement with Aquila, Inc. d/b/a Aquila Networks
under which Aquila, Inc. agreed to transport and deliver natural gas supplies obtained by the
Company for operation of our biodiesel plant. In exchange for Aquila, Inc.s services, we agreed
to pay Aquila, Inc. $150 per month for administration costs related to transportation services, the
applicable sales tariff basic monthly charge, a capacity charge as set forth in the applicable
sales tariff schedule, and a delivery charge for all volumes of natural gas received as set forth
in the applicable sales tariff rate schedule. We will also be obligated to pay for fixed gas costs
assigned to us under the applicable sales tariff rate and any charges that Aquila, Inc. incurs from
a pipeline on behalf of the Company. The agreement was in effect for an initial term of one year
from the date of commencement of services and continues thereafter from year to year until canceled
by either party with notice.
Sewer. Pursuant to a private redevelopment agreement dated November 21, 2006, Jasper County
agreed to construct sewer improvements for our biodiesel project site. The agreement authorizes
Jasper County to finance these improvements through the issuance of bonds or notes. In return for
these improvements, we were required to construct a thirty million gallon per year biodiesel plant
requiring a total investment of at least $38,000,000 and to create at least twenty new full-time
jobs at our plant and maintain such jobs until June 30, 2015. Also, we were required to enter into
an assessment agreement with Jasper County to establish a minimum actual value of our property and
related improvements for purposes of the calculation and assessment of our real property taxes.
Our failure to comply with or satisfy any condition or covenant contained in the agreement will
constitute an event of default. In such event, the County can exercise any one or more remedies
against the Company, including, without limitation, holding the Company responsible for repayment
of an amount equal to the sum of all costs incurred by Jasper County in connection with the
construction of the sewer improvements or any other legal, equitable or administrative remedy
available to it under the agreement or applicable law. We are currently in default of this
Agreement. See ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
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Energy
Management. In November 2009, we entered into an energy
management services agreement with U.S.
Energy Services, Inc. (U.S. Energy) under which U.S. Energy provides natural gas and electricity
supply management services. Among these services, U.S. Energy manages
supply and transportation of natural gas, reviews natural gas invoices for
discrepancies, determines the most beneficial rate structure and method for securing natural gas
supplies, negotiates transportation agreements and rates with natural
gas pipelines and suppliers, provides cost and usage analysis,
advises the Company on trade credit issues, and provides
risk management services for natural gas, including making hedging recommendations. U.S. Energy
also manages supply and transportation of electricity reviews
electricity, invoices for discrepancies, determines the most beneficial rate structure
and method for securing electricity, investigates market conditions and negotiates favorable
agreements with electricity suppliers, and analyzes electricity cost and usage. U.S.
Energy also evaluates energy tax exemption opportunities. Under this
agreement, our monthly service fee
is approximately $0.06/MMBtu consumed with a $450 monthly minimum. The
monthly service fee will increase 4% annually on each
November 1st the agreement remains in effect. The agreement
also authorizes U.S. Energy to manage the Companys assets
as part of U.S. Energys larger portfolio when the same
would result in lower energy costs to the Company and would otherwise
be in the Companys best interest. The agreement also governs
the purchase and sale of natural gas between the Company and
U.S. Energy. This agreement will continue in effect for two
years and thereafter for
successive one-year terms unless terminated by either party with at
least 60 days prior written notice prior to the expiration of the
applicable term. Under the agreement, we appoint U.S.
Energy to act as its agent for purposes of managing our energy supplies and dealing with third
parties in connection with energy-related matters.
Patent, Trademarks and Licenses.
As part of our design-build agreement with REG, Inc., REG, Inc. agreed to provide us a
perpetual and irrevocable license to use any and all of its technology and propriety property
related to or incorporated into the plant in connection with our operation, maintenance and repair
of the plant.
Federal Biodiesel Supports
The biodiesel industry is dependent on economic incentives to produce biodiesel, including
federal biodiesel supports. The Energy Policy Act of 2005, the Energy Independence and Security Act
of 2007 and the American Jobs Creation Act have established the groundwork for biodiesel market
development.
Renewable Fuels Standard
The Energy Policy Act of 2005 created the Renewable Fuel Standard (RFS) which required
refiners to use 7.5 billion gallons of renewable fuels by 2012. The Energy Independence and
Security Act of 2007 (EISA) expanded the existing RFS (sometimes referred to as RFS2) to
require the use of 9 billion gallons of renewable fuel in 2008, increasing to 36 billion gallons of
renewable fuel by 2022. The EISA requires that 600 million gallons of renewable fuel used in 2009
must come from advanced biofuels other than corn-based ethanol, such as ethanol derived from
cellulose, sugar or crop residue and biomass-based diesel (which includes biodiesel and renewable
diesel), increasing to 21 billion gallons in 2022. The EISA further includes a requirement that
500 million gallons of biodiesel and biomass-based diesel fuel be blended into the national diesel
pool in 2009, gradually increasing to one billion gallons by 2012. In 2008, however, the EPA
announced that the RFS program in 2009 would be applicable to producers and importers of gasoline
only, which meant that the 500 million gallons of biomass-based diesel required by the RFS2 under
EISA was not required to be blended into U.S. fuel supplies in 2009. This was due to the fact that
the regulatory structure of the original RFS program does not provide a mechanism for implementing
the EISA RFS2 requirement for the use of 500 million gallons of biomass-based diesel. In May 2009,
the EPA proposed regulations to implement the EISA RFS2 biomass-based diesel requirements; however, as of
the date of this report, no final regulations have been issued. Accordingly, it is uncertain when
the EISA biomass-based diesel requirements will be effective.
EISA required as part of RFS2 that advanced biofuels reduce life cycle greenhouse gas
emissions by 50% relative to gasoline sold or distributed in transportation. In May 2009, the EPA
proposed rules that took into account indirect land use changes when calculating greenhouse gas
emissions. Based on the EPAs preliminary findings, soy-based biodiesel was found to reduce
greenhouse gas emissions by only 22%, which would disqualify it from counting towards the RFS2.
Biodiesel from animal fat was found to reduce greenhouse gas emissions by approximately 80%. The
EPAs preliminary results did not measure biodiesel produced from corn oil. Although the EPA
previously announced that it intended to publish final rules implementing RFS2 prior to the end of
2009, final rules have not been issued as of the date of this report. The EPA has suggested that
the final rules will take into account estimates for the uncertainty of the inclusion of indirect
land use changes in its calculations of greenhouse gas emissions. However, it is uncertain whether
soy bean oil-based biodiesel will qualify for the RFS2.
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We anticipate that the RFS may increase demand for biodiesel in the long-term, as it sets a
minimum usage requirement for biodiesel and other types of biomass-based diesel. However, there
can be no assurances that demand for biodiesel will be increased by the RFS or RFS2, once final
rules are implemented. As of June 22, 2009, the National Biodiesel Board estimated that national
biodiesel production capacity was approximately 2.69 billion gallons per year, which already
exceeds the 2012 biodiesel and biomass-based diesel use mandate contained in EISA.
Accordingly, there is no assurance that additional production of biodiesel and biomass-based diesel
will not continually outstrip any additional demand for biodiesel that might be created by the RFS
program. Furthermore, any additional delays in the EPAs implementation of the RFS2 biomass-based
diesel rules could hinder the stimulation of additional biodiesel demand. If the final rules
adopted to implement RFS2 do not significantly increase demand compared to increases in supply, the
RFS2 will not likely lead to an increase in biodiesel demand. We also anticipate that the RFS2
will be primarily satisfied by ethanol, including both corn-based and other types of ethanol. The
amount of corn-based ethanol that may be used to satisfy the RFS requirements is capped at 15
million gallons starting in 2015 and, accordingly, other types of ethanol, including
cellulose-based ethanol, will likely be used to satisfy any requirements over and above the 15
million gallon corn-based ethanol cap.
The RFS system will be enforced through a system of registration, recordkeeping and reporting
requirements for obligated parties and renewable producers (RIN generators), as well as any party
that procures or trades renewable identification numbers, either as part of their renewable
purchases or separately. Any person who violates any prohibition or requirement of the RFS program
may be subject to civil penalties for each day of each violation. For example, a failure to
acquire sufficient RINs to meet a partys renewable fuels obligation would constitute a separate
day of violation for each day the violation occurred during the annual averaging period. The
enforcement provisions are necessary to ensure the RFS program goals are not compromised by illegal
conduct in the creation and transfer of RINs. The EPA has assigned equivalence values to each
type of renewable energy fuel in order to determine compliance with the RFS. The equivalence
values used ethanol as the base-line measurement (such that one gallon of ethanol is equivalent to
one credit towards RFS compliance) and assigned biodiesel an equivalence value of 1.5, such that
each gallon of biodiesel used by an obligated party will be equal to one and one-half gallons
credit towards its RFS compliance.
Production of biofuels, including both biodiesel and ethanol, may continue to increase at a
faster pace than the RFS2 requirements. Should the supply of biofuels increase more rapidly than
demand for biofuels, including biodiesel, it may lead to decreases in the selling price of
biodiesel.
Biodiesel Tax Credits
The Energy Policy Act of 2005 provided for a tax subsidy for small agri-biodiesel
producers with total annual production capacities of 60 million gallons or less. The subsidy is
applicable to the first 15 million gallons of biodiesel produced annually and is available through
December 31, 2010. The subsidy is equivalent to a 10 cent credit per gallon of biodiesel produced
annually and the maximum annual subsidy per biodiesel producer is $1.5 million. This tax credit may
foster additional growth and increase competition among biodiesel producers whose plant capacity
does not exceed 60 million gallons per year. Because Central Iowa Energy is organized as a limited
liability company, this credit passes through to its members and may be used as a credit against
their federal income tax liability, subject to various limitations.
The American Jobs Creation Act of 2004 originally created the biodiesel blenders excise tax
credit known as the Volumetric Ethanol Excise Tax Credit (VEETC). The blenders tax credit
provides a tax credit of $1.00 per gallon for biodiesel. The blenders tax credit may be claimed
in both taxable and nontaxable markets, including exempt fleet fuel programs and off-road diesel
markets. The desired effect of the blenders tax credit is to streamline the use of biodiesel and
encourage petroleum blenders to blend biodiesel as far upstream as possible, which will allow more
biodiesel to be used in the marketplace. The blenders tax credit also streamlines the tax refund
system for below-the-rack blenders to allow a tax refund of the biodiesel tax credit on each gallon
of biodiesel blended with diesel (dyed or undyed) to be paid within 20 days of blending.
Below-the-rack blenders are those blenders that market fuel that is for ground transportation
engines and is not in the bulk transfer system. The blenders tax credit was extended until
December 31, 2009 as part of the Emergency Economic Stabilization Act of 2008 (EESA). The
blenders tax credit, as extended by EESA, contained a few significant changes, including the
closure of the so-called splash and dash loophole, which refers to those instances in which
biodiesel produced in foreign
countries was transported to the United States, blended with a small percentage of diesel to
claim the tax incentive, and then shipped to a third country for sale and use. Pursuant to EESA,
biodiesel produced outside the United States will no longer qualify for the biodiesel tax
incentive. The law also reduces the credit for biodiesel co-processed with petroleum feedstock
from $1.00 to 50 cents. As of the date of this report, no legislation has been enacted to renew it
beyond December 31, 2009 and there can be no assurance that it will be renewed again in the future.
However, a bill known as the Biodiesel Tax Incentive Reform and Extension Act of 2009 (Senate Bill
1589) has been introduced to the Senate Finance Committee. The loss of the biodiesel tax incentive
provided by the blenders tax credit, or a decrease in the benefits provided by any renewed or
extended version of the blenders tax credit, would increase the cost of biodiesel production and
would have a negative impact on the biodiesel industrys ability to compete with petroleum-based
diesel. This would have an adverse impact on our ability to generate a profit and could reduce the
value of our members investment.
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Biofuels Interagency Working Group
The White House has recently announced that it has directed Secretary of Agriculture Tom
Vilsack to spearhead a Biofuels Interagency Working Group, to combine the efforts of the Department
of Agriculture, Department of Energy, and the EPA to increase the nations energy independence,
accelerate the investment in the production of biofuels and increase rural economic development.
Secretary Vilsack was directed to expedite and increase production of and investment in biofuels
development efforts by refinancing existing investments in renewable fuels to preserve jobs in
ethanol and biodiesel plants, electricity generation plants, and other supporting industries; and
making renewable fuels energy financing opportunities from Food, Conservation and Energy Act of
2008 available within 30 days. While the specific details on what the Biofuels Interagency Working
Group expects to accomplish remain unclear, it is possible that the biodiesel industry may benefit
from this taskforces activities.
Commodity Credit Corporation Bioenergy Program
The Farm, Nutrition and Bioenergy Act of 2008 reauthorized the Commodity Credit Corporation,
or CCC, Bioenergy Program. The program provides $55.0 million in funding in both 2009 and 2010, $85.0
million in funding in 2011 and $105.0 million in funding in 2012 for producers of advanced biofuels
derived from renewable biomass, including biodiesel, other than corn kernel. Biodiesel producers
must apply for this credit
and will be paid based on the quantity and duration of advanced biofuel production and on net
nonrenewable
energy content of the advanced biofuel. Funding to a single eligible producer may be limited to
ensure equitable
distribution of funding. Producers with production capacity of less than 150 million gallons will
be eligible for
95% of the funds provided under the program. In late December 2009, subsequent to the period
covered by this report, Central Iowa Energy received approximately $114,200 in funds pursuant to
the CCC Bioenergy Program.
State Legislation
Several states are currently researching and considering legislation to increase the amount of
biodiesel used and produced in their states. Minnesota was the first state to mandate biodiesel
use. The Minnesota legislation, which became effective in September 2005, requires that all diesel
fuel sold in the state contain a minimum of 2% biodiesel. In 2008, Minnesota passed additional
legislation to increase biodiesel content of diesel fuel sold in the state from 2% to 20%, which is
the highest in the nation, by 2015. The 2% soy biodiesel blend has nearly the same cold flow
properties as No. 2 petroleum diesel, which allows it to be used in Minnesotas colder climate much
the same as petroleum diesel throughout the year. Similarly, in 2008 Massachusetts signed a law
that requires all home heating oil and diesel fuel in the state to consist of 2% biodiesel by 2010
and 5% biodiesel by 2013. However, the Massachusetts Department of Energy Resources will be
entitled to delay those requirements if it determines that fuels are not available to meet these
requirements.
In 2006, several laws were passed in Iowa for the purpose of expanding and funding consumer
access to biodiesel and ethanol-blended fuels. These laws provide retailers with an opportunity
for cost-sharing grants. In addition, the laws provide certain incentives such as an Iowa RFS
starting at 10% in 2009 and increasing to 25% by 2019; a retail tax credit for biodiesel blends of
$0.03 per gallon for retailers whose diesel sales include 50% or greater biodiesel blends; and an
expanded infrastructure program designed to help retailers and wholesalers offset
the cost of bringing E85 and biodiesel blends to customers. While this legislation does not
specifically require increased use of biodiesel, it encourages renewable fuels usage in Iowa,
including increased biodiesel consumption.
Other states have enacted legislation to encourage (but not require) biodiesel production and
use. Several states provide tax incentives and grants for biodiesel-related studies and biodiesel
production, blending, and use. In addition, several governors have issued executive orders
directing state agencies to use biodiesel blends to fuel their fleets.
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Effect of Government Incentives and Regulation
The biodiesel industry and our business depend upon continuation of the state and federal
biodiesel supports discussed above. These incentives have supported a market for biodiesel that
might disappear without the incentives. Alternatively, the incentives may be continued at lower
levels than at which they currently exist. The elimination or reduction of such state and federal
biodiesel supports would make it more costly for us to produce our biodiesel and would increase our
net loss and negatively impact our future financial performance.
Additionally, environmental laws such as the Clean Air Act Amendments that are aimed at
lowering fuel emissions may also promote biodiesel consumption. The Clean Air Act Amendments of
1990 required the EPA to regulate air emissions from a variety of sources. In a 2001 rule, the EPA
provided for the decrease of emissions from vehicles using on-road diesel by requiring the
reduction in the sulfur content of diesel fuel from 500 parts per million (ppm) to a significantly
lower 15 ppm commencing in June 2006, and 10 ppm by 2011. Reducing the sulfur content of
petroleum-based diesel leads to a decrease in lubricity of the fuel, which may adversely impact
motor engines. On the other hand, biodiesel contains no sulfur (and therefore does not emit sulfur
dioxide) and is able to supply lubricity, which makes biodiesel an attractive blending stock.
Furthermore, environmental regulations that may affect our company change frequently. It is
possible that the government could adopt more stringent federal or state environmental rules or
regulations, which could increase our operating costs and expenses or might eliminate provisions
such as the Clean Air Act Amendments that may promote the use of biodiesel. The government could
also adopt federal or state environmental rules or regulations that may have an adverse effect on
the use of biodiesel. Furthermore, the Occupational Safety and Health Administration (OSHA) will
govern our plant operations. OSHA regulations may change such that the costs of the operation of
the plant may increase. Any of these regulatory factors may result in higher costs or other
materially adverse conditions affecting our operations, cash flows and financial performance.
These adverse effects could decrease or eliminate the value of our units.
Competition with Other Biodiesel Producers
We operate in a very competitive environment. Because biodiesel is a relatively uniform
commodity, competition in the marketplace is predominately based on variables other than the
product itself, such as price, consistent quality and, to a lesser extent, delivery service.
Accordingly, the uniform nature of the product limits the competitive advantage that may be gained
based upon unique or improved product features. Nevertheless, the consistent high-quality
biodiesel produced by BQ-9000 certified plants is becoming the standard in the industry.
In 2008, approximately 700 million gallons of biodiesel were produced in the United States. As
of June 22, 2009 (the latest date for which data is available), the National Biodiesel Board
reported that there were 173 operating biodiesel plants in the United States with a total annual
production capacity of 2.69 billion gallons. One of these plants was undergoing expansions to
increase its annual production capacity. Another 29 plants were reported to be in the planning
stages or under construction as of June 2009. The additional combined capacity of these plants
under construction or expansion is estimated at 427.8 million gallons per year. Accordingly,
biodiesel supply may already far exceed demand for biodiesel. Currently, there are 15 existing
biodiesel plants in Iowa, including our plant. However, several of these plants may not be
operating, may not be operating at full capacity, or may never begin operations due to economic and
market conditions. We expect that additional biodiesel producers may enter the market if the
demand for biodiesel increases. As additional biodiesel plants are constructed and brought on line,
we expect the supply of biodiesel to increase. The absence of increased demand may cause prices
for biodiesel to
decrease. We may not be able to compete successfully or such competition may reduce our
ability to generate the profits necessary to operate our plant.
We must compete with other biodiesel producers in the industry not just in the sale of our
biodiesel, but also in the acquisition of soybean oil, animal fats and other feedstocks and raw
materials. A majority of biodiesel plants, including many of the largest biodiesel producers,
utilize soybean oil. This may change over time as high soybean oil prices are encouraging
biodiesel producers to find ways to utilize alternative and less costly types of feedstock.
Furthermore, producers may design their plants with the capability to use multiple feedstocks.
Nonetheless, we expect that increased biodiesel production will continue to increase the demand and
cost of not only soybean oil, but also animal fats and other inputs. We expect this will make it
more expensive for us to produce our biodiesel from soybean oil alternatives, such as animal fat,
and will reduce our profit margins when we are engaged in ordinary biodiesel production. This is
because there is little or no correlation between the cost of feedstock and the market price of
biodiesel and, therefore, we cannot pass along increased feedstock costs to our biodiesel
customers. In order to stay competitive in the diesel industry, biodiesel must be competitively
priced with petroleum-based diesel. Therefore, biodiesel prices fluctuate more in relation to
petroleum-based diesel market prices than with feedstock market prices. As a result, increased
feedstock costs may result in decreased profit margins when we are engaged in ordinary biodiesel
production. If we continue to experience high feedstock costs for a sustained period of time, such
pricing may reduce our ability to generate revenues and our profit margins may significantly
decrease or be eliminated.
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Many current plants are capable of using only vegetable oil for feedstock. Our plant is able
to use both vegetable oils and animal fats to produce biodiesel, allowing us to use whichever types
of feedstock provide the greatest return at any given time when we are engaged in ordinary
biodiesel production (as opposed to biodiesel production pursuant to toll processing arrangements
pursuant to which the third party ordering production supplies us with feedstock). This is
beneficial because the cost of feedstock is the highest cost associated with ordinary biodiesel
production. Our ability to utilize animal fats is also significant because animal fat-based
biodiesel has some favorable advantages over soybean oil-based biodiesel, such as better lubricity
and lower nitrogen oxide (NOx) emissions. However, some purchasers of animal fat-based biodiesel
may believe that it is not suitable for use during the winter months in colder climates due to its
tendency to gel at higher temperatures than soybean oil-based biodiesel. This could limit our
ability to sell animal fat-based biodiesel during winter months.
We compete with large, multi-product companies and other biodiesel plants with varying
capacities. Some of our competitors have greater resources than we currently have or will have in
the future. Large plants with which we compete include the 85 million gallon per year Archer
Daniels Midland Co (ADM) canola-based plant in Velva, North Dakota; the 90 million gallon per
year Green Earth Fuels multi-feedstock plant in Galena Park, Texas; the 100 million gallon per year
multi-feedstock Imperium Grays Harbor plant in Grays Harbor, Washington; the 100 million gallon per
year multi-feedstock plant in Las Vegas, Nevada; and the 180 million gallon per year
multi-feedstock RBF Port Neches plant in Port Neches, Texas.
Although most biodiesel plants are not equipped to process raw materials (such as soybeans)
into feedstock (such as soybean oil), there are several of our competitors that have soy-crushing
facilities and are therefore not reliant upon third parties for their feedstock supply like we are.
As a result, we face a competitive challenge from biodiesel plants owned and operated by the
companies that supply our inputs, such as Cargill, Inc. (Cargill), Ag Processing, Inc. (AGP)
and ADM. Cargill, AGP and ADM have significant crush capabilities throughout North America and are
large suppliers of soybean oil and own and operate their own biodiesel plants in the Midwest.
Cargill, Inc. owns a 37.5 million gallon plant in Iowa Falls, Iowa and AGP owns a 30 million
gallon per year plant in Sergeant Bluff, Iowa, both of which process soy oil into biodiesel. ADM
has constructed an 85 million gallon plant in Velva, North Dakota which processes canola oil into
biodiesel. Also, increasing feedstock costs have spurred, and will likely continue to spur,
additional development of crush facilities throughout the country. Such vertical integration
provides these plants with greater control over their feedstock supplies, thereby providing them
with a competitive advantage over plants like ours that do not have soy-crushing capabilities,
especially as prices and competition for soybean oil and other feedstocks have increased.
Furthermore, we must compete with REG, the entity that currently manages our plant, procures
our inputs and markets our products pursuant to the MOSA. We have also entered into a toll
processing agreement with an
entity affiliated with REG. REG owns a plant located in Ralston, Iowa which produces
biodiesel primarily from feedstock produced at its soybean crushing facility and has an annual
production capacity of 12 million gallons. REG has also announced its intention to increase its
ownership of biodiesel production facilities. In June 2008, REG acquired a 35 million gallon per
year plant in Houston Texas which now operates under the name REG Houston. Its previous plans to
construct two additional biodiesel plants in Kansas and Louisiana were put on hold due to
unfavorable economic and industry conditions. However, under our proposed consolidation
transaction with REG, it is contemplated that REG could acquire up to two additional biodiesel
plants in addition to Central Iowa Energys, including Western Iowa Energy, LLC and Blackhawk
Biofuels, LLC, even if our consolidation transaction does not close. Accordingly, we will be in
direct competition with REG for the acquisition of inputs and the sale of our products. Our MOSA
does not prohibit REG from providing marketing and sales services for our competitors. If REG
cannot market all of the biodiesel produced at its own biodiesel production facilities or at the
facilities of other plants managed by REG, then those plants managed by REG, including Central Iowa
Energy, are at risk that this loss will be allocated to them.
16
Table of Contents
Commercial Biodiesel Production Plants (December 7, 2009)
The
following list produced by the National Biodiesel Board indicates the locations of most
of the active plants in the United States as of December 7, 2009. Active plants are those
companies that are actively producing biodiesel. Companies in the earlier stages of the process
are not represented on this map.
Ann. | ||||||||||||||||
Production | ||||||||||||||||
Company | City | State | Capacity | Feedstock | Start date | BQ9000 | ||||||||||
Allied Renewable Energy, LLC |
Birmingham | AL | 15,000,000 | Soy | May-07 | |||||||||||
Eagle Biodiesel, Inc. |
Bridgeport | AL | 30,000,000 | Multi Feedstock | Apr-07 | |||||||||||
N.A.B. Energy Group, Inc. |
Florence | AL | ||||||||||||||
Delta American Fuel, LLC |
Helena | AR | 40,000,000 | Multi Feedstock | Mar-09 | |||||||||||
Amereco Biofuels Corp |
Arlington | AZ | 15,000,000 | Multi Feedstock | Sep-07 | |||||||||||
Environmental Development Group |
Tucson | AZ | 1,500,000 | Recycled Cooking Oil | Aug-09 | |||||||||||
Grecycle Arizona, LLC |
Tucson | AZ | 2,500,000 | Yellow Grease | May-09 | |||||||||||
Performance Biofuels, LLC |
Chandler | AZ | 1,500,000 | Recycled Cooking Oil | Dec-08 | |||||||||||
Baker Commodities |
Los Angeles | CA | 10,000,000 | Multi Feedstock | Dec-10 | |||||||||||
Biodiesel Industries of Ventura, LLC |
Port Hueneme | CA | 3,000,000 | Full Spectrum, including but not limited to yellow grease, jatropha & algae | Aug-09 | |||||||||||
Community Fuels |
Stockton | CA | 10,000,000 | Multi Feedstock | Jun-08 | |||||||||||
Crimson Renewable Energy, LP |
Bakersfield | CA | 30,000,000 | Multi Feedstock | 3Q 2009 | |||||||||||
Eco Energy Biodiesel, Inc. |
Adelanto | CA | 1,000,000 | Multi Feedstock | 3Q 2009 | |||||||||||
Enviro Fuels Enterprises, LLC |
Fresno | CA | 3Q 2009 | |||||||||||||
GeoGreen Biofuels, LLC |
Vernon | CA | 3,000,000 | Recycled Cooking Oil | Apr-09 | |||||||||||
Imperial Western Products |
Coachella | CA | 8,000,000 | Multi Feedstock | Oct-01 | * | ||||||||||
Manning Beef, LLC |
Pico Rivera | CA | Tallow | 3Q 2009 | ||||||||||||
New Leaf Biofuel, LLC |
San Diego | CA | Dec-08 | |||||||||||||
Noil Energy Group |
Commerce | CA | 5,000,000 | Multi Feedstock | 2Q 2009 | |||||||||||
Promethean Biofuels Cooperative Corporation |
Temecula | CA | ||||||||||||||
Renewable Energy Products, LLC |
Santa Fe Springs | CA | 10,000,000 | Multi Feedstock | Jul-08 | |||||||||||
Simple Fuels Biodiesel, Inc. |
Chilcoot | CA | 3Q 2009 | |||||||||||||
Whole Energy Fuels |
Pacifica | CA | 3,000,000 | Recycled Cooking Oil | 2Q 2009 | |||||||||||
Wright Biofuels, Inc. |
San Jacinto | CA | 5,500,000 | Multi Feedstock | Sep-07 |
17
Table of Contents
Ann. | ||||||||||||||||
Production | ||||||||||||||||
Company | City | State | Capacity | Feedstock | Start date | BQ9000 | ||||||||||
Yokayo Biofuels, Inc. |
Ukiah | CA | 350,000 | Recycled Cooking Oil | Apr-06 | |||||||||||
Hawaiian Islands Bioenergy, Inc. |
Parker | CO | 1,000,000 | Multi Feedstock | May-09 | |||||||||||
BioDiesel One Ltd. |
Southington | CT | 4,000,000 | Recycled Cooking Oil | Feb-09 | |||||||||||
BioPur Inc. |
Bethlehem | CT | 1,000,000 | Multi Feedstock | Jul-06 | |||||||||||
Clayton |
Clayton | DE` | 11,000,000 | Multi-Feedstock | Jan-10 | |||||||||||
Agri-Source Fuels, Inc. |
Dade City | FL | 10,000,000 | Multi Feedstock | Oct-07 | |||||||||||
New Eden Energy, LLC |
St. Cloud | FL | 1,000,000 | Recycled Cooking Oil | Dec-08 | |||||||||||
Smart Fuels, LLC |
Fruitland Park | FL | 3Q 2009 | |||||||||||||
Southern Biodiesel Corporation |
Miami | FL | 4Q 2009 | |||||||||||||
Alterra Bioenergy of Middle Georgia, LLC |
Gordon | GA | 15,000,000 | Multi Feedstock | Aug-07 | |||||||||||
Alterra Bioenergy of Plains Georgia, LLC |
Plains | GA | 30,000,000 | Soy | 4Q 2008 | |||||||||||
BullDog BioDiesel |
Ellenwood | GA | 18,000,000 | Multi Feedstock | Jan-08 | |||||||||||
Down to Earth Energy, Inc. |
Monroe | GA | 2,000,000 | Multi Feedstock | Aug-09 | |||||||||||
ECO Solutions, LLC |
Chatsworth | GA | 25,000,000 | Multi Feedstock | Aug-07 | |||||||||||
Middle Georgia Biofuels |
East Dublin | GA | 1,500,000 | Poultry Fat, Tallow | Apr-06 | |||||||||||
Peach State Labs |
Rome | GA | Soy | Jan-05 | * | |||||||||||
Perfect Circle Renewable Energy, LLC |
Atlanta | GA | Recycled Cooking Oil | Jul-09 | ||||||||||||
Seminole Biodiesel |
Bainbridge | GA | 10,000,000 | Multi Feedstock | Jan-08 | |||||||||||
AGP |
Sergeant Bluff | IA | 30,000,000 | Soy | Aug-96 | * | ||||||||||
Cargill |
Iowa Falls | IA | 37,500,000 | Soy | Jun-06 | * | ||||||||||
Central Iowa Energy, LLC |
Newton | IA | 30,000,000 | Multi Feedstock | Apr-07 | * | ||||||||||
Energy Tec, LLC |
Maquoketa | IA | 37,000 | Sep-08 | ||||||||||||
Iowa Renewable Energy, LLC |
Washington | IA | 30,000,000 | Multi Feedstock | Jul-07 | * | ||||||||||
Maple River Energy, LLC |
Galva | IA | 5,000,000 | Soy | May-09 | |||||||||||
Nova Biosource Clinton County |
Clinton | IA | 10,000,000 | Multi Feedstock | Apr-06 | |||||||||||
REG Ralston, LLC |
Ralston | IA | 12,000,000 | Multi Feedstock | 2002 | * | ||||||||||
Riksch BioFuels, LLC |
Crawfordsville | IA | 10,000,000 | Multi Feedstock | Dec-06 | |||||||||||
Sioux Biochemical, Inc. |
Sioux Center | IA | 2,000,000 | Corn, Soy | Dec-06 | |||||||||||
Western Dubuque Biodiesel |
Farley | IA | 30,000,000 | Crude or Refined Vegetable Oils | Aug-07 | * |
18
Table of Contents
Ann. | ||||||||||||||||
Production | ||||||||||||||||
Company | City | State | Capacity | Feedstock | Start date | BQ9000 | ||||||||||
Western Iowa Energy, LLC |
Wall Lake | IA | 30,000,000 | Multi Feedstock | Jun-06 | * | ||||||||||
BiofuelBox Corporation |
American Falls | ID | 1,000,000 | Waste Vegetable Oil, Brown Grease | Feb-09 | |||||||||||
Blue Sky Biodiesel, LLC |
New Plymouth | ID | 10,000,000 | Soy | Jul-06 | |||||||||||
Pleasant Valley Biofuels, LLC |
American Falls | ID | 1,500,000 | Recycled Cooking Oil, Tallow | Aug-08 | |||||||||||
BioVantage Fuels, LLC |
Belvidere | IL | 5,000,000 | Multi Feedstock | 3Q 2009 | |||||||||||
Blackhawk Biofuels, LLC |
Danville | IL | 45,000,000 | Multi Feedstock | Nov-08 | * | ||||||||||
Incobrasa Industries, Ltd. |
Gilman | IL | 31,000,000 | Soy | Jan-07 | |||||||||||
Midwest Biodiesel Products, Inc. |
South Roxanna | IL | 30,000,000 | Multi Feedstock | May-07 | |||||||||||
Nova Biosource Seneca |
Seneca | IL | 60,000,000 | Multi Feedstock | Apr-08 | * | ||||||||||
Stepan Company |
Millsdale | IL | 22,000,000 | Multi Feedstock | Jan-01 | * | ||||||||||
Alternative Fuel Solutions, LLC |
Huntington | IN | 3Q 2009 | |||||||||||||
e-biofuels, LLC |
Middletown | IN | 15,000,000 | Multi Feedstock | Jun-07 | |||||||||||
Integrity Biofuels |
Morristown | IN | 10,000,000 | Soy | Aug-06 | |||||||||||
Kingsbury Energy Group, LLC |
La Porte | IN | Soy | Dec-08 | ||||||||||||
Louis Dreyfus Agricultural Industries, LLC |
Claypool | IN | 80,000,000 | Soy | Jan-08 | * | ||||||||||
Healy Biodiesel, Inc. |
Sedgwick | KS | 1,000,000 | Recycled Cooking Oil | Jun-07 | |||||||||||
REG Emporia, LLC |
Emporia | KS | 60,000,000 | Multi Feedstock | 2Q 2010 | |||||||||||
Griffin Industries |
Butler | KY | 1,750,000 | Multi Feedstock | Dec-98 | * | ||||||||||
Owensboro Grain |
Owensboro | KY | 50,000,000 | Soy | Jan-08 | |||||||||||
REG New Orleans, LLC |
New Orleans | LA | 60,000,000 | Multi Feedstock | 2Q 2010 | |||||||||||
Baker Commodities |
Billerica | MA | 15,000,000 | Multi Feedstock | Dec-10 | |||||||||||
Baystate Biofuels, LLC |
North Andover | MA | 10,000,000 | Multi Feedstock | 3Q 2009 | |||||||||||
Biofuels of New England, LLC |
Newburyport | MA | 300,000 | Recycled Cooking Oil | Nov-08 | |||||||||||
MBP Bioenergy, LLC |
Attleboro | MA | 500,000 | Recycled Cooking Oil | Nov-06 | |||||||||||
Eagle Creek Fuel Services, LLC |
Baltimore | MD | Recycled Cooking Oil, Multi Feedstock | Aug-08 | ||||||||||||
Greenlight Biofuels, LLC |
Princess Anne | MD | 4,000,000 | Multi Feedstock | Oct-07 | |||||||||||
Michigan Biodiesel, LLC |
Bangor | MI | 10,000,000 | Multi Feedstock | Jan-07 | |||||||||||
TPA Inc. |
Warren | MI | 20,000,000 | Multi Feedstock | Jul-08 |
19
Table of Contents
Ann. | ||||||||||||||||
Production | ||||||||||||||||
Company | City | State | Capacity | Feedstock | Start date | BQ9000 | ||||||||||
Ever Cat Fuels, LLC |
Isanti | MN | 3,000,000 | Multi Feedstock | Aug-09 | |||||||||||
FUMPA BioFuels |
Redwood Falls | MN | 3,000,000 | Multi Feedstock | Dec-04 | |||||||||||
Minnesota Soybean Processors |
Brewster | MN | 30,000,000 | Soy | Aug-05 | * | ||||||||||
AGP |
St. Joseph | MO | 29,900,000 | Soy | Sep-07 | * | ||||||||||
American Energy Producers, Inc. |
Carrollton | MO | 50,000,000 | Soy | 4Q 2009 | |||||||||||
Global Fuels, LLC |
Dexter | MO | 3,000,000 | Multi Feedstock | Apr-07 | |||||||||||
Mid America Biofuels, LLC |
Mexico | MO | 30,000,000 | Soy | Dec-06 | * | ||||||||||
Paseo Cargill Energy, LLC |
Kansas City | MO | 37,500,000 | Soy, Animal Fats | Apr-08 | * | ||||||||||
Prairie Pride |
Deerfield | MO | 30,000,000 | Soy | Dec-07 | * | ||||||||||
Producers Choice Soy Energy LLC |
Moberly | MO | 5,000,000 | Soy | Jun-09 | |||||||||||
Terra Bioenergy, LLC |
St. Joseph | MO | 30,000,000 | Multi Feedstock | 4Q 2009 | |||||||||||
Delta Biofuels, Inc. |
Natchez | MS | 80,000,000 | Multi Feedstock | May-07 | * | ||||||||||
GreenLight Biofuels, LLC |
Meridian | MS | Mar-09 | |||||||||||||
Scott Petroleum Corporation |
Greenville | MS | 20,000,000 | Multi Feedstock | Oct-07 | * | ||||||||||
Earl Fisher Bio Fuels |
Chester | MT | 250,000 | Canola, Camelina, Safflower, Sunflower | Apr-08 | |||||||||||
Blue Ridge Biofuels |
Asheville | NC | 1,000,000 | Multi Feedstock | May-06 | |||||||||||
Evans Environmental Energies, Inc. |
Wilson | NC | 3,000,000 | May-07 | ||||||||||||
Foothills Bio-Energies, LLC |
Lenoir | NC | 5,000,000 | Multi Feedstock | Sep-06 | |||||||||||
Leland Organic Corporation |
Leland | NC | 30,000,000 | Multi Feedstock | Sep-08 | |||||||||||
Patriot Biodiesel, LLC |
Greensboro | NC | 1,500,000 | Multi Feedstock | Dec-08 | |||||||||||
Piedmont Biofuels |
Pittsboro | NC | 4,000,000 | Multi Feedstock | Nov-06 | * | ||||||||||
Triangle Biofuels Industries, Inc. |
Wilson | NC | 3,000,000 | Multi Feedstock | Jan-08 | |||||||||||
ADM |
Velva | ND | 85,000,000 | Canola | Aug-07 | * | ||||||||||
Atlantic Biodiesel |
Salem | NH | 3,000,000 | 3Q 2009 | ||||||||||||
White Mountain Biodiesel, LLC |
North Haverhill | NH | 3Q 2009 | |||||||||||||
Fuel Bio One, LLC |
Elizabeth | NJ | 50,000,000 | Multi Feedstock | Mar-07 | |||||||||||
Innovation Fuels |
Newark | NJ | 40,000,000 | Multi Feedstock | Jul-04 | * | ||||||||||
ARFuels, LLC |
Clovis | NM | 30,000,000 | Multi Feedstock | 3Q 2010 |
20
Table of Contents
Ann. | ||||||||||||||||
Production | ||||||||||||||||
Company | City | State | Capacity | Feedstock | Start date | BQ9000 | ||||||||||
Rio Valley Biofuels, LLC |
Anthony | NM | 750,000 | Multi Feedstock | Jul-06 | |||||||||||
Bently Biofuels |
Minden | NV | 1,000,000 | Multi Feedstock | Nov-05 | |||||||||||
Biodiesel of Las Vegas |
Las Vegas | NV | 100,000,000 | Multi Feedstock | 4Q 2009 | |||||||||||
Metro Fuel Oil Corp. |
Brooklyn | NY | 2009 | |||||||||||||
Northern Biodiesel, Inc. |
Ontario | NY | 20,000,000 | Jun-08 | ||||||||||||
TMT Biofuels, LLC |
Port Leyden | NY | 250,000 | Recycled Cooking Oil | Sep-08 | |||||||||||
Agrifuels, LLC |
Bremen | OH | 1,000,000 | Multi Feedstock | Mar-07 | |||||||||||
Ambiol Flex Fuels, LLC |
East Toledo | OH | 2,000,000 | Soy | Feb-08 | |||||||||||
American Ag Fuels, LLC |
Defiance | OH | 7,000,000 | Multi Feedstock | Jul-05 | |||||||||||
Arlington Energy, LLC |
Mansfield | OH | 4,000,000 | Multi Feedstock | Jul-08 | |||||||||||
Center Alternative Energy Company |
Cleveland | OH | 5,000,000 | Soy, Choice White Grease, yellow grease, tallow | May-07 | |||||||||||
Jatrodiesel Inc. |
Miamisburg | OH | 5,000,000 | Multi Feedstock | Jun-07 | |||||||||||
Peter Cremer NA |
Cincinnati | OH | 30,000,000 | Soy | Oct-02 | * | ||||||||||
PK Biodiesel |
Woodstock | OH | 5,000,000 | Multi Feedstock | Aug-08 | |||||||||||
Twin Rivers Technologies Natural Ingredients, LLC |
Cincinnati | OH | 60,000,000 | Multiple Feedstocks | Dec-06 | * | ||||||||||
High Plains Bioenergy |
Guymon | OK | 30,000,000 | Multi Feedstock | Mar-08 | * | ||||||||||
South East Oklahoma Biodiesel |
Valliant | OK | 5,000,000 | Multi Feedstock | Nov-08 | |||||||||||
Tulsa Biofuels, LLC |
Tulsa | OK | Nov-07 | |||||||||||||
Beaver Biodiesel, LLC |
Albany | OR | 1,200,000 | Multi Feedstock | Feb-09 | |||||||||||
Green Fuels of Oregon, Inc. |
Klamath Falls | OR | 1,000,000 | Canola, Waste Vegetable Oil | Mar-07 | |||||||||||
Biodiesel of Pennsylvania, Inc. |
White Deer | PA | 1,500,000 | Multi Feedstock | Mar-07 | |||||||||||
Eagle Bio Diesel |
Kane | PA | 2Q 2009 | |||||||||||||
Keystone BioFuels, Inc. |
Shiremanstown | PA | Multi Feedstock | Mar-06 | ||||||||||||
Lake Erie Biofuels |
Erie | PA | 45,000,000 | Soy | Sep-07 | * | ||||||||||
Middletown Biofuels, LLC |
Middletown | PA | 4,000,000 | Soy | Jun-07 | |||||||||||
Mother Earth Energy, Inc. |
Chester | PA | 3,500,000 | Recycled Cooking Oil, Vegetable Oils | 3Q 2009 | |||||||||||
Pennsylvania Biodiesel, Inc. |
Monaca | PA | 25,000,000 | Multi Feedstocks | Jul-09 | |||||||||||
Soy Energy, Inc. |
New Oxford | PA | 1,500,000 | Soy | Feb-07 |
21
Table of Contents
Ann. | ||||||||||||||||
Production | ||||||||||||||||
Company | City | State | Capacity | Feedstock | Start date | BQ9000 | ||||||||||
United Biofuels, Inc. |
York | PA | 3,000,000 | Multi Feedstock | Apr-06 | |||||||||||
United Oil Company |
Pittsburgh | PA | 5,000,000 | Multi Feedstock | Dec-05 | |||||||||||
US Alternative Fuels Corp. |
Johnstown | PA | 4Q 2008 | |||||||||||||
Lantic Green Energy, LLC |
West Greenwich | RI | 1Q 2009 | |||||||||||||
Newport Biodiesel, LLC |
Newport | RI | 500,000 | Recycled Cooking Oil | Jan-08 | |||||||||||
Cateechee Biofuels, LLC |
Central | SC | 3Q 2009 | |||||||||||||
Ecogy Biofuels, LLC |
Estill | SC | 30,000,000 | Soy | Dec-07 | |||||||||||
Green Valley Biofuels, LLC |
Warrenville | SC | 10,000,000 | Multi Feedstock | 3Q 2009 | |||||||||||
Greenlight Biofuels, LLC |
Laurens | SC | 10,000,000 | Multi Feedstock | 4Q 2008 | |||||||||||
Greenpath Biofuels of Myrtle Beach, Inc. |
Conway | SC | Recycled Cooking Oil | 4Q 2009 | ||||||||||||
Southeast BioDiesel, LLC |
North Charleston | SC | 8,000,000 | Multi Feedstock | Jan-07 | |||||||||||
Midwest BioDiesel Producers, LLC |
Alexandria | SD | 7,000,000 | Multi Feedstock | Mar-06 | |||||||||||
Milagro Biofuels of Memphis |
Memphis | TN | 5,000,000 | Multi Feedstock | Oct-06 | |||||||||||
Southern Alliance for Clean Energy |
Knoxville | TN | 380,000 | Recycled Cooking Oil | Jul-09 | |||||||||||
SunsOil, LLC |
Athens | TN | 1,500,000 | Multi Feedstock | Oct-07 | |||||||||||
Agribiofuels, LLC |
Dayton | TX | 12,000,000 | Multi Feedstock | Dec-06 | |||||||||||
AgriMax Fuels, LLC |
Channelview | TX | 3,000,000 | Soy | Mar-07 | |||||||||||
Beacon Energy |
Cleburne | TX | 12,000,000 | Multi Feedstock | Mar-06 | * | ||||||||||
Biodiesel of Texas, Inc. |
Denton | TX | 360,000 | Multi Feedstock | 3Q 2009 | |||||||||||
BioSelect Fuels (GBBLP) |
Galveston | TX | 30,000,000 | Multi Feedstock | May-07 | |||||||||||
Brownfield Biodiesel, LLC |
Ralls | TX | 2,000,000 | Cottonseed, Soy, Canola | Apr-06 | |||||||||||
Direct Fuels |
Euless | TX | 10,000,000 | Multi Feedstock | Feb-08 | * | ||||||||||
Global Alternative Fuels, LLC |
El Paso | TX | 5,000,000 | Multi Feedstock | Mar-09 | |||||||||||
Green Earth Fuels of Houston, LLC |
Galena Park | TX | 90,000,000 | Multi Feedstock | Jul-07 | |||||||||||
Greenlight Biofuels, Ltd. |
Littlefield | TX | 5,000,000 | Multi Feedstock | Aug-07 | |||||||||||
Hardin Fuels, Inc. |
Kountze | TX | Mar-08 | |||||||||||||
Mississippi Investment Petroleum Co., LLC |
Houston | TX | 5,000,000 | Poultry Fat, Recycled Cooking Oil | 3Q 2009 | |||||||||||
New Fuel Company |
Dallas | TX | 250,000 | Multi Feedstock | Apr-06 |
22
Table of Contents
Ann. | ||||||||||||||||
Production | ||||||||||||||||
Company | City | State | Capacity | Feedstock | Start date | BQ9000 | ||||||||||
Organic Fuels, LLC |
Galena Park | TX | 45,000,000 | Multi Feedstock | Jan-06 | * | ||||||||||
RBF Port Neches, LLC |
Port Neches | TX | 180,000,000 | Multi Feedstock | 4Q 2008 | |||||||||||
Red River Biodiesel Ltd. |
New Boston | TX | 15,000,000 | Multi Feedstock | May-08 | |||||||||||
REG Houston, LLC |
Seabrook | TX | 35,000,000 | Multi Feedstock | Jul-08 | |||||||||||
Texas Green Manufacturing, LLC |
Littlefield | TX | 1,250,000 | Tallow | Apr-09 | |||||||||||
The Sun Products Corp. |
Pasadena | TX | 15,000,000 | Palm | Jun-05 | * | ||||||||||
TM Chemicals LP |
Deer Park | TX | 7,000,000 | Tallow | Dec-08 | |||||||||||
Denali Industries, LLC |
American Fork | UT | 3,800,000 | Multi Feedstock | Jul-07 | |||||||||||
Chesapeake Custom Chemical |
Ridgeway | VA | 5,500,000 | Multi Feedstock | Jan-06 | |||||||||||
RECO Biodiesel, LLC |
Richmond | VA | 10,000,000 | Multi Feedstock | Dec-06 | |||||||||||
Red Birch Energy, Inc. |
Bassett | VA | 2,500,000 | Multi Feedstock | Jun-08 | |||||||||||
REVNOVA Biofuels, LLC |
Remington | VA | Oct-08 | |||||||||||||
Synergy Biofuels, LLC |
Pennington Gap | VA | 3,000,000 | Multi Feedstock | Dec-08 | |||||||||||
Virginia Biodiesel Refinery |
West Point | VA | 7,000,000 | Multi Feedstock | Oct-03 | |||||||||||
General Biodiesel Seattle LLC |
Seattle | WA | 5,000,000 | Multi Feedstock | Jun-09 | |||||||||||
General Biodiesel Seattle LLC |
Seattle | WA | 5,000,000 | Multi Feedstock | 3Q 2009 | |||||||||||
Gen-X Energy Group, Inc. |
Burbank | WA | 15,000,000 | Multi Feedstock | Jun-07 | |||||||||||
Imperium Grays Harbor |
Hoquiam | WA | 100,000,000 | Multi Feedstock | Aug-07 | * | ||||||||||
Inland Empire Oilseeds, LLC |
Odessa | WA | 8,000,000 | Canola, Soy, Camelina | Nov-08 | |||||||||||
Whole Energy Fuels |
Bellingham | WA | Recycled Cooking Oil | 1Q 2009 | ||||||||||||
Best Biodiesel, Inc. |
Cashton | WI | 10,000,000 | Multi Feedstocks | Jan-08 | |||||||||||
Bio Blend Fuels Inc. |
Manitowoc | WI | 2,600,000 | May-09 | ||||||||||||
Sun Power Biodiesel, LLC |
Cumberland | WI | 3,000,000 | sunflower, canola | Dec-09 | |||||||||||
Walsh Bio Fuels, LLC |
Mauston | WI | 5,000,000 | Multi Feedstock | May-07 | |||||||||||
AC & S, Inc. |
Nitro | WV | 3,000,000 | Soy | Dec-07 |
Source: National Biodiesel Board
* | Denotes BQ-9000 Accredited Producers |
|
(1) | Annual Production Capacity only refers to the reported maximum production capability of the
facility. It does not represent how many gallons of biodiesel were actually produced at each
plant. |
|
(2) | Includes the annual production capacity of plants which chose not to list their production. |
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Competition from Other Fuel Sources and Additives
The biodiesel industry is in competition with the diesel fuel segment of the petroleum
industry. Historically, biodiesel prices have correlated to the prices of petroleum-based diesel.
Over the past several years, according to the Energy Information Administration, the price of
diesel fuel steadily increased until reaching a record high average price in July 2008 of
approximately $4.70 per gallon for No. 2 ultra low sulfur diesel, and thereafter declined to
approximately $2.75 as of December 7, 2009. Although the price of diesel fuel has decreased over
the past several months, diesel fuel prices per gallon remain at levels below or equal to the price
of biodiesel. Following the trend of diesel prices, biodiesel prices steadily increased over the
past year to their peak in the summer of 2008, after which time they decreased. As of December 11,
2009, the National Weekly Ag Energy Roundup reports that B100 biodiesel prices in Iowa ranged from
$3.25 to $3.50 per gallon, which is up from a
range of $2.65 to $2.84 approximately one year ago. If the diesel fuel industry is able to produce petroleum-based diesel fuel with acceptable
environmental characteristics, we may find it difficult to compete with diesel fuel due to its
price advantage. Moreover, if the $1.00 blenders tax credit is not renewed or extended following
its expiration on December 31, 2009, biodiesel will be even more costly to produce and biodiesel
prices will be even less competitive with diesel fuel prices. In addition, other more
cost-efficient domestic alternative fuels may be developed and displace biodiesel as an
environmentally-friendly alternative. If diesel prices do not continue to increase or a new fuel is
developed to compete with biodiesel, it may be difficult to market our biodiesel, which could
result in the loss of some or all of our ability to operate profitably.
At least one large oil company has previously announced its intent to produce renewable
diesel, another form of diesel with which we may be required to compete. Renewable diesel has
characteristics similar to that of petroleum-based diesel fuel and can be co-processed at
traditional petroleum refineries from vegetable oils or animal fats mixed with crude oil through a
thermal de-polymerization process. As a result of an Internal Revenue Service interpretation of
the application of certain biodiesel tax credits created under the Energy Policy Act of 2005,
renewable diesel processed in traditional petroleum-refining equipment is currently eligible for
the blenders tax credit. Opponents of the recent IRS interpretation argue that the blenders tax
credit was intended for specific, limited production technologies, including the methyl ester
biodiesel production process, and that the recent interpretation will allow a large subsidy of
conventional petroleum refinery capacity at the expense of free-standing producers of biodiesel.
In 2007, ConocoPhillips announced its plans to add technology to some of its refineries to produce
approximately 175 million gallons of renewable diesel per year. Because renewable diesel is
eligible for the blenders tax credit (at the reduced rate of 50 cent per gallon as compared to
$1.00 per gallon for biodiesel), other large oil companies may also decide to add production
capacity for renewable diesel. These large petroleum refiners likely have greater financial
resources than we do and may be able to devote greater production capacity to the production of
renewable diesel than the typical biodiesel plant, which on average has an annual production
capacity of 30 million gallons. Accordingly, if renewable diesel proves to be more cost-effective
than biodiesel, our revenues and our ability to operate profitably may be adversely affected.
In addition, the EPA has issued regulations to reduce the amount of sulfur in diesel fuel in
order to improve air quality. The removal of sulfur from diesel fuel also reduces its lubricity
which must be corrected with fuel additives, such as biodiesel, which has inherent lubricating
properties. We expect to compete with producers of other diesel additives made from raw materials
other than soybean oil having similar lubricity values as biodiesel, such as petroleum-based
lubricity additives. Some major oil companies produce these petroleum-based lubricity additives
and strongly favor their use because they may be used in lower concentrations than biodiesel. In
addition, much of the infrastructure in place is for petroleum-based additives. As a result,
petroleum-based additives may be more cost-effective than biodiesel. Therefore, it may be
difficult to market our biodiesel as a lubricity additive, which could result in the loss of some
or all of our members investment.
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Glycerin Competition
Excess production of glycerin, a co-product of the biodiesel production process, may cause the
price of glycerin to decline, thereby adversely affecting our source of revenue from glycerin. It
is estimated that every one million gallons of biodiesel produced adds approximately another
100,000 gallons of crude glycerin into the market. Accordingly, as biodiesel production has
increased, the glycerin market has become increasingly saturated. As a
result, glycerin prices dropped dramatically in 2006, with crude glycerin prices hovering around 2
cents per pound or less. Some plants were forced to give away glycerin, and according to the
Jacobsen Publishing Companys Biodiesel Bulletin, others paid 3 cents to 4 cents per pound to
dispose of crude glycerin. However, as of December 2009, according to the Jacobsen Biodiesel
Bulletin, average crude glycerin prices increased to approximately 5 to 6 cents per pound. REG
markets the glycerin produced at our plant under our MOSA. When we produce biodiesel pursuant to
our toll processing agreement with REG Marketing, we are able to retain and sell the glycerin that
is produced as a result of the biodiesel toll processing. The average sales price we received for
our glycerin during fiscal year 2009 was approximately 5 cents per pound.
Excess glycerin production capacity may limit our ability to market our glycerin co-product,
and we may even be forced to pay to dispose of our glycerin if prices decrease as they did in 2006.
Low glycerin prices may also limit our ability to generate revenues through the sale of our
co-product. This may negatively affect the profitability of our business. Additionally, some of
our competitors, such as Cargill and ADM, have expanded their glycerin refining capacities due to
relatively higher prices for refined glycerin when compared to the price of crude glycerin. In
Iowa Falls, Iowa, Cargill has built a 30 million pound per year glycerin refinery near its 37.5
million gallon per year biodiesel production plant. These biodiesel producers may therefore have a
competitive advantage over plants like ours that do not have glycerin refining capabilities.
Research and Development
We do not conduct any research and development activities associated with the development of
new technologies for use in producing biodiesel and glycerin.
New Products and Services
We have not introduced any new products or services during the fiscal year ended September 30,
2009.
Dependence on One or a Few Major Customers
We are highly dependent upon REG for the successful marketing of our products and the
procurement of adequate supplies of the inputs needed to produce our products under the MOSA. We do
not have our own sales force or any other agreements with any third party for the marketing and
sale of our products or the supply and procurements of our inputs. Our lack of a sales force and
reliance on a third party to sell and market our products and procure our inputs may place us at a
competitive disadvantage.
REG has provided us written notice of its intent to terminate the MOSA on approximately May 1,
2010. Due to our significant reliance on REG for the management of our plant, the procurement of
our inputs, and the sale and marketing of our products, this could have a material adverse affect
on our ability to operate and generate revenues in the event we are not able to negotiate a new
MOSA with REG, to enter into an agreement for similar services with another third party or to
consummate our proposed consolidation transaction with REG. See ITEM 7. MANAGEMENTS DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS for a description of our proposed
consolidation with REG.
Furthermore, we are in direct competition with REG due to its ownership and management of
other existing biodiesel plants and proposed biodiesel plants, and any failure by REG to comply
with the terms of our MOSA could negatively impact our ability to generate revenues. The MOSA does
not prohibit REG from providing services to our competitors, and its does not provide any
procedures as to how REG will address any conflicts of interest that may arise during REGs service
to our plant and competitor plants. If REG places the interests of other biodiesel plants which it
owns or manages ahead of our interests, our profitability may be negatively impacted.
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Costs and Effects of Compliance with Environmental Laws
We are subject to extensive air, water and other environmental regulations and we have been
required to obtain a number of environmental permits to construct and operate the plant. We have
obtained all of the necessary permits to conduct plant operations, including air emissions permits,
a NPDES permit, and boiler permits. We also
entered into an agreement with the City of Newton for the discharge of our wastewater into its
wastewater disposal system. We are now subject to ongoing environmental regulation and testing.
Thompson Environmental Consulting, Inc. assisted us in obtaining all of our required permits and
continues to provide us assistance in ongoing permitting matters. Although we have been successful
in obtaining all of the permits currently required, any retroactive change in environmental
regulations, either at the federal or state level, could require us to obtain additional or new
permits or spend considerable resources on complying with such regulations. We estimate that we
will spend approximately $20,000 in complying with federal, state, and local environmental laws
over the next twelve months.
The governments regulation of the environment changes constantly. It is possible that more
stringent federal or state environmental rules or regulations could be adopted, which would
increase our operating costs and expenses. It also is possible that federal or state environmental
rules or regulations could be adopted that could have an adverse effect on the use of biodiesel.
There is always a risk that the EPA may enforce certain rules and regulations differently than
Iowas environmental administrators. Iowa or EPA rules are subject to change, and any such changes
could result in greater regulatory burdens on plant operations.
We could also be subject to environmental or nuisance claims from adjacent property owners or
residents in the area arising from possible foul smells or other air or water discharges from the
plant. Such claims may result in an adverse result in court if we are deemed to engage in a
nuisance that substantially impairs the fair use and enjoyment of real estate.
Employees
As of December 15, 2009, we had 22 full-time employees, which is a reduction in the size of
our staff from our fiscal year 2008. In January 2009, we reduced the size of our staff by six
persons in order to save costs due to our liquidity constraints, our lack of biodiesel sales
contracts and our plants operation at significantly below its nameplate capacity. The chart below
summarizes the type and number of positions that we employ as of December 15, 2009.
JOB TITLE | NUMBER EMPLOYEES | |||
Process Operator |
12 | |||
Supervisor/Management |
5 | |||
Shipping/Receiving |
1 | |||
Maintenance |
2 | |||
Laboratory Technician |
1 | |||
Office |
1 | |||
Total |
22 | |||
Our general manager and operations manager are employed by REG and placed at our facility
pursuant to our MOSA. Our current general manager, Derek Winkel, and operations manager, Phil
Abels, were both hired by REG. We directly employ all other employees and have sole responsibility
for the terms and conditions of their employment. Pursuant to the MOSA, REG assists us in hiring
and training our personnel and provides human resources and payroll assistance. The compensation
and benefits associated with the position of general manager and operations manager are paid by
REG. We are responsible for other staff and personnel costs.
The functions of the general manager under our management and operational services agreement
are:
| Utilize his or her ongoing best efforts to successfully and profitably manage
the plant in our best interests; |
| Develop an annual budget for presentation to and approval of our board; |
| Attend meetings of our board and provide information upon its request; |
| Insure that all raw product costs are minimized and that all finished product
revenues are maximized; |
| Work with us to formulate our mission and goals; |
| Manage the plants resources to efficiently achieve such mission and goals; |
| Manage our duties and rights under agreements with third parties relating to
the plant; |
| Assist with regulatory affairs monitoring and compliance; |
| Hire, terminate and replace plant personnel as necessary and in all cases in
accordance with the policies of our board; |
| Management of governmental relations, including USDAs biodiesel programs; and |
| Such other duties as may be agreed upon. |
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The functions of the operations manager are:
| Planning and scheduling biodiesel production to meet our needs and marketing
goals; |
| Monitor and improve quality control; |
| Oversee facility and equipment maintenance; |
| Assist with budgeting and the monitoring of labor and other expenses in the
operation; |
| Implement processing changes and new technologies as they evolve, and plan for
new projects relating to biodiesel production; and |
| Such other duties as may be agreed upon. |
In March 2007, we entered into an Industrial New Jobs Training Agreement with Des Moines Area
Community College (DMACC) in Ankeny, Iowa for the establishment of a new jobs training program to
educate and train employees of Central Iowa Energy. The services provided pursuant to this program
include management and supervisory training, technical and safety training, and professional job
skills training. The program will also include training materials. Up to $76,000 is available for
training under this program. The agreement provides that DMACC will issue training certificates to
provide funding for the project. DMACCs project costs will be paid by incremental property taxes
to be derived from the Companys business, the receipt of a portion of the increased payroll
withholding tax revenues resulting from the creation of the new jobs, and, if such funds are
insufficient, the Companys funds. The term of the agreement will not exceed ten (10) years. The
Company will be required to pay the project costs to the extent that the new jobs credit from
withholding and incremental property taxes are insufficient to pay the project costs, including the
principal and interest on the certificates. DMACC has issued training certificates and raised
funds for the program. We are currently diverting payroll withholding tax for payment towards the
program costs. Approximately $75,000 of funds remain available for training cost reimbursement
under this program.
ITEM 1A. RISK FACTORS.
You should carefully read and consider the risks and uncertainties below and the other information
contained in this report. The risks and uncertainties described below are not the only ones we may
face. The following risks, together with additional risks and uncertainties not currently known to
us or that we currently deem immaterial could impair our financial condition and results of
operations.
Risks Related to Our Business
There are doubts about our ability to continue as a going concern and if we are unable to
continue our business, our units may have little or no value. As discussed in Note 9 to the
accompanying financial statements, our non-compliance with the loan covenants contained in our
financing agreements with our lender and our failure to make payments of principal under such
agreements since January 2009 has raised doubts about our ability to continue as a going concern.
We have failed to comply with all of our loan covenants as of September 30, 2009, including the
working capital, tangible owners equity, and tangible net worth covenants and the fixed charge
ratio. Failure to comply with these loan covenants, as well as failure to make payments of
principal when due, constitutes an event of default under our financing agreements entitling our
lender, at its election, to accelerate all of the unpaid principal loan balance and accrued
interest under the financing agreements or to foreclose on its mortgage and security interest in
the real and personal property securing our loans. If such an event occurs, we may be forced to
permanently shut down the plant and our members could lose all of their investment. Furthermore,
the blenders tax credit, upon which the biodiesel industry has been reliant, is expected to expire
on December 31, 2009, subject to action by Congress to renew or extend the tax credit. There can be
no assurance that the blenders tax credit will be extended or renewed at all or at the same level
currently in effect. The loss of the blenders tax credit, or a reduction
in the benefits provided by such tax credit, could adversely affect our ability to profitably
produce and sell biodiesel. The expiration of this blenders tax credit also raises doubts about
our ability to continue as a going concern.
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Liquidity constraints could require us to cease operations. We are currently experiencing
liquidity problems due to our lack of working capital, our failure to generate significant funds
from our ongoing operations, and the unavailability of additional credit. Our current lack of
working capital and ongoing liquidity constraints have made it difficult or impossible for us to
acquire adequate inputs and feedstock to produce biodiesel and, accordingly, our plant is typically
only producing biodiesel pursuant to toll processing arrangements under which the other party has
the right to order the production of biodiesel from us from feedstock supplied by such other party.
Our lack of working capital may even make it difficult to operate pursuant to a toll processing
arrangement. We have exhausted our funds available under our debt facilities and we do not have
further commitments for financing from any lender. Should we lack adequate funds to operate our
plant or become unable to satisfy our obligations as they become due, we may have to cease
operations, either on a permanent or temporary basis.
The second amended and restated asset purchase agreement entered into by the Company, REG, and
certain other REG affiliates is subject to a variety of closing conditions and may not close. On
November 20, 2009 the Company entered into a Second Amended and Restated Asset Purchase Agreement
pursuant to which the Company is expected to consolidate its business and operations with REG under
a newly formed holding company, REG Newco, Inc., a Delaware corporation. The Company thereafter
intends to dissolve, liquidate and wind up as soon as immediately practicable following the receipt
of the requisite unit holder approval for the same and the close of the consolidation transaction.
The proposed consolidation transaction, however, is subject to multiple closing conditions,
including the certain regulatory approvals and the approval of the Companys unit holders and REGs
shareholders, among other conditions. In the event that any one or more of the conditions to
closing are not satisfied or any event giving rise to a partys right to terminate the agreement
arises, the consolidation transaction may not close and the Company will have to evaluate other
alternatives to cope with its financial difficulties. Furthermore, the longer that the
consolidation transaction closing or termination is delayed, the greater the Companys liquidity
constraints will likely become and the more difficult it may become for the Company to find
suitable alternatives.
Unit holder approval of the Companys dissolution, liquidation and winding up is not a
condition to the closing of the Companys proposed consolidation with REG. Unit holder approval of
the Companys dissolution, liquidation and winding up is not a condition to the closing of the
proposed consolidation of the Companys business and operations with REG under REG Newco, Inc. and,
accordingly, it is possible that the Company could remain in existence indefinitely following a
future successful closing of the consolidation transaction. Although REG Newco, Inc. has agreed to
pay for certain mutually agreeable ongoing costs for a period of up to six months following the
closing of the consolidation transaction, there is no guarantee that the Company will obtain the
requisite unit holder approval during such time period. In such event, the Company would not have
any active business operations or assets (other than REG Newco stock to be issued as part of the
consolidation transaction) to support any ongoing costs which it may incur as part of its
continuing existence.
We may be required to write down our long-lived assets and these impairment charges would
adversely affect our operating results. We account for the impairment of long-lived assets to be
held and used in accordance with ASC Topic 360. In accordance with ASC Topic 360, an asset (other
than goodwill and indefinite-lived intangible assets) is considered impaired when estimated future
cash flows are less than the carrying amount of the asset. In the event the carrying amount of such
asset is not deemed recoverable, the asset is adjusted to its estimated fair value. Fair value is
generally determined based upon estimated discounted future cash flows. At September 30, 2009 the
carrying amount of our fixed assets is $34.7 million. In determining if there has been an
impairment, we have projected future cash flows assuming that we are able to obtain sufficient
working capital to operate our plant until the planned merger and our expectations related to the
extension of the blenders credit and favorable RFS 2 legislation. If conditions or events change
and we have to reconsider our plans, the projected cash flows could change requiring the assets to
be adjusted to the estimated fair value. As a result, the amount of any annual or interim
impairment could be significant and could have a material adverse effect on our reported financial
results for the period in which the charge is taken.
We do not have sufficient working capital to engage in ordinary biodiesel production. We
expect to continue operating on an as-needed basis for toll processing orders for the foreseeable
future. We do not expect to
have sufficient working capital on hand in the foreseeable future to acquire feedstock to
produce biodiesel other than pursuant to a toll processing arrangement, which generally shifts the
risk of feedstock costs and biodiesel prices to the other party but do not guarantee us any minimum
biodiesel toll processing orders. It is also uncertain whether we will maintain sufficient funds to
cover the non-feedstock costs of production associated with biodiesel production under toll
processing arrangements. Our inability to engage in ordinary biodiesel production for biodiesel
sales contracts may have an adverse effect on our ability to generate revenues. Our lack of
working capital could also adversely affect our ability to operate profitably even pursuant to
tolling arrangements, which could reduce the value of our members investments.
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We have a limited operating history. We organized our company in March 2005 and commenced
production of biodiesel at our plant in April 2007. Accordingly, we have a limited operating
history from which you can evaluate our business and prospects. Our prospects must be considered
in light of the risks and uncertainties encountered by an early-stage company and in rapidly
growing industries, such as the biodiesel industry, where supply and demand may change
substantially in a short amount of time. Our operating results could fluctuate significantly in
the future as a result of a variety of factors, including those discussed throughout these RISK
FACTORS. Many of these factors are outside of our control. There is no assurance that our future
financial performance will improve. If we cannot successfully address these risks, our business,
future results of operations and financial condition may be materially adversely affected.
We have a history of losses and may not ever operate profitably. For our fiscal years ended
September 30, 2009 and 2008, we incurred a net loss of $7,923,496 and $2,414,438, respectively.
There is no assurance that we will be successful in our efforts to operate the biodiesel plant or
that we will be able to operate profitably. The biodiesel industry is experiencing volatile
feedstock prices, decreasing demand and lower biodiesel prices. Market conditions may continue to
result in a situation where the costs of producing biodiesel are more than the price we receive for
biodiesel. Decreased demand for biodiesel may also impair our ability to enter into tolling
arrangements for biodiesel production. If unfavorable market conditions persist, we may have to
continue to scale back or cease operations at the biodiesel plant, either on a temporary or
permanent basis. This may affect our ability to generate revenues and could decrease or eliminate
the value of our units.
We could be forced to consider filing for bankruptcy protection in the event that economic
conditions and our liquidity problems do not improve. Various biofuels companies across the
company have filed for bankruptcy, which is likely due in part to the unfavorable economic climate
and market conditions. We are currently experiencing liquidity problems due in large part to our
lack of working capital and available credit, decreased biodiesel demand, and lack of biodiesel
sale contracts. We anticipate operating at significantly below our nameplate production capacity
for the first several quarters of 2010 due to these factors. We expect that most, if not all, of
any biodiesel production during such periods will be pursuant to tolling arrangements. Although we
currently anticipate consolidating our business and operations with those of REG under a newly
formed holding company, REG Newco, Inc., there can be no assurances that such consolidation
transaction will ever close. If our current liquidity problems persist and we are unable to
generate sufficient revenues from the sale of our biodiesel or tolling arrangements, we may have to
consider bankruptcy as an option to cope with our financial difficulties. This would reduce or
eliminate the value of our members investment in the Company.
We are currently in default of our agreement with Jasper County, Iowa. Jasper County, Iowa
constructed certain sewer improvements for our plant site pursuant to a private redevelopment
agreement which obligates us to pay Jasper County for the total cost of improvements constructed by
Jasper County in the event of our default under the agreement. We are currently in default under
this agreement due to our failure to pay property taxes due September 30, 2009. We also failed to
timely file an annual report required under the agreement. Accordingly, if Jasper County elects to
declare an event of default, we would be obligated to pay approximately $745,000. In such event,
we would not likely have sufficient funds to pay this amount and this would have a material adverse
effect on our ability to operate and generate revenues, and our members could lose all or some of
their investment.
We have defaulted in the payment of property taxes due as of September 30, 2009. The Company
failed to pay property taxes in the amount of approximately $130,000 due and payable on September
30, 2009. As of December 15, 2009 the Company had still not yet paid such property taxes. The
Companys delinquent property tax payment amount will accrue interest until satisfied in full,
which will be added to the unpaid balance of such
property taxes. The Companys failure to pay property taxes
could result in a tax judgment and/or lien being filed against the
property which could hinder the Companys
ability to transfer property to third parties in the future,
including as part of the Companys proposed consolidation
transaction with REG. Additionally, if the Company continues to fail to pay its delinquent property
taxes, the Companys property may be subject to a tax sale under
Iowa law. If the property is not redeemed within the period required
by Iowa law and the delinquent property tax amount remains unpaid, the purchaser in the tax sale may be
able to initiate foreclosure proceedings on the Companys property. This would adversely affect
the Companys ability to operate and could cause the business to fail.
Our business is not diversified. Our success depends largely on our ability to profitably
operate our biodiesel plant. We do not have any other lines of business or other sources of
revenue. If we are forced to continue to operate at significantly less than our nameplate capacity
or cease operations at our biodiesel plant for any reason, our ability to produce revenue will be
adversely affected and our members could lose some or all of their investment.
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Our business is sensitive to demand for biodiesel and glycerin. Our results of operations and
financial conditions are significantly affected by the demand for our biodiesel and glycerin. For
the 2009 fiscal year, we operated at approximately only 17% of our nameplate production capacity
due in part to decreased demand for biodiesel. Due to market forces, as well as our ongoing
liquidity concerns, we expect to continue to operate substantially below our production capacity in
the 2010 fiscal year, although we expect that most, if not all, biodiesel production in the
foreseeable future will be pursuant to tolling arrangements. If demand for biodiesel remains low
or decreases further, we will likely continue to operate at less than full capacity. If we operate
at less than full capacity for a sustained period of time, our ability to generate revenues will be
adversely affected.
Our business is sensitive to feedstock costs. Changes in the prices and availability of our
feedstock may hinder our ability to generate revenue. Our results of operations and financial
condition are significantly affected by the cost and supply of feedstock when we engage in ordinary
biodiesel production. Biodiesel production at our plant requires significant amounts of feedstock.
Changes in the price and supply of feedstock are subject to and determined by market forces over
which we have no control. Because there is little or no correlation between the costs of feedstock
and the price of biodiesel, we cannot pass along increased feedstock costs to our biodiesel
customers. As a result, increased feedstock cost may result in decreased profits. If we experience
a sustained period of high or volatile feedstock costs, such pricing may reduce our ability to
generate revenues and our profit margins will decrease, and these decreases may be significant. We
also expect that competition for feedstock from other biodiesel producers may increase our cost of
feedstock and harm our financial performance and reduce our profits. Any inability to obtain
adequate quantities of feedstock at economical prices will result in increased costs and result in
increased losses.
We are in competition with REG, our plant manager and product marketer, which could place us
at a competitive disadvantage and cause a conflict of interest for REG. We have contracted with
REG for management, feedstock procurement and marketing services for our plant. We are highly
dependent upon REG to procure our inputs and market our products. We are also highly dependent upon
REGs experience and relationships in the biodiesel industry and its knowledge regarding the
operation of the plant, as REG was also the design-builder of our plant. Further, if our plant
should fail to operate at the level anticipated by us in our business plan, we will rely on REG to
adequately address such deficiency. REG operates its own biodiesel production facilities in
Ralston, Iowa and Houston, Texas and anticipates increasing its biodiesel production through
wholly-owned and third-party managed biodiesel plants in the future. This means that REG, our
current plant manager and product marketer, is in competition with us in many aspects of our
business, including feedstock procurement and biodiesel production and marketing. We also have to
compete with REG for employees. Because REG operates its own biodiesel production facilities and
competes with us in many aspects of our business, REG may have a conflict of interest in managing
our plant and marketing our products. Although we have entered into a MOSA with REG for management
and marketing services, there is no assurance that REGs performance of these services is not, or
will not be, compromised by its own biodiesel production operations.
We have limited experience in the biodiesel industry, which increases the risk of our
inability to operate the biodiesel plant. We are presently, and will likely continue to be,
dependent upon our directors to govern the business of the biodiesel plant. Most of our directors
are experienced in business generally but have limited or no experience in operating a biodiesel
plant or in governing and operating a public company. Most of our directors have no expertise in
the biodiesel industry. In addition, certain directors on our board of directors are presently
engaged in
business and other activities that impose substantial demands on the time and attention of
such directors. Pursuant to the MOSA, REG previously hired Derek Winkel to be general manager and
Phil Abels to be operations manger of our plant, each of whom do have experience with production
facilities. However, REG may not be successful in retaining such individuals because of the
competitive market for such individuals. New plants are continually being constructed and there are
a limited number of individuals with expertise in this area. In addition, REG may have difficulty
in attracting other competent personnel to relocate to Iowa in the event that such personnel are
not retained. REGs failure to attract and retain such individuals could limit or eliminate any
profit that we might make and could result in our failure. If Central Iowa Energy fails, our
members could lose all or substantially all of their equity interest.
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Our exclusive reliance on REG to manage our plant, procure our inputs and market our products
could damage our profitability if REG fails to perform its obligations under the MOSA. We are
highly dependent upon REG to manage our plant, procure our inputs and market our products pursuant
to our MOSA. We do not have a soy crushing facility to supply our own raw soybean oil and we do
not have any arrangements with other suppliers of feedstock. Rather, we depend upon REG to acquire
our feedstock from third parties. If REG is unable to provide us with adequate feedstock or other
inputs, we may have to decrease or halt operations which would adversely affect our ability to
generate profits and adversely affect our financial obligations.
In addition, we do not have a sales force of our own to market our biodiesel and glycerin and
are highly dependent upon REG to market our products. If REG breaches the terms of the MOSA or
does not have the ability, for financial or other reasons, to market all of the biodiesel and
glycerin we produce, we will not have any readily available means to sell our biodiesel and
glycerin. Our lack of a sales force and reliance on REG to sell and market our products may place
us at a competitive disadvantage. Our failure to sell all of our biodiesel and glycerin products
may result in less income from sales, reducing our revenue, which could adversely affect our
financial position.
If REG does not perform its obligations as agreed, we may be unable to specifically enforce
our agreement. Our reliance on REG may place us at a competitive disadvantage. Any loss of this
relationship with REG may result in the failure of our business. Significant costs and delays would
likely result from the need to find other plant managers, feedstock suppliers, consultants or
product marketers. In addition, any failure to perform under our MOSA by REG may reduce our ability
to generate revenue and may significantly damage our competitive position in the biodiesel industry
such that our members could lose all or substantially all of their investment in the Company.
We may engage in hedging transactions which involve risks that can harm our business. We are
exposed to market risk from changes in commodity prices. Exposure to commodity price risk results
from our dependence on commodities in the biodiesel production process, such as soybean oil and
home heating oil. Hedging activities themselves can result in increased costs because price
movements in soybean oil contracts, home heating oil contracts, and other commodity contracts are
highly volatile and are influenced by many factors that are beyond our control. There are several
variables that could affect the extent to which our derivative instruments are impacted by price
fluctuations in the cost of soybean oil, home heating oil and other commodities. However, it is
likely that commodity cash prices will have the greatest impact on the derivative instruments with
delivery dates nearest the current cash price. We may incur such costs and they may be
significant. If we realize losses with respect to our derivative instruments, our net loss could
increase.
The effectiveness of our hedging strategies with respect to soybean oil is dependent upon the
cost of soybean oil and other commodities and our ability to sell sufficient amounts of our
products to use all of the soybean oil for which we have futures contracts. There is no assurance
that our hedging activities will successfully reduce the risk caused by price fluctuation which may
leave us vulnerable to high soybean oil prices. Alternatively, we may choose not to engage in
hedging transactions. As a result, our results of operations and financial conditions may also be
adversely affected during periods in which soybean oil prices increase.
Risks Related to Operation of the Biodiesel Plant
We depend on key suppliers, whose failure to perform could force us to abandon our business,
hinder our ability to operate profitably or decrease the value of our units. We are highly
dependent upon REGs experience and relationships in the biodiesel industry and its knowledge
regarding the operation of the plant. Further, if our plant does not continue to operate to the
level anticipated by us in our business plan, we will rely on REG to adequately address such
deficiency. REG may not be able to address such deficiency in an acceptable manner. Failure to do
so could cause us to cease production of biodiesel, either temporarily or permanently, which could
damage our ability to generate revenues and reduce the value of our units.
We are highly dependent upon REG to procure our inputs and market our products. If REG does
not perform its obligations pursuant to our MOSA we may be unable to specifically enforce our
agreement which could negatively affect the value of our units. Our reliance on REG may place us at
a competitive disadvantage. Our reliance on REG is of particular concern given that REG owns and
operates biodiesel plants near Ralston, Iowa and Houston, Texas, and previously announced its
desire to increase biodiesel production through additional wholly-owned and third-party managed
biodiesel plants. This means that REG and its affiliates are competitors for many aspects of our
business including: feedstock procurement, biodiesel marketing, management services and employees.
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REG has provided notice of its intent to terminate the MOSA. On April 7, 2009, we received
written notice of REGs intent to terminate the MOSA on or about May 1, 2010. Although REG has
indicated it may consider entering into a new mutually agreeable agreement with us, it is likely
that the terms of any such new agreement would be less favorable to us than those in our current
MOSA. If our consolidation with REG does not close and we do not renegotiate a new agreement with
REG, we may be unable to enter into agreements with a new plant manager or suitable product
marketers or supplier at all or on favorable terms. We will likely be highly dependent upon any
new manager or product marketer we may hire and if they do not adequately perform their duties, or
if we cannot find a new marketer or manager, we will likely experience increased losses and our
business may fail.
Changes in production technology could require us to commit resources to updating the
biodiesel plant or could otherwise hinder our ability to compete in the biodiesel industry or to
operate at a profit. We expect advances and changes in the technology of biodiesel production to
occur. Such advances and changes may make our biodiesel production technology less desirable or
obsolete. The plant is a single-purpose facility and likely has no use other than the production of
biodiesel and associated products. Much of the cost of the plant is attributable to the cost of
production technology which may be impractical or impossible to update. The value of our units
could decline if changes in technology cause us to operate the plant at less than full capacity for
an extended period of time or cause us to abandon our business. Further, more efficient
technologies might be developed in the future that we cannot implement that would allow our
competitors to produce biodiesel in a more cost effective manner than us.
Risks Related to Biodiesel Industry
The economic recession and tightening of credit markets has caused demand for biodiesel to
decline, which may adversely affect our ability to generate revenues. The collapse of various
major financial institutions and the federal governments bailout and takeover of troubled
financial institutions and corporations over the past year have caused economic upheaval in the
United States and abroad. The United States is currently in an economic recession and credit
markets remain constricted. We believe that these economic factors have contributed to a decrease
in demand for fuel in general, including biodiesel, which may persist throughout all or parts of
fiscal year 2010. It is uncertain for how long and to what extent these economic troubles may
negatively affect biodiesel demand in the future. If demand for biodiesel remains low or declines
further, we may be forced to temporarily or permanently cease operations and you may lose some or
all of your investment.
The European Commission has imposed definitive anti-dumping and countervailing duties on
biodiesel imported into Europe, which may negatively impact biodiesel demand and our revenues. In
March 2009, the European Commission imposed anti-dumping and anti-subsidy tariffs on biodiesel
produced in the U.S. These tariffs have reduced European demand for biodiesel produced in the U.S.
In July 2009, the European Commission decided to extend these tariffs beyond their July 2009
expiration until 2014. These duties significantly increase the price at which U.S. biodiesel
producers may be able to sell biodiesel in European markets, making it difficult or impossible
to compete with European biodiesel producers and thereby increasing the supply and reducing
overall demand for biodiesel produced in the U.S. Accordingly, these duties on U.S. biodiesel
imported into Europe could significantly harm our financial performance.
The EPAs recent findings that soy-based biodiesel does not meet the requirements under the
RFS to reduce greenhouse emissions could reduce demand for soy-based biodiesel and reduce our
profitability. The EPA recently issued findings that soy-based biodiesel fails to meet targets for
reducing greenhouse emissions, as required under the RFS. The RFS requires that biodiesel reduce
greenhouse gas emissions by 40% to 50% when compared to conventional biodiesel in order to count
towards the RFS mandate. The EPA found soy-based biodiesel to reduce greenhouse gas emissions by
only 22%. If the EPA implements final rules providing that soy-based biodiesel does not count
towards the RFS, demand for biodiesel made from soy oil will likely be reduced. If animal
fat-based biodiesel demand increases as a result, animal fat prices may increase to the extent that
we cannot produce animal fat-based biodiesel profitably. The results could significantly harm our
revenues and financial performance and reduce the value of your investment.
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The decline in crude oil and diesel prices may affect our ability to sell biodiesel at
profitable prices. The price for biodiesel is correlated to the price for diesel, as biodiesel is
used primarily as a diesel additive. The price of biodiesel tends to increase as the price of
diesel increases, and the price of biodiesel tends to decrease as the price of diesel decreases.
Diesel prices are typically influenced by crude oil prices. The global economic downturn has
resulted in a rapid decline in crude oil and diesel prices. In November 2008, crude oil prices fell
to their lowest level in more than three years, dropping below $50 a barrel, down from
approximately $150 a barrel in July 2008. Currently crude oil prices are approximately $75 per
barrel. Additionally, average retail diesel prices declined by approximately 40% from July 2008
until December 2008, since that time diesel prices have risen slightly. If crude oil and diesel
prices remain low or decline even further, biodiesel prices will also likely remain low or decline
further. This could make it difficult for us to produce and sell biodiesel at a profit and you
could lose some or all of your investment as a result.
If demand for biodiesel fails to grow at the same rate as planned supply, the excess
production capacity will adversely impact our financial condition. In 2008, approximately 700
million gallons of biodiesel were produced in the United States, according to the National
Biodiesel Board. Our biodiesel plant alone could produce almost 4% of the 2008 domestic production
if we operated at our annual nameplate production capacity. The National Biodiesel Board
estimates the current dedicated U.S. biodiesel production capacity of existing biodiesel plants as
of June 22, 2009 (the latest date for which information is available) is approximately 2.69 billion
gallons per year. Further, plants under construction and expansion as of June 22, 2009, if
completed, are expected to result in another 427.8 million gallons of annual U.S. biodiesel
production capacity, for total annual production capacity of approximately 3.12 billion gallons.
Thus the current annual production capacity of existing plants far exceeds 2008 annual biodiesel
consumption, and will likely far exceed 2009 biodiesel consumption. As production capacity
increases, our competition with other biodiesel producers for the sale of our products increases,
especially if there is not a corresponding increase in demand for biodiesel. Many biodiesel plants
do not operate at full capacity due to the discrepancy between annual domestic biodiesel
consumption and annual U.S. biodiesel production capacity, among other factors. Several biodiesel
plants have even been forced to completely shut down or declare bankruptcy, which may be due in
part to an increase in national excess production capacity without a corresponding increase in
biodiesel demand in combination with the worsening economic conditions. If biodiesel production
capacity continues to expand at its current pace, and demand does not grow to meet the available
supply, we may be forced to suspend production at our plant and the value of your units could be
decreased or eliminated.
Excess capacity in the biodiesel industry may cause increased competition for inputs and
decreased market prices for biodiesel. Biodiesel production at our plant requires significant
amounts of soybean oil and other inputs. If overproduction of biodiesel occurs, we will face
increased competition for inputs which means we may be either unable to acquire the inputs that we
need or unable to acquire them at profitable prices. In addition, if excess capacity occurs, we may
also be unable to market our products at profitable prices. If the demand for biodiesel does not
grow at the same pace as increases in supply, we would expect the price for biodiesel to decline.
Any decrease in the price at which we can sell our biodiesel will negatively impact our future
revenues. Increased expenses and decreased sales prices for biodiesel will result in decreased
revenues and increased losses.
Excess production of glycerin, a co-product of the biodiesel production process, may cause the
price of glycerin to decline, thereby adversely affecting our ability to generate revenue from the
sale of glycerin. It is estimated that every million gallons of biodiesel produced adds
approximately another one hundred thousand gallons of crude glycerin into the market. As biodiesel
production has increased, the glycerin market has become increasingly saturated, resulting in
significant declines in the price of glycerin. The Jacobsen Company reported average glycerin
prices of 5 to 6 cents in December 2009. However, if the price of glycerin declines, our revenues
will be adversely affected and we could even be forced to pay to dispose of our glycerin. Any
further excess glycerin production capacity may limit our ability to market our glycerin co-product
and could negatively impact our future revenues.
The biodiesel manufacturing industry is a feedstock limited industry. As more plants are
developed and go into production there may not be an adequate supply of feedstock to supply the
demands of the industry, which could threaten the viability of our plant. The number of biodiesel
manufacturing plants either in production or in the planning or construction phase continues to
increase. As more plants are developed and go into production, and as more existing plants expand
their production capacities, there may not be an adequate supply of feedstock to supply the demand
of the biodiesel industry. Consequently, the price of feedstock may rise to the point where it
threatens the viability of our plant. This is because there is little or no correlation between the
price of feedstock and the market price of biodiesel and, therefore, we cannot pass along increased
feedstock costs to our biodiesel customers. We cannot pass along increased feedstock costs to our
biodiesel customers because in order to stay competitive in the diesel industry, biodiesel must be
competitively priced with petroleum-based diesel. Therefore, biodiesel prices fluctuate more in
relation to petroleum-based diesel market prices than with feedstock market prices. As a result,
increased feedstock costs may result in decreased profit margins. If we experience a sustained
period of high feedstock costs, such pricing may significantly decrease or eliminate our profit
margins. Furthermore, REG currently owns and operates two biodiesel plants and has also announced
its desire to increase biodiesel production through wholly-owned and third-party managed biodiesel
plants. This means that our plant manager and product marketer, REG and its affiliates, are
competitors for a limited supply of feedstock.
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The biodiesel industry is becoming increasingly competitive and we compete with some larger,
better financed entities which could impact our ability to operate profitably. We face a
competitive challenge from larger biodiesel plants and from biodiesel plants owned and operated by
the companies that supply our inputs, such as soybean oil. We also expect to compete with plants
that are capable of producing significantly greater quantities of biodiesel than the amount we
expect to produce. Moreover, some of these plants may not face the same competition we do for
inputs as the companies that own them are suppliers of the inputs. Such competition could result in
lower prices for biodiesel, which would adversely affect our ability to generate profits and
adversely affect our financial obligations.
Risks Related to Biodiesel Production
Declines in the demand for and prices of biodiesel and its primary co-product will have a
significant negative impact on our financial performance. When we are able to engage in ordinary
biodiesel production, our revenues will be greatly affected by the price at which we can sell our
biodiesel and its primary co-product, glycerin. These prices can be volatile as a result of a
number of factors over which we have no control. These factors include the overall supply and
demand, the price of diesel fuel, level of government support and continuation of government
incentives and tax credits (including the blenders tax credit), and the availability and price of
competing products, and domestic and global economic conditions. The total production capacity of
biodiesel continues to expand at this time. Demand may not rise to meet the increase in supply,
and increased production of biodiesel may lead to lower prices. Any lowering of biodiesel prices
may negatively impact our ability to generate profits.
We believe that the recent U.S. recession and global financial market turmoil may also depress
biodiesel demand and prices. We expect that we will operate below our nameplate capacity
throughout our fiscal year 2010. If we continue to operate at less than full capacity, this would
have a negative impact on our revenues.
In addition, increased biodiesel production has lead to increased supplies of co-products from
the production of biodiesel, such as glycerin. These increased supplies have led to lower prices
for glycerin. If the price
of glycerin declines, our revenue from glycerin may substantially decrease. Increased
expenses and decreased sales prices for our products will result in decreased revenues.
Because of volatile soybean oil prices, we may use alternative feedstocks, such as corn oil,
to produce our biodiesel, which may have risks and disadvantages of which we are not yet fully
aware. We may produce some of our biodiesel from corn oil that we obtain from ethanol plants or
other sources. Corn oil, however, poses several unique challenges due to its moisture and solid
content, as well as its elevated free-fatty-acid levels. Furthermore, unlike many other oil
sources, corn oil from ethanol plants contains waxy compounds and sterols. This tends to cause a
waxy substance to build-up in the process equipment during the production process. The technology
utilized by the ethanol plant which extracts the corn oil may also cause the suitability of the
corn oil for the biodiesel production process to vary. These characteristics could cause corn oil
to be less desirable than other types of feedstock. Furthermore, special technologies may be
necessary to pretreat corn oil for utilization in the biodiesel production process. Accordingly,
our use of alternative feedstocks such as corn oil may require us to make modifications to our
equipment, purchase new equipment or repair equipment that could unexpectedly be damaged by the use
of different feedstocks. There may be disadvantages to the use of corn oil as a feedstock of which
we are not yet aware. If as a result of the unique characteristics of alternative feedstocks like
corn oil the demand or price we are able to receive for biodiesel produced from such feedstocks is
less than what we can receive for biodiesel produced from other types of feedstock, our revenues
could be negatively affected.
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Our business is sensitive to feedstock costs and the availability of adequate supplies of
feedstock. Changes in the cost and availability of our feedstock may hinder our ability to generate
revenue and reduce the value of our units. Our results of operations and financial condition are
significantly affected by the cost and supply of feedstock when we are engaged in ordinary
biodiesel production. Changes in the cost and supply of feedstock are subject to and determined by
market forces over which we have no control. REG has agreed to procure adequate quantities of
feedstock for our plant at competitive prices. We still pay for our feedstock when engaging in
ordinary biodiesel production, however, and may be required to pay varying prices for it. Because
there is little or no correlation between the cost of feedstock and the price of biodiesel, we
cannot pass along increased feedstock costs to our biodiesel customers. We cannot pass along
increased feedstock costs to our biodiesel customers because in order to stay competitive in the
diesel industry, biodiesel must be competitively priced with petroleum-based diesel. Therefore,
biodiesel prices fluctuate more in relation to petroleum-based diesel market prices than with
feedstock market prices. As a result, increased feedstock costs may result in decreased
profitability. If we experience a sustained period of high feedstock costs, such costs may reduce
our ability to generate positive margins and our profit margins may significantly decrease or be
eliminated, which could decrease or eliminate the value of our units.
If we are forced to continue to temporarily cease operating our biodiesel plant, we might not
be able to meet our current liabilities and our losses may be increased. Our plant has not been
continuously operating during the past fiscal year due to our liquidity concerns, decreased
biodiesel demand and lack of sales contracts. If we are forced to temporarily cease operations at
our biodiesel plant for sustained periods of time, either due to our inability to sell the
biodiesel we are producing, feedstock costs, our lack of working capital and available credit,
defects in our equipment at the plant, elimination or reduction of governmental incentives or tax
credits, violations of environmental law, or any other reason, our ability to produce revenue would
be adversely affected. We do not have any source of revenues other than production of biodiesel and
glycerin at our biodiesel plant. If our plant continues to cease production for sustained periods
of time, we will not generate significant revenue and we might not be able to pay our debts as they
become due. If the plant is forced to cease to operate for enough time, we might not be able to
re-start operations at the plant and our members could lose some or all of their investment.
We are at a disadvantage in marketing our glycerin because our plant will not produce
pharmaceutical grade glycerin, thereby decreasing the market for the glycerin we produce. A major
use of glycerin is in the production of drugs. The glycerin our plant produces, however, is not
pharmaceutical grade glycerin. This limits our ability to market the glycerin produced by our
biodiesel plant. The glycerin we produce has to be purified in order for it to be used in
pharmaceutical applications. Since the market in which we can sell our glycerin is limited, we
might not be able to sell all of the glycerin we produce or we may not be able to sell our glycerin
at a favorable price.
Competition from other sources of fuel may decrease the demand for our biodiesel. Although
the price of diesel fuel has increased over the last several years and reached near record high
prices earlier in 2008 before sharply decreasing in the fall and winter of 2008, diesel fuel prices
per gallon remain at levels below or equal to the price of biodiesel. In addition, other more
cost-efficient domestic alternative fuels may be developed and displace biodiesel as an
environmentally-friendly alternative. If diesel prices do not continue to increase or a new fuel is
developed to compete with biodiesel, it may be difficult to market our biodiesel, which could
result in decreased revenues.
Asian soybean rust and other plant diseases may decrease our ability to obtain a sufficient
feedstock supply. Our feedstock supply is highly dependent upon the availability and price of
soybeans. Asian soybean rust is a plant fungus that attacks certain plants including soybean
plants. Asian soybean rust is abundant in certain areas of South America, and is present in the
United States. Left untreated, it can reduce soybean harvests by as much as 80%. Although it can
be killed with chemicals, the treatment increases production costs for farmers by approximately
20%. Increases in production costs and reduced soybean supplies could cause the price of soybeans
to rise and increase the cost of soybean oil as a feedstock to our plant. Such increase in cost
would increase the cost of producing our biodiesel and increase our loss from operations.
Concerns about fuel quality may impact our ability to successfully market our biodiesel.
Industry standards impose quality specifications for biodiesel fuel. Actual or perceived problems
with quality control in the industry may lead to a lack of consumer confidence in the product and
hinder our ability to successfully market our biodiesel. An inability to successfully market our
biodiesel will lead to decreased revenues and may adversely impact our ability to operate at all.
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Cold weather may cause biodiesel to gel, which could have an adverse impact on our ability to
successfully market our biodiesel. The pour point for a fuel is the temperature at which the flow
of the fuel stops. A lower pour point means the fuel is more flowable in cold weather. The pour
point of 100% soy-based biodiesel is approximately 27ºF to 30ºF. The pour point for tallow-based
biodiesel is approximately 61ºF. The pour point for No. 2 petroleum diesel fuel, the non-biodiesel
fuel currently used in machines, is approximately -30ºF. When diesel is mixed with soy-based
biodiesel to make a 2% biodiesel blend, the pour point is -25ºF. Therefore, we believe we will
need to blend soy-based biodiesel and animal fat-based biodiesel with petroleum diesel in order to
provide a biodiesel product that will have an acceptable pour point in cold weather. Generally,
biodiesel that is used in blends of 2% to 20% is expected to provide an acceptable pour point for
colder markets comparable to the No. 2 petroleum diesel pour point. In colder temperatures, lower
blends are recommended to avoid fuel system plugging. This may cause the demand for our biodiesel
in northern markets to diminish during the colder months.
The tendency of biodiesel to gel in colder weather may also result in long-term storage
problems. At low temperatures, fuel may need to be stored in a heated building or heated storage
tanks. This may result in a decrease in demand for our product in colder climates due to increased
storage costs.
Automobile manufacturers and other industry groups have expressed reservations regarding the
use of biodiesel, which could negatively impact our ability to market our biodiesel. Because it is
a relatively new product, the research on biodiesel use in automobiles and its effect on the
environment is ongoing. Some industry groups, including the World Wide Fuel Charter, have
recommended that blends of no more than 5% biodiesel be used for automobile fuel due to concerns
about fuel quality, engine performance problems and possible detrimental effects of biodiesel on
rubber components and other parts of the engine. Although some manufacturers have encouraged use
of biodiesel fuel in their vehicles, cautionary pronouncements by others may impact our ability to
market our product.
In addition, studies have shown that nitrogen oxide emissions increase by 10% when pure
biodiesel is used. Nitrogen oxide is the chief contributor to ozone or smog. New engine technology
is available and is being implemented to eliminate this problem. However, these emissions may
decrease the appeal of our product to environmental groups and agencies who have been historic
supporters of the biodiesel industry, which may result in our inability to market our biodiesel.
Competition from other diesel fuel lubricity additives for ultra low sulfur diesel may be a
less expensive alternative to our biodiesel, which would cause us to lose market share and
adversely affect our ability to generate revenues. The Environmental Protection Agency (EPA) has
issued regulations to reduce the amount of sulfur in diesel fuel in order to improve air quality.
These regulations affect all diesel fuel available for retail sale since October 2006. The removal
of sulfur from diesel fuel also reduces its lubricity which must be corrected with fuel additives,
such as biodiesel which has inherent lubricating properties. Our biodiesel plant is expected to
compete with producers of other diesel additives made from raw materials other than soybean oil
having similar lubricity values as biodiesel, such as petroleum-based lubricity additives. Many
major oil companies produce these petroleum-based lubricity additives and strongly favor their use
because they may be used in lower concentrations than biodiesel. In addition, much of the
infrastructure in place is for petroleum-based additives. As a result, petroleum-based additives
may be more cost-effective than biodiesel. Therefore, it may be difficult to market our biodiesel
as a lubricity additive, which could adversely affect our ability to generate revenues.
Risks Related to Our Financing Plan
We are in default under our financing agreements. We have undertaken significant borrowings to
finance the construction of our biodiesel plant. We have failed to make any payments of principal
required under our financing agreements since January 2009, which constitutes an event of default.
Although we have made all payments of interest required under our financing agreements as of
September 30, 2009, there can be no assurance that we will be able to continue satisfying future
interest payments. Our financing agreements require the Company to maintain minimum levels of
working capital, tangible net worth and tangible owners equity, as well as a fixed charge coverage
ratio. As of our year ended September 30, 2009, we failed to comply with all such covenants, which
also constitutes an event of default. These defaults have led to our auditor raising doubt about
our ability to continue as a going concern, as expressed in Note 9 to the accompanying financial
statements. For so long as we remain in default under our financing agreements, our lender may
elect to exercise any one or more remedies provided by the financing agreements and applicable law,
which include acceleration of the principal and interest payments due under our financing
agreements or foreclosure on the lenders mortgage and security interests in all of our assets.
Such actions would have a material adverse impact on our operations and could cause our business to
fail. Accordingly, our members could lose some or all of their investment in the Company in the
event we continue to be in default under our financing agreements.
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We may be unable to obtain additional credit or raise capital to fund our operations. We have
exhausted all of the funds available under our debt facilities and we do not have further
commitments for additional credit from any lender. Subsequent to the period covered by this
report, our former $2,000,000 revolving line of credit matured in October 2009, but we have failed
to repay the amounts outstanding or otherwise enter into a renewal or extension of such revolving
line of credit. Our failure to repay the principal and interest amounts outstanding on our
revolving line of credit on the maturity date constitutes an event of default under our financing
agreements with our senior lender. We are experiencing liquidity problems due to our lack of
available credit and working capital, our lack of biodiesel sales contracts and decreased biodiesel
demand. We are currently operating pursuant to tolling arrangements under which we are not
responsible for purchasing feedstock for biodiesel production; however, our lack of funds may make
it difficult to even continue operating in this capacity. We expect that the current economic
recession, along with our continuing default under our financing agreements and our auditors
doubts about our ability to continue as a going concern, may make it difficult for us to obtain
additional credit from our current lender or other lenders or to otherwise raise capital. If we are
unable to obtain additional credit facilities or acquire additional capital to fund our operations,
we may be forced to temporarily or permanently shut down our plant and our members could lose some
or all of their investment.
Our auditor has raised doubts about our ability to continue as a going concern and if we are
unable to continue our business, our units may have little or no value. As discussed in the
accompanying financial statements, we have generated significant losses for the 2009 fiscal year
and have experienced significant increases in our input costs and undertaken significant borrowings
to finance the construction of our biodiesel plant. These liquidity issues, along with our
continuing defaults under our financing agreements, raise doubts about our ability to continue as a
going concern. See Note 9 to the financial statements. Moreover, our long-term debt is classified
as a current liability due to our auditors doubts about our ability to continue as a going
concern, as GAAP requires long-term debt to be listed as a current liability when a company has such a going concern disclosure.
In the event our lender declares a default under our financing agreements and elected to accelerate
our payments or take possession of our assets securing the loans, we may be forced to shut down the
plant and our members could lose some or all of their investment. These factors have raised doubts
as to our ability to continue as a going concern.
Risks Related to Regulation and Governmental Action
The EPAs delay in issuing RFS2 rules implementing the 500 million gallons biomass-based
diesel blending requirements may hinder stimulation of demand for biodiesel that may have otherwise
been created by the 2007 amendments to the RFS program. The Energy Independence and Security Act of
2007 (EISA) amended the Renewable Fuel Standard program originally created by the Energy Policy
Act of 2005 by increasing the amount of biofuels that are required to be blended into the national
diesel pool annually through 2022 (RFS2). EISA created a biodiesel mandate requiring that 500
million gallons of biomass-based diesel fuel be used in on-road fuel in 2009, increasing to 1
billion gallons in 2022. However, in November 2008, the EPA announced that the 500 million gallons
of biomass-based diesel required by EISA would not have to be blended into U.S. fuel supplies in
2009. The EPA indicated that this is due to the fact that the regulatory structure of the original
RFS program does not provide a mechanism for implementing the EISA RFS2 biomass-based diesel
mandate. The EPA issued proposed rules to implement the RFS2 in May 2009; however, as of the date
of this report, no final rules have been issued. The EPAs delay in implementing these rules may
hinder any growth in biodiesel demand that may have otherwise been created if the RFS2 mandates
were in effect. Any future delays in the implementation of the RFS2 biomass-based diesel mandate
could cause stagnant biodiesel demand, which could adversely affect our ability to generate
profits.
Loss of or ineligibility for favorable tax benefits for biodiesel production could hinder our
ability to operate at a profit and reduce the value of our units. The biodiesel industry and our
business are assisted by various federal biodiesel incentives. One such incentive is the
Volumetric Ethanol Excise Tax Credit (VEETC), also known as the blenders tax credit, which
provides a tax credit of $1.00 per gallon of biodiesel. The blenders tax credit is set to expire
on December 31, 2009 and there can be no guarantees that Congress will act to extend the tax credit
beyond this date. These tax incentives for the biodiesel industry may not continue, or, if they
continue, the incentives may not be at the same level. The elimination or reduction of tax
incentives to the biodiesel industry, including the blenders tax credit, could significantly
reduce the market for biodiesel and could materially impair our ability to profitably produce and
sell biodiesel. The loss or reduction of the blenders tax credit would make it more costly or
difficult to produce and sell biodiesel and we could be forced to take significant cost savings
measures or temporarily or permanently cease production at our plant. Demand for biodiesel
tolling, which is the only way which we anticipate producing biodiesel in the foreseeable future,
could also be reduced significantly. If federal biodiesel tax incentives, including the blenders
tax credit, are eliminated or sharply curtailed, we believe that a decreased demand for biodiesel
will result, which could depress biodiesel markets and negatively impact our financial performance.
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A change in environmental regulations or violations thereof could be expensive and increase
our losses. We are subject to extensive air, water and other environmental regulations. In
addition, some of these laws require our plant to operate under a number of environmental permits.
These laws, regulations and permits can often require expensive pollution control equipment or
operation changes to limit actual or potential impact to the environment. A violation of these
laws and regulations or permit conditions can result in substantial fines, damages, criminal
sanctions, permit revocations and/or plant shutdowns. To the best of our knowledge, we have at all
times been in complete compliance with these laws, regulations or permit conditions and we have all
permits required to operate our business. Additionally, any changes in environmental laws and
regulations, both at the federal and state level, could require us to invest or spend considerable
resources in order to comply with future environmental regulations. The expense of compliance
could be significant enough to increase our losses and negatively affect our financial condition.
Risks Related to Conflicts of Interest
We may have conflicts of interest with REG, which may cause difficulty in enforcing claims
against REG. We expect that one or more employees or associates of REG will continue to advise our
directors. We anticipate REG to continue to be involved in substantially all material aspects of
our operations. We have entered into a MOSA with REG under which REG acquires feedstock and the
basic chemicals necessary for our operation, and to perform the sales and marketing functions for
our plant. It is possible that REG may purchase more of our units. There is no assurance that our
arrangements with REG are as favorable to us as they could have been if obtained from unaffiliated
third parties. In addition, because of the extensive roles that REG has in the operation of the
plant, it may be difficult or impossible for us to enforce claims that we may have against REG.
Such conflicts of interest may increase our losses and reduce the value of our units and could
result in reduced distributions to investors.
REG and its affiliates may also have conflicts of interest because employees or agents of REG
are involved as owners, creditors and in other capacities with other biodiesel plants in the United
States. We cannot require REG to devote its full time or attention to our activities. As a result,
REG may have conflicts of interest in allocating personnel, materials and other resources to our
biodiesel plant.
Risks Related to Tax Issues in a Limited Liability Company
We expect to continue to be taxed as a partnership, however, if we are taxed as a corporation
we would be subject to corporate level taxes which would decrease our net income and decrease the
amount of cash available to distribute to our members. We expect that our company will continue to
be taxed as a partnership. This means that our company does not pay any company-level taxes.
Instead, the members are allocated any income generated by our company based on the members
ownership interest, and would pay taxes on the members share of our income. If we are not taxed as
a partnership, our company would be liable for corporate level taxes which would decrease our net
income which may decrease the cash we have to distribute to our members.
We are not in compliance with the job creation requirements of our agreement with the Iowa
Department of Economic Development and members may receive a reduction in the amount of investment
tax credit available to be claimed over the life of such tax credit. Under our agreement with the
Iowa Department of Economic Development (IDED), we were eligible to receive a refund of a portion
of the sales tax paid in connection with the construction of our facility and our members were
eligible to receive certain investment tax credits upon the condition that we create and maintain a
certain number of jobs. However, we fell short of such requirements by approximately 14% and,
accordingly, the Iowa Department of Revenue has notified that Company that an amount equal to 14%
of the investment tax credit available to be claimed by our members should be deducted from the
remaining portion of the tax credit available to members over the remainder of the life of such tax
credit. This will result in a reduction in the amount of tax credit available to members. The
Company is also obligated to repay approximately 14% of the sales tax refunds received by the
Company pursuant to its agreement with IDED, plus accrued interest, which will adversely affect the
Companys ability to manage its ongoing liquidity problems.
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Members may be allocated a share of our taxable income that exceeds any cash distributions
received, therefore members may have to pay this tax liability using their personal funds. We
expect to continue to be taxed as a partnership. This means members are allocated a percentage of
our taxable income or losses based on their ownership interest in our company. Members may have tax
liability based on their allocation of this income. We may make distributions that are less than
the amount of tax members owe based on their allocated percentage of our taxable income, or we may
not make any distributions at all. If this is the case, members would have to satisfy this tax
liability using their personal funds.
If we are audited by the IRS resulting in adjustments to our tax returns, this could cause the
IRS to audit members tax returns, which could lead to additional tax liability for our members.
The IRS could audit our tax returns and could disagree with tax decisions we have made on our
returns. This could lead to the IRS requiring us to reallocate items of income, gain, losses,
deductions, or credits that could change the amount of our income or losses that is allocated to
members. This could require adjustments to members tax returns and could lead to audits of
members tax returns by the IRS. If adjustments are required to members tax returns, this could
lead to additional tax liabilities for members as well as penalties and interest being charged to
members.
We do not anticipate declaring distributions to members in the foreseeable future. We have
incurred a net loss of $7,923,496 as of our fiscal year ended September 30, 2009. We do not
anticipate that our board of directors will be declaring distributions to members in the
foreseeable future. Accordingly, members will not likely receive distributions on their units and,
in the event that members incur any tax liability as a result of their ownership of units in the
company, members may be required to satisfy such liability with their personal funds.
ITEM 2. PROPERTIES
Our property consists primarily of our biodiesel plant and the real estate upon which the
plant sits near Newton, Iowa in Jasper County. The plant is located on an approximately 35 acre
rural site located north of Newton, Iowa approximately 4.75 miles from Interstate 80. We commenced
construction of the plant at our site in June 2006 and completed construction in April 2007. Our
plant has capacity to produce a total of 30 million gallons of biodiesel per year. The plants
address is 3426 East 28th Street North. The site is near the main line of the Iowa Interstate
Railroad line, which provides rail access to the plant. We have entered into an industrial track
agreement with the Iowa Interstate Railroad for the use, operation, and maintenance of track to
serve the plant. See Distribution of Principal Products under Item 1. BUSINESS above.
The plant consists of the primary buildings and improvements listed below, which are in good
working condition:
| Principal office building |
||
| Processing building |
||
| Pretreatment building |
||
| Loading/receiving building |
||
| Storage warehouse |
||
| Storage tank farm |
Substantially all of our property, real and personal, serves as the collateral for our debt
facilities with our senior lender, including our term loan, term revolving loan and revolving line
of credit. We are currently in default under our financing agreements for our debt facilities and,
accordingly, our senior lender could elect to foreclose on its security interest in our property or
take any one or more other remedies to which it is entitled under our financing agreements or
applicable law. See ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS Liquidity and Capital Resources for information regarding our debt
facilities and our defaults under our financing agreements.
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ITEM 3. LEGAL PROCEEDINGS.
From time to time in the ordinary course of business, Central Iowa Energy may be named as a
defendant in legal proceedings related to various issues, including without limitation, workers
compensation claims, tort claims, or contractual disputes. We are not currently involved in any
material legal proceedings, directly or indirectly, and we are not aware of any claims pending or
threatened against us or any of the directors that could result in the commencement of legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On August 19, 2009, we held our 2009 Annual Meeting of Members for the purpose of electing
three Group I directors to serve for a term of three years. Votes were solicited in person and by
proxy. The three persons identified below were nominated by the Companys board of directors to
fill the open director positions. Each of the
three nominees previously served as directors prior to the 2009 Annual Meeting. The three
director nominees elected to serve on our board of directors for their respective terms, and the
votes cast for each such nominee, were as follows:
For | Against | Abstain | ||||||||||
James Johnston |
8,957 | 371 | 372 | |||||||||
Craig Hamilton |
9,170 | 210 | 320 | |||||||||
Don Huyser |
9,270 | 190 | 240 |
There were no broker non-votes with respect to this proposal.
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED MEMBER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES.
Market Information
There is no public trading market for our units. We have created a private qualified online
matching service in order to facilitate trading of our units. This service has been designed to
comply with federal tax laws and IRS regulations concerning qualified matching services, as well as
state and securities laws. Our online matching service consists of an electronic bulletin board
that provides information to prospective sellers and buyers of our units. We do not receive any
compensation for creating or maintaining the matching service. We do not become involved in any
purchase or sale negotiations arising from our qualified matching service. In advertising our
qualified matching service, we do not characterize the Company as being a broker or dealer in an
exchange. We do not give advice regarding the merits or shortcomings of any particular
transaction. We do not receive, transfer or hold funds or securities as an incident of operating
the online matching service. We do not use the bulletin board to offer to buy or sell securities
other than in compliance with the securities laws, including any applicable registration
requirements. We have no role in effecting the transactions beyond approval, as required under our
amended and restated operating agreement, and the issuance of new certificates. So long as we
remain a public reporting company, information about the Company will be publicly available through
the SECs filing system. However, if at any time we cease to be a public reporting company, we
will continue to make information about the Company publicly available on our website. Only one
sale transaction has been completed pursuant to the Companys qualified matching service since its
establishment. This transaction occurred in the first quarter of fiscal year 2008 and the sale
price was $1,200 per unit. No such transactions occurred during the 2009 fiscal year.
There are detailed timelines that must be followed under the qualified matching service rules
and procedures with respect to offers and sales of membership units. All transactions must comply
with the qualified matching service rules, our amended and restated operating agreement, and are
subject to approval by our board of directors.
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As a limited liability company, we are required to restrict the transfers of our membership
units in order to preserve our partnership tax status. Our membership units may not be traded on
any established securities market or readily traded on a secondary market (or the substantial
equivalent thereof). All transfers are subject to a determination that the transfer will not cause
Central Iowa Energy to be deemed a publicly traded partnership.
Unit Holders
As of December 15, 2009, we had 567 unit holders of record and 26,672 units issued and
outstanding.
Distributions
We have not declared or paid any distributions on our units. Under our amended and restated
operating agreement, our board of directors has discretion over the timing and amount of
distributions to our unit holders, subject to the covenants contained in our debt financing
agreements and any restrictions imposed by law. However, our amended and restated operating
agreement provides that the board of directors will endeavor to make cash distributions at such
times and in such amounts as will permit our unit holders to satisfy their income tax liability in
a timely fashion. Our financing documents with our lender restricts our ability to declare or pay
dividends. See ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS Liquidity and Capital Resources.
Equity Compensation Plans
We do not have any equity compensation plans under which equity securities of Central Iowa
Energy are authorized for issuance.
Sale of Unregistered Securities
We did not make any sales of equity securities that were unregistered during the fiscal year
ended September 30, 2009.
Repurchases of Equity Securities
Neither we nor anyone acting on our behalf has repurchased any of the Companys outstanding
units.
ITEM 6. SELECTED FINANCIAL DATA.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of
1934 and are not required to provide information under this item.
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
We prepared the following discussion and analysis to help you better understand our financial
condition, changes in our financial condition, and results of operations for the fiscal year ended
September 30, 2009. This discussion should be read in conjunction with the financial statements
and related notes for the fiscal year ended September 30, 2009.
Cautionary Statements Regarding Forward Looking Statements
This report contains forward-looking statements that involve known and unknown risks and
relate to future events, our future financial performance, or our expected future operations and
actions. In some cases, you can identify forward-looking statements by terminology such as may,
will, should, expect, plan, anticipate, believe, estimate, future, intend,
could, hope, predict, target, potential, or continue or the negative of these terms or
other similar expressions. These forward-looking statements are only our predictions based upon
current information 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 under ITEM 1A. RISK FACTORS and elsewhere in this report. While it is
impossible to identify all such factors, factors that could cause actual results to differ
materially from those estimated by us may include:
| Changes in interest rates or the availability, terms and conditions of credit; |
| Our ability to generate free cash flow to invest in our business and service our debt; |
| Our ability to raise additional equity capital proceeds; |
| Overcapacity within the biodiesel industry resulting in increased competition and costs for feedstock
and/or decreased prices for our biodiesel and glycerin; |
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| Decrease in the demand for biodiesel; |
| Actual biodiesel and glycerin production varying from expectations; |
| Availability and cost of products and raw materials, particularly soybean oil, animal fats, and methanol; |
| Changes in the price and market for biodiesel and its co-products, such as glycerin; |
| Our ability to market and our reliance on third parties to market our products; |
|
| Changes in or elimination of governmental laws, tariffs, trade or other controls or enforcement
practices such as: |
| national, state or local energy policy; |
||
| federal and state biodiesel tax incentives; |
||
| legislation establishing a renewable fuel standard or other legislation mandating the use of
biodiesel or other lubricity additives; or |
||
| environmental laws and regulations that apply to our plant operations and their enforcement; |
| Total U.S. consumption of diesel fuel and biodiesel, fuel prices, and consumer attitudes regarding the
use of biodiesel; |
| Fluctuations in petroleum and diesel prices; |
| Changes in our business strategy, capital improvements or development plans; |
| Results of our hedging strategies; |
| Our liability resulting from litigation; |
| Our ability to retain key employees and maintain labor relations; |
| Changes and advances in biodiesel production technology; |
| Competition from alternative fuels and alternative fuel additives; |
| The occurrence of events of default under our financing agreements, our failure to comply with loan
covenants contained in our financing agreements and the response of our lender to such defaults and
non-compliance; |
| Our ability to continue to export our biodiesel and the European Commissions imposition of tariffs or
other duties on biodiesel imported from the U.S.; |
| Current unfavorable domestic and international economic conditions; |
| Our ability to enter into toll processing agreements or other arrangements that shift responsibility for
feedstock procurement and costs to other parties; |
| Changes in plant production capacity or technical difficulties in operating the plant for any reason,
including changes due to events beyond our control or as a result of intentional reductions in
production or plant shutdowns; |
| The closing, or the failure to close, of the transaction contemplated by the Second Amended and Restated
Asset Purchase Agreement entered into by the Company with REG and certain other parties affiliated with
REG; |
| Our ability to obtain the requisite unit holder vote to liquidate, dissolve and wind up if our proposed
consolidation with REG is approved by the unit holders and successfully closes; |
| Our defaults under other material agreements, including our agreement with Jasper County, Iowa and the
Iowa Department of Economic Development; |
| Our ability to generate profits; |
| Our reliance on REG for management, marketing and procurement services and our ability to successfully
operate the plant in light of REGs intent to terminate our current Management and Operational Services
Agreement; and |
| Other factors described elsewhere in this report. |
We undertake no duty to update these forward-looking statements, even though our situation may
change in the future. Furthermore, we cannot guarantee future results, events, 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, the
documents that we reference in this report, and the documents we have filed as exhibits to this
report 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.
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Overview
Central Iowa Energy, LLC was formed as an Iowa limited liability company on March 31, 2005.
References to Central Iowa Energy, we, us, our and the Company refer to the entity and
business known as Central Iowa Energy, LLC. We own and operate a 30 million gallon per year
biodiesel production plant near Newton, Iowa. We have been engaged in the production and sale of
biodiesel and its primary co-product, glycerin, since April 2007. Our plant is capable of producing
biodiesel from both vegetable oil, including soybean oil and corn oil, and animal fats. Our
facility is also capable of pretreating crude vegetable oils, including soybean oil and corn oil,
and animal fats. Pursuant to our Management and Operational Services Agreement (MOSA) with
Renewable Energy Group, Inc. (REG), REG is required to manage our plant, acquire feedstock and
chemicals necessary for the plants operation, sell and market our products and perform certain
administrative functions in exchange for a fixed fee per gallon of biodiesel produced at our plant.
On April 7, 2009, REG provided the Company with twelve months written notice of its intent to
terminate the MOSA. We expect the MOSA will terminate on or about May 1, 2010. Due to our
significant reliance on REG for the management of our plant, the procurement of our inputs, and the
sale and marketing of our biodiesel, this could have a material adverse affect on our ability to
operate and generate revenues in the event we are not able to negotiate a new MOSA with REG or
enter into an agreement for similar services with another third party and we do not close on our
proposed consolidation transaction with REG. During the fiscal year ended September 30, 2009 we
paid only $58,512 under the MOSA, and no amounts were payable under the MOSA as of September 30,
2009 due to the fact that for most of the 2009 fiscal year we did not produce biodiesel other than
pursuant to a toll processing agreement entered into with an entity affiliated with REG. Under the
toll processing agreement, the per gallon fixed fee provided for in the MOSA that is typically
applicable to each gallon of biodiesel produced at our plant does not apply to the gallons of
biodiesel produced under the toll processing agreement.
We are subject to industry-wide factors that affect our operating and financial performance.
Our operating results are typically driven by the prices at which we sell our biodiesel and
glycerin and the costs of our feedstock and operating costs. Our revenues are typically impacted by
such factors as the available supply and demand for biodiesel, the price of diesel fuel (with which
biodiesel prices often correlate), general economic conditions, the weather, our dependence on one
major customer who markets and distributes our products, the intensely competitive nature of our
industry, the extensive environmental laws that regulate our industry, possible legislation at the
federal, state and/or local level, and changes in federal biodiesel supports and incentives. To
the extent that we continue to produce biodiesel exclusively pursuant to tolling arrangements,
however, our revenues will not be dependent on variable feedstock costs and biodiesel prices.
Current feedstock costs, combined with falling biodiesel prices and demand, have generally made
profit margins small or nonexistent in the biodiesel industry. Demand for biodiesel has also
decreased due to the unfavorable economic conditions that are prevailing in the U.S. and abroad.
We incurred a net loss of $7,923,496 for the fiscal year ended September 30, 2009. We are
currently experiencing liquidity concerns due to our lack of working capital, our failure to
generate significant funds from operations, and the unavailability of additional short-term
financing and credit. For the fiscal year ended September 30, 2009, we produced a total of
approximately 5,014,686 gallons of biodiesel, of which 3,988,292 gallons of biodiesel were produced
pursuant to our tolling arrangement with an affiliate of REG and 1,026,394 gallons of biodiesel
were produced pursuant to ordinary biodiesel sales contracts. Based upon our nameplate production
capacity of 30,000,000 gallons of biodiesel per year (or 2,500,000 gallons per month), we produced
biodiesel at approximately 17% of our production capacity for the fiscal year ended September 30,
2009.
We only engaged in ordinary biodiesel production in October and November 2008; for the
remainder of the 2009 fiscal year, our only biodiesel production was pursuant to a toll processing
agreement with REG Marketing & Logistics, LLC (REG Marketing), an entity affiliated with REG,
pursuant to which REG Marketing has the right to order from the Company the production of biodiesel
meeting certain specifications and yield requirements from certain types of feedstock supplied by
REG Marketing, in exchange for which we are entitled to receive a fixed fee per gallon of biodiesel
produced. The term of this toll processing agreement will continue until March 30, 2010 and will
continue thereafter month-to-month unless terminated by either party at least one month in advance
of the termination date. However, the toll processing agreement does not guarantee that we will
receive any minimum amount of biodiesel orders. Approximately 80% of all biodiesel produced during
our fiscal year ended September 30, 2009 was pursuant to our tolling agreement with REG Marketing;
the other 20% was produced pursuant to ordinary biodiesel sales contracts.
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For the first quarter of fiscal year 2010, we anticipate that we will continue to operate at
or below approximately 40% of our nameplate production capacity. We do not currently have any open
biodiesel contracts and we therefore expect that most, if not all, of our biodiesel production
during the first quarter of 2010 will be pursuant to the toll processing agreement with REG
Marketing or similar arrangements, although there can be no assurances that we will obtain any
orders pursuant to such tolling arrangements.
We previously entered into a toll processing agreement with an entity affiliated with REG for
the pre-treatment processing of corn oil from time to time, for which we will receive a fixed fee
per pound of corn oil delivered minus the amount from the sale of materials obtained from the
pre-treatment processing. Throughout the fiscal year 2009, we also
from time to time pretreated feedstock for another REG network plant
on a tolling basis. We may continue to operate under this same or similar arrangements
throughout the 2010 fiscal year, although there can be no assurances that we will obtain any orders
pursuant to such tolling arrangements.
We expect to continue operating on an as-needed basis for toll processing orders for the
foreseeable future until general biodiesel demand increases and our liquidity situation has
improved. We do not expect to have sufficient working capital on hand in the foreseeable future to
acquire feedstock to produce biodiesel other than pursuant to a toll processing arrangement, which
generally shifts the risk of feedstock costs and biodiesel prices to the other party. It is also
uncertain whether we will maintain sufficient funds to cover the non-feedstock costs of production
associated with biodiesel production under toll processing arrangements. Decreased demand for
biodiesel, our failure to obtain biodiesel purchase contracts or toll processing orders and our
lack of working capital may continue to have a material adverse affect on our ability to generate
revenues.
Proposed Consolidation with REG
On November 20, 2009 we entered into a Second Amended and Restated Asset Purchase Agreement
with REG, REG Newco, Inc., a Delaware corporation (Newco), and REG Newton, LLC, a wholly-owned
subsidiary of Newco and an Iowa limited liability company (REG Newton) (the Asset Purchase
Agreement) pursuant to which we anticipate consolidating our business and operations with REG
under Newco (the Transaction). REG currently provides biodiesel plant management, feedstock
procurement and product marketing services under our MOSA. REG was also the design-builder of our
plant. The proposed consolidation will occur through the acquisition by REG Newton of substantially
all of our assets and certain liabilities. The Asset Purchase Agreement also contemplates the
potential consolidation under Newco of the business and operations of two other biodiesel plants,
Western Iowa Energy, LLC (WIE) and Blackhawk Biofuels, LLC (Blackhawk).
Under the Asset Purchase Agreement, we will receive in consideration of the Transaction an
aggregate of approximately 4,414,345 shares of Common Stock of Newco and 164,197 shares of
Preferred Stock of Newco (subject to adjustment for fractional shares) for distribution to our unit
holders as provided below. Based on the assumption that the Transaction and the other consolidation
transactions involving WIE and Blackhawk close, we will receive in the aggregate approximately
1.20% of the total issued and outstanding shares of Newco Preferred Stock and approximately 11.89%
of the issued and outstanding shares of Newco Common Stock. We expect to distribute two percent
(2%) of the Newco shares of Common Stock and Preferred Stock to our financial advisor, Houlihan
Smith & Company, Inc., for certain financial advisory services rendered to the Company, including
services rendered in connection with the Transaction, and we may also be required to distribute,
liquidate or hold back additional Newco shares to satisfy any claims or liabilities of the Company
that remain outstanding following the close of the Transaction. It is expected that the balance of
the Newco shares will be distributed to our unit holders in proportion to their respective positive
capital account balances in connection with our anticipated dissolution, liquidation and winding up
following the close of the Transaction. We plan to seek unit holder approval of our dissolution,
liquidation and winding up at the same meeting we seek unit holder approval of the Transaction;
however, such approval is not a condition to closing of the Transaction. If the requisite unit
holder approval for our dissolution, liquidation and winding up is not obtained at the time the
Transaction is approved by the unit holders, we expect to seek such unit holder approval at a later
date, although there can be no assurances that it will be obtained. If the Company has not obtained
the requisite unit holder approval prior to closing on the transaction, the Company will receive
Newco Stock certificates issued in its name and the Newco Stock will not be distributed to the
Companys unit holders until the dissolution approval has been received. Any shares that we are
required to distribute or liquidate in satisfaction of liabilities or claims arising or incurred
prior to our dissolution and liquidation
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will reduce the number of shares of Newco Stock available
for distribution to unit holders. Upon receipt of the
requisite unit holder approval, we plan to dissolve, liquidate, wind up and terminate our
existence as soon as is reasonably practicable after the closing of the Transaction. Until we are
dissolved and our existence is terminated, Newco has agreed to pay certain mutually agreeable
ongoing costs for a period up to six months following closing of the Transaction. In the event we
are not dissolved, liquidated and wound up by the end of this six month period, Newco will be under
no obligation to continue to pay for any of our ongoing costs. In the event that the Transaction
is approved, but the dissolution, liquidation and winding up is not approved at the same time, the
Company could be forced to continue its existence without any ongoing business operations or assets
to support any costs or expenses that it may incur as part of its ongoing existence.
The closing of the Transaction is subject to variety of conditions, including without
limitation the receipt of the approval of the Transaction by our unit holders and REGs
shareholders and the closing of the proposed REG consolidation with Newco prior to or
simultaneously with the Transaction. Closing of the Transaction is not conditioned upon the
closing of the WIE or Blackhawk consolidations or upon the Companys dissolution and liquidation.
There can be no assurances that the Transaction will ever close. The foregoing description of the
Asset Purchase Agreement is qualified in its entirety by reference to the full text of the Second
Amended and Restated Asset Purchase Agreement, which was filed as an exhibit to the Companys Form
8-K filed on November 23, 2009.
Results of Operations for the Fiscal Year Ended September 30, 2009 and 2008
The following table shows the results of our operations and the percentage of revenues, costs
of goods sold, operating expenses and other items to total revenues in our statements of operations
for the fiscal year ended September 30, 2009 and 2008:
Fiscal Year Ended | Fiscal Year Ended | |||||||||||||||
September 30, 2009 | September 30, 2008 | |||||||||||||||
Statement of Operations Data | Amount | Percent | Amount | Percent | ||||||||||||
Revenues |
$ | 10,684,528 | 100.00 | % | $ | 84,562,559 | 100.00 | % | ||||||||
Cost of Goods Sold |
14,844,628 | 138.94 | % | 82,373,776 | 97.41 | % | ||||||||||
Gross Profit (Loss) |
(4,160,100 | ) | (38.94 | %) | 2,188,783 | 2.59 | % | |||||||||
Operating Expenses |
1,993,762 | 18.66 | % | 2,420,758 | 2.86 | % | ||||||||||
Operating (Loss) |
(6,153,862 | ) | (57.60 | %) | (231,975 | ) | (0.27 | %) | ||||||||
Other (Expense) |
(1,769,634 | ) | (16.56 | %) | (2,182,463 | ) | (2.59 | %) | ||||||||
Net (Loss) |
(7,923,496 | ) | (74.16 | %) | (2,414,438 | ) | (2.86 | %) |
Revenues
The following table shows the sources of our revenues for the fiscal years ended September 30,
2009 and 2008:
Fiscal Year Ended | Fiscal Year Ended | |||||||||||||||
September 30, 2009 | September 30, 2008 | |||||||||||||||
Revenue Source | Amount | % of Revenues | Amount | % of Revenues | ||||||||||||
Biodiesel Sales |
$ | 6,576,666 | 61.55 | % | $ | 71,186,907 | 84.18 | % | ||||||||
Glycerin, Fatty Acid and Soap Stock
Sales |
1,214,440 | 11.37 | % | 3,926,966 | 4.65 | % | ||||||||||
Toll Processing
Service Fees |
1,703,162 | 15.94 | % | 0 | 0.00 | % | ||||||||||
Federal Incentives |
1,190,260 | 11.14 | % | 9,448,686 | 11.17 | % | ||||||||||
Total Revenues |
$ | 10,684,528 | 100.00 | % | $ | 84,562,559 | 100.00 | % | ||||||||
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Revenues from operations for the fiscal year ended September 30, 2009 totaled $10,684,528
compared with $84,562,559 for the fiscal year ended September 30, 2008. Total revenues were
significantly lower for the fiscal year ended September 30, 2009 compared to the same period in
2008 due to reduced biodiesel production, decreased biodiesel demand, decreased biodiesel sales
contracts, and our production of biodiesel almost exclusively under tolling arrangements for the
fiscal year ended September 30, 2009. Under tolling arrangements, we produce biodiesel using
feedstock supplied by the party ordering biodiesel production. The other party pays for the
feedstock and we pay for the other costs of production, receiving a fixed fee per gallon of
biodiesel produced. We may also from time to time pretreat or process feedstock pursuant to similar
tolling arrangements. We produced approximately 75% less biodiesel for the fiscal year ended
September 30, 2009 (taking into account production under tolling arrangements) compared to the
fiscal year ended September 30, 2008.
The portion of our revenues for the fiscal year ended September 30, 2009 relating to biodiesel
sales reflects the sale of biodiesel inventory during fiscal year 2009 that was produced early in
the 2009 fiscal year or during periods prior to the 2009 fiscal year. Although biodiesel sales
represents the largest component of our revenues for the fiscal year ended September 30, 2009, we
only actually produced biodiesel pursuant to ordinary biodiesel sales contracts in October and
November 2008; for the remainder of the fiscal year ended September 30, 2009 we did not produce any
biodiesel other than pursuant to our tolling arrangements with REG Marketing. This is a significant
contrast to fiscal year 2008, in which we solely engaged in ordinary biodiesel production pursuant
to biodiesel sales contracts.
The second largest component of our revenues for the fiscal year ended September 30, 2009 came
from toll processing service fees, as compared to the same period in 2008 in which we earned no
revenues from toll processing services. Under biodiesel tolling arrangements, we only receive a
fixed fee per gallon of biodiesel produced, and we do not receive a variable price per gallon that
fluctuates based on prevailing biodiesel prices. We expect to continue operating on an as-needed
basis for toll processing orders for the foreseeable future, as we do not expect to have sufficient
working capital on hand in the foreseeable future to acquire feedstock to produce biodiesel other
than pursuant to a toll processing arrangement.
The expiration of the blenders tax credit on December 31, 2009 could adversely impact our
ability to profitably produce and sell biodiesel, whether pursuant to ordinary biodiesel contracts
or tolling arrangements. The loss or reduction of the blenders tax credit will make biodiesel
production more costly and make it less competitive with petroleum-based biodesel. Demand for
biodiesel tolling, which is the only way which we anticipate producing biodiesel in the foreseeable
future, could also be significantly reduced if the tax credit is not renewed or its benefits are
reduced. We could be forced to take significant cost savings measures or temporarily or permanently
cease production at our plant in the event that Congress does not act to renew or extend the
blenders tax credit in 2010. The loss or reduction of the blenders tax credit would likely
decrease our ability to generate revenues.
Under our biodiesel tolling agreement with REG Marketing, we are entitled to retain the
byproducts of biodiesel production, including glycerin (subject to the payment of certain
by-product payments). Accordingly, we continue to sell these by-products from time to time, along
with any inventory of such by-products from biodiesel production in early fiscal year 2009 or
periods prior to the period covered by this report. This is the reason why the sale of glycerin,
fatty acids and soap stock continues to be a component of our revenues despite our shift to
production of biodiesel pursuant to tolling arrangements in the fiscal year ended September 30,
2009.
Under tolling arrangements, the other party ordering biodiesel production is typically
entitled to receive the federal incentive payments associated with such production. The $1,190,260
in federal incentives included in our revenues for the fiscal year ended September 30, 2009 relates
to federal incentive payments receivable in connection with our sales of B99 biodiesel inventory
that we produced in the first two months of fiscal year 2009 or during periods prior to the period
covered by this report. The $8,258,426 decrease in federal incentives from the fiscal year ended
September 30, 2008 to the fiscal year ended September 30, 2009 is reflective of our decrease in
ordinary biodiesel production and our shift to production of biodiesel almost exclusively pursuant
to tolling arrangements.
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Because biodiesel is primarily used as an additive to petroleum-based diesel, biodiesel prices
have generally correlated to diesel fuel prices. Although the price for diesel fuel has increased
over the last several years, reaching record highs, diesel fuel prices per gallon remain at levels
below or equal to the price of biodiesel. According to the USDAs Weekly Ag Energy Round-Up report, the average price for B100 biodiesel
in Iowa for the week of December 18, 2009 was approximately $3.20 to $3.46 per gallon. However, according to the Energy Information
Administration, the average diesel price for the Midwest was approximately $2.75 as of December 7,
2009, which is lower than the price per gallon for biodiesel. Demand for biodiesel has been and
will likely continue to be reduced as a result of this price difference. The price disadvantage of
biodiesel will be even greater if the $1.00 blenders tax credit is not renewed or extended beyond
its expiration date of December 31, 2009. Additionally, current economic conditions have resulted
in decreased demand for biodiesel and other fuels. Combined with the lack of demand for biodiesel
is an increased supply of biodiesel and increased competition for and costs of our inputs, which
has also led to difficulty in marketing biodiesel at profitable prices. Moreover, demand for
biodiesel typically decreases even further in the winter months because blenders decrease their
biodiesel blend percentages due to cold flow concerns. We expect these trends to continue for our
2010 fiscal year. Decreased demand for biodiesel may negatively impact our ability to profitably
produce and/or sell biodiesel, either pursuant to biodiesel tolling arrangements or ordinary
biodiesel sales contracts.
Moreover, the EPA recently issued preliminary findings that soy-based biodiesel fails to meet
targets for reducing greenhouse emissions, as required under the Renewable Fuel Standard (RFS).
If these findings are implemented into the proposed revisions to the RFS (RFS2) such that
soy-based biodiesel is not counted toward the RFS, demand for our biodiesel and our tolling
services could be reduced as a result. Additionally, RFS2, which would have required the blending
of 500 million gallons of biomass-based diesel for 2009, was delayed by the EPAs previous
extension of the comment period to September 25, 2009. As of the date of this report, no final
rules for RFS2 have been issued by the EPA and it is still uncertain whether soy-based biodiesel
will count towards the RFS under the anticipated new rules. The EPA previously indicated that it
intended to issue the RFS2 rules by the end of 2009; however, as of the date of this report, no
final rules have been so issued. Demand for biodiesel may also be harmed by the European
Commissions decision to extend anti-subsidy and anti-dumping tariffs on U.S. biodiesel imported
into Europe through 2014, which has significantly increased the price at which U.S. biodiesel
producers will be able to sell biodiesel in European markets, thereby likely significantly reducing
overall demand for biodiesel produced in the U.S.
Cost of Goods Sold
The primary components of cost of goods sold from the production of biodiesel are typically
raw materials (soybean oil, animal fats, corn oil, methanol and other chemicals), energy (natural
gas and electricity), labor and depreciation on process equipment.
Cost of goods sold for our products for the fiscal year ended September 30, 2009 was
$14,844,628 which is a significant decrease from $82,373,776 for the fiscal year ended September
30, 2008. This decrease is a result of a 91% decrease in biodiesel sales volume experienced for
the fiscal year ended September 30, 2009 as compared to the same period for 2008 and our shift from
ordinary biodiesel production in fiscal year 2008 to production of biodiesel in fiscal year 2009
almost exclusively under tolling arrangements.
Under biodiesel tolling arrangements, the other party supplies the feedstock at its own cost
and we typically pay for the other costs associated with biodiesel production. Most of the costs
for which we are responsible under tolling arrangements are fixed costs rather than variable costs,
such as feedstock costs, and such variable costs are typically the greatest cost component
associated with ordinary biodiesel production. Because of this difference and our shift from
ordinary biodiesel production to biodiesel production almost exclusively pursuant to toll
processing arrangements, our cost of goods sold and gross profits for the fiscal year ended
September 30, 2009 and 2008 are not comparable.
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The following table shows the components of our cost of goods sold for the fiscal year ended
September 30, 2009 and 2008:
Fiscal Year Ended | Fiscal Year Ended | |||||||||||||||
September 30, 2009 | September 30, 2008 | |||||||||||||||
Component of Cost of Goods Sold | Amount | Percent | Amount | Percent | ||||||||||||
Feedstock and Chemical
Inputs |
$ | 10,474,038 | 70.6 | % | $ | 72,137,199 | 87.6 | % | ||||||||
Plant Wages and Salaries |
1,014,896 | 6.8 | % | 1,216,125 | 1.5 | % | ||||||||||
Utilities |
1,117,104 | 7.5 | % | 1,997,029 | 2.4 | % | ||||||||||
Fees-Procurement,
Operation Management |
15,398 | 0.1 | % | 401,937 | 0.5 | % | ||||||||||
(Gain) Loss on
Derivative Financial
Instruments |
(1,171,039 | ) | (7.9 | %) | 2,117,833 | 2.6 | % | |||||||||
Depreciation |
2,567,102 | 17.3 | % | 2,550,512 | 3.0 | % | ||||||||||
Freight |
300,875 | 2.0 | % | 1,170,431 | 1.4 | % | ||||||||||
Maintenance, Supplies
and Other Expenses |
526,254 | 3.6 | % | 782,710 | 1.0 | % | ||||||||||
Total |
$ | 14,844,628 | 100 | % | $ | 82,373,776 | 100 | % | ||||||||
Feedstock typically makes up the greatest cost component of biodiesel production, but
biodiesel toll processing arrangements generally shift the risk of variable feedstock costs to the
other party. For the fiscal year ended September 30, 2008, feedstock costs and other chemical
input costs account for approximately 88% of our cost of goods sold. However, during the fiscal
year ended September 30, 2009 in which we operated almost exclusively pursuant to tolling
arrangements (other than in October and November 2008), the primary components of our cost of goods
sold were the cost of sales of biodiesel inventory produced in the first two months of the 2009
fiscal year or during periods prior thereto, chemical inputs, depreciation, plant wages and
salaries and utilities. We expect that any biodiesel production in the first quarter of fiscal year
2010 will be primarily or exclusively pursuant to tolling arrangements with other third parties.
Accordingly, we expect that fixed and overhead costs such as depreciation, labor costs and
utilities, along with chemical inputs, will continue to comprise a large part of our cost of goods
sold for the first quarter of our 2010 fiscal year and that variable feedstock costs will not
significantly impact our cost of goods sold.
Prices for feedstock can be volatile. According to the USDAs National Weekly Ag Energy
Round-Up report, the price for crude soybean oil in Iowa for the week of December 18, 2009 ranged
from 34.89 cents to 37.34 cents per pound, up slightly from the 27.20 cents to 29.70 cents per
pound range posted for the same week a year ago. The prices for animal fats tend to move in
relation to the price of other feedstocks such as soybean oil. According to the USDAs December 11,
2009 Oil Crops Outlook report, estimated average lard and edible tallow prices for November 2009
were 30.07 cents and 29.65 cents per pound respectively, down from the August 2008 average high
prices of 32.20 and 34.14 cents per pound, respectively. Based on recent trends, we expect that
cost of goods sold on a per-gallon of biodiesel sold basis may decrease or stay the same for the
2010 fiscal year with regard to any biodiesel that is not produced pursuant to a toll processing
agreement. We expect that feedstock prices will remain volatile, however, throughout the 2010
fiscal year, as domestic and global economic conditions and commodities affect pricing.
For the fiscal year ended September 30, 2009, we experienced a $1,171,039 net gain related to
our derivative instruments. This hedging net gain consisted of a realized gain of $1,241,595 and a
reduction to unrealized gains of $70,556 as the Companys positions were liquidated and gains were
realized. We experienced a $2,117,833 net loss during the fiscal year ended September 30, 2008
related to our derivative instruments.
Operating Expenses
Operating expenses for the fiscal year ended September 30, 2009 totaled $1,993,762 as compared
to operating expenses of $2,420,758 for the same period in 2008. This decrease in operating
expenses is the result of a $336,016 increase in professional fees which was offset by a $763,012
reduction in general and administrative expenses. In light of our reduced production and biodiesel
output the Company has trimmed costs where possible, which has resulted in the decrease in general
and administrative expenses. Our increase in professional fees is primarily related to legal fees
incurred in connection with the proposed Transaction.
Other Income (Expenses)
Our other expenses for the fiscal year ended September 30, 2009 totaling $1,769,634
were 16.56% of our revenues. This expense resulted primarily from interest expense totaling
$1,783,935, which is down from $2,182,463 for the fiscal year ended September 30, 2008. The
decrease in interest expense is a result of a drop in the interest rates applicable to our credit
facilities and a reduction in the average balance outstanding of our credit facilities. We received
$14,319 in interest income for the fiscal year ended September 30, 2009.
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Changes in Financial Condition
The following table highlights the changes in our financial condition from September 30, 2008
to September 30, 2009:
September 30, 2009 | September 30, 2008 | |||||||
Current Assets |
$ | 941,934 | $ | 10,476,632 | ||||
Current Liabilities |
$ | 26,020,150 | $ | 29,787,038 | ||||
Members Equity |
$ | 9,519,628 | $ | 17,443,124 |
Current Assets. Current assets totaled $941,934 at September 30, 2009 down from
$10,476,632 at September 30, 2008. The decrease during this period is in part a result of a
significant decrease in inventory from $7,776,472 at September 30, 2008 to $226,871 at September
30, 2009 stemming from our significant decrease in production levels and shift to production of
biodiesel pursuant to tolling arrangements. Further, trade account receivables in the amount of
$161,974 at September 30, 2009 was significantly less than the amount of trade account receivables
of $1,200,587 at September 30, 2008. This decrease in trade accounts receivables is primarily due
to the decrease in biodiesel sales for the fiscal year ended September 30, 2009 as compared to the
fiscal year ended September 30, 2008.
Current Liabilities. Current liabilities totaled approximately $26,020,150 at
September 30, 2009, down from approximately $29,787,038 at September 30, 2008. The decrease of
$3,766,888 during this period resulted primarily from reduced accounts payable due to our decrease
in biodiesel production and due to the reduction in our outstanding debt, including our term loan
and our revolving line of credit. Due to the going concern opinion contained in Note 9 to the
financial statements, all long-term debt has been classified as current. Our line of credit was due
on October 13, 2009, however, as of the date of this report we have not yet repaid the $550,000
that was outstanding as of September 30, 2009, nor have we formally extended or renewed the
agreement.
Members Equity. Total members equity as of September 30, 2009 was $9,519,628, down
from $17,443,124 as of September 30, 2008. The decrease in total members equity is a result of
our net loss realized during the period.
Cash Flows
Cash Flow from Operating Activities. Net cash flow provided by operating activities
for the fiscal year ended September 30, 2009 totaled $3,507,793. This was the result of an
operating loss of $7,923,496, non-cash items of $2,723,677, and a $8,707,612 increase in working
capital components. The working capital component increase is primarily due to a reduction in
inventory and receivables during the fiscal year ended September 30, 2009.
Cash Flow from Investing Activities. Net cash flow used in investing activities for
the fiscal year ended September 30, 2009 totaled $503,378, which was primarily related to an
increase in our restricted cash balance due to our senior lenders requirement of a pledge of a
certificate of deposit as collateral for our irrevocable line of credit which secures our loan from
the Iowa Department of Economic Development.
Cash Flow from Financing Activities. Net cash used in financing activities for the
fiscal year ended September 30, 2009 totaled $3,284,384, which was the result of payments totaling
$2,450,000 on our revolving line of credit, which were made in connection with the reduction in our
maximum line of credit amount and in order to reduce the borrowing base on our line of credit, and
the payment of $834,384 on our long-term debt with our lender.
Liquidity and Capital Resources
Short Term and Long-Term Debt Financing Sources
We currently have a term loan, term revolving loan and revolving line of credit outstanding
with our current lender, AgStar Financial Services, PCA (AgStar), which purchased the interests
of our former lender, F & M Bank Iowa, in such loans and related financing agreements.
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Our $22,000,000 term loan with AgStar accrues interest at a variable base rate equal to the
LIBOR Rate plus 325 basis points. The LIBOR Rate is generally defined as the One Month London
Interbank Offered Rate reported on the 10th day of the month preceding each interest
period by the Wall Street Journal in its daily listing of money rates, defined therein as the
average of interbank offered rates for dollar deposits in the London market. We are required to
make equal monthly payments of principal and interest on the term loan until the maturity date on
May 1, 2012, at which time any outstanding and unpaid principal, interest or other charges owing
under the term loan will be due and payable. The principal payments are equal to an amount that
fully amortizes the outstanding principal balance of the term note over a period not to exceed 10
years, together with accrued interest on the term loan. As of the fiscal year ended September 30,
2009, there was a principal balance of $18,616,731 on the term loan. We have failed to make any
principal payments required under our term loan since January 2009, from which date we have only
made payments of interest. As of September 30, 2009, we were current on all required payments of
accrued interest on our term loan. Failure to make payments required on our term loan is an event
of default under our financing agreements with our lender. We have failed to cure our default
arising from our failure to make principal payments when due.
Advances under our term revolving loan with AgStar, up to the amount of $5,000,000, may be
used for cash and inventory management purposes. We pay interest on the term revolving loan each
month. The term revolving loan bears interest at a rate equal to the LIBOR Rate plus 325 basis
points. The term revolving loan will mature on May 1, 2012. On the maturity date, any outstanding
and unpaid principal, interest and other charges owning thereunder will be due and payable. As of
the fiscal year ended September 30, 2009, we had drawn the full $5,000,000 on the term revolving
loan and do not have any additional credit available thereunder.
In October 2008 our lender extended us a $2,000,000 revolving line of credit. As of September
30, 2009, $550,000 was outstanding on our line of credit. Since December 2008, we were out of
compliance with our borrowing base requirements with respect to our revolving line of credit, which
constitutes an event of default that we failed to cure. Our revolving line of credit loan accrued
interest at a rate equal to the LIBOR Rate plus 400 basis points. Interest payments were required
to be made monthly and any outstanding and unpaid principal, interest or other costs owing under
the line of credit was due and payable on October 13, 2009. However, as of the date of this
report, we had not paid the principal balance outstanding on the line of credit, which constitutes
a default under our financing agreements. We have also not formally extended or renewed our
revolving line of credit.
We have exhausted the credit available under our debt facilities, as no amount remains
available under our term revolving loan. We are unable to draw on the additional $1,450,000 under
our $2,000,000 revolving line of credit due to the fact that we are out of compliance with the
applicable borrowing base requirements. We do not have further commitments for additional credit
facilities from any lender. There is no assurance that we will be able to obtain other sources of
short-term financing. The current U.S. economic recession and the ongoing credit crisis have
created an unfavorable credit environment that may make it more difficult to obtain additional debt
facilities. Unfavorable conditions in the biodiesel industry, including decreased demand, increased
competition and decreasing biodiesel prices, may also limit our ability to obtain additional debt
financing.
In connection with our financing agreements, we executed a mortgage and a security agreement
in favor of F&M Bank, whose interests have been acquired by our current lender, AgStar, granting a
security interest in all of our assets, including without limitation our real estate, our plant,
fixtures located on our property, any rent or income we might receive in connection with the use or
occupancy of our land, and all of our personal property. This security interest secures our
obligations under the financing agreements, including the term loan, the revolving term loan, and
the revolving line of credit loan.
Certain covenants in our financing agreements with our lender may restrict our operating
flexibility. Certain of these covenants restrict our ability to declare and pay any dividends to
our members or make any other distribution of assets to our members, make certain capital
expenditures, enter into certain transactions, or incur additional debt financing or further pledge
our assets. We are permitted to make dividends and distributions only in limited circumstances, and
provided that no event of default exists under the agreements.
We are also required to comply with certain financial covenants and ratios contained in our
financing agreements, including the maintenance of certain levels of working capital, tangible
net worth and tangible owners equity (as each of those terms is defined in our financing
agreements). We are also required to maintain a fixed charge ratio (as that term is defined in
our financing agreements) of not less than 1.25 to 1.00. As of September 30, 2009, we were in
default under our financing agreements for failure to satisfy all of the loan covenants and ratios
with which we are obligated to comply. Our failure to comply with these covenants and ratios
constitutes an event of default under our financing agreements and we have failed to cure such
defaults. Our lender has not waived our failure to comply with these loan covenants and ratios.
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We have received multiple written notices of default from AgStar indicating that it is
entitled to take any one or more remedies to which it is entitled under our financing agreements
and applicable law. Our continuing default under our financing agreements has resulted in our
lenders imposition of a 2% increase in the interest rate applicable to our debt facilities, which
has been in effect since approximately July, 2008. For so long as we continue to be in default
under our financing agreements, our lender will also be entitled to take any one or more remedies
afforded to the lender under our financing agreements, including, without limitation:
| acceleration of the unpaid principal balance under the financing agreements and all
accrued interest thereon and all other amounts payable thereunder; |
| withholding of any one or more advances to which the Company may otherwise be
entitled under the financing agreements, or termination of the lenders obligation to
make any advances under the financing agreements; |
| appointment of a receiver to take possession of the collateral securing the loans
from our lender, including without limitation, our real estate, plant, and equipment; |
| requiring the Company to pledge to the lender as additional security immediately
available funds equal to the maximum amount available to be drawn under all outstanding
letters of credit under our financing agreements; |
| foreclosure on the lenders mortgage on and security interest in the Companys
property securing our loans, including our real estate, improvements, equipment and
other assets and personal property; and |
| any and all other rights and remedies afforded to our lender applicable law or
equity. |
Our lenders exercise of any one or more of the foregoing remedies would have a material
adverse impact on the Companys financial condition and results of operations and could result in
the loss of the assets securing our loans and a permanent shut-down of our plant. This could cause
our members to lose all of their investment in the Company.
Although our lender has refrained from exercising its other rights and remedies under the
financing agreements as of the date of this report (other than the imposition of a default interest
rate), there can be no assurance that our lender will continue to forbear from accelerating the
principal and interest due under our loans or foreclosing on and taking possession of the
collateral securing our loans. Our continuing default has caused doubts about our ability to
continue as a going concern. See Note 9 to the financial statements accompanying this report.
We are currently experiencing liquidity problems due to the lack of cash being generated from
our continuing operations and our lack of available credit. We do not currently believe that our
cash flow from continuing operations will alone be sufficient to fund our operations over the next
twelve months. If we are unable to obtain sufficient capital, credit or short-term financing to
cover the cost of our future operations and improve our liquidity, we may have to temporarily or
permanently cease operations at our plant. Accordingly, our members could lose some or all of their
investment in the Company. Please also see Overview Proposed Consolidation With
REG for a description of a Second Amended and Restated Asset Purchase Agreement we entered
into on November 20, 2009 providing for the consolidation of our business and operations with those
of REG, and potentially two other biodiesel production facilities, under a newly formed holding
company. If the consolidation is consummated, we intend to liquidate, dissolve, and wind up as
soon as is reasonably practicable after receipt of the requisite unit holder approval for the same,
and to distribute as part of our liquidation the Newco Stock received in consideration of the
Transaction to our unit holders, less the number of shares we are required to distribute to our
financial advisor, Houlihan Smith & Company, Inc., for certain financial advisory services rendered
in connection with the Transaction and to satisfy any other outstanding claims or liabilities of
the Company that may remain or arise following closing of the Transaction. However, the closing of
the consolidation is subject to numerous conditions and there is no assurance that the Transaction
will ever close. We do not expect to distribute any Newco Stock to our unit holders until the
Company has received the requisite unit holder approval for the Companys dissolution, liquidation
and winding up.
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Agreements with Governmental Entities
Agreement with Iowa Department of Economic Development
We entered into a loan agreement with the Iowa Department of Economic Development (IDED) for
a total of $400,000, $300,000 of which is a zero interest loan and $100,000 of which is a
forgivable loan. The $300,000 zero interest loan must be repaid in sixty monthly installments of
$5,000. As of September 30, 2009, we owed approximately $215,000 to IDED. To receive a permanent
waiver of the forgivable loan, the Company must meet certain conditions, including the creation and
maintenance of 14 full-time equivalent jobs which pay qualifying wages. In September 2009,
however, the Company received a written notice of default from IDED specifying that the Company
fell short of satisfying its job creation obligation as of the measurement date specified in the
IDED agreement by creating only 12 full-time equivalent jobs, which constitutes a 14% deficiency
and renders the Company ineligible for a full waiver of the forgivable loan amount. IDED notified
the Company that due to its job creation shortfall, an amount equal to 14% of the forgivable loan
amount (or $14,000), plus accrued interest at the rate of 6% from the date of disbursement of
funds, is immediately due and payable by the Company. The Company has been advised that the amount
which it is obligated to repay, with accrued interest, will be amortized into the monthly payments
for the remaining life of the zero-interest loan payable to IDED. These loans are secured by a
$400,000 irrevocable standby letter of credit for the benefit of IDED issued by Bank Iowa on
account of the Company; however, the Company was required to pledge to Bank Iowa a $400,000
certificate of deposit as collateral for the letter of credit.
Under our agreement with IDED, we were further eligible to receive a refund of a portion of
the sales tax paid in connection with the construction of our facility and our members were
eligible to receive approximately $2,350,000 in tax incentives and assistance pursuant to IDEDs
High Quality Job Creation Program. Pursuant to this program, our members may claim an investment
tax credit up to 5% of certain qualifying expenditures directly related to new jobs created and
maintained as a result of our business, provided that certain conditions are met. The Companys
failure to create and maintain the requisite number of jobs, however, has resulted in the Companys
obligation to repay 14% of the sales tax refunds received by the Company, plus accrued interest,
for a total of approximately $75,920 due as of September 30, 2009. In September 2009, the Company
accrued the $75,920 liability upon receiving a notice from the Iowa Department of Revenue seeking
to collect such amounts. Furthermore, the Iowa Department of Revenue has notified the Company of
its proposal that an amount equal to 14% of the investment tax credit available to be claimed by
the Companys members be deducted from the remaining portion of the tax credit available to members
over the remainder of the life of such tax credit. This may result in a deduction in the amount of
the tax credit available to members.
Private Redevelopment Agreement with Jasper County
Pursuant to a private redevelopment agreement dated November 21, 2006 between the Company and
Jasper County, Jasper County agreed to construct certain sewer improvements for the Companys plant
site, which improvements were to be financed through the issuance of bonds or notes. In return for
Jasper Countys construction of these improvements, the Company was obligated under the agreement
to construct a 30,000,000 gallon per year biodiesel plant having a total investment amount of at
least $38,000,000 and to create at least 20 new
full-time jobs at the Companys plant and maintain such jobs until June 30, 2015. The private
redevelopment agreement provides that in the event of the Companys default, the Company could be
required to pay Jasper County for the total cost of improvements constructed by the County, or
approximately $745,000. In connection with the private redevelopment agreement, the Company was
obligated to enter into an assessment agreement with Jasper County to establish a minimum actual
value of the Companys property and related improvements for the purpose of calculating and
assessing the Companys real property taxes. The Company is currently in default of the private
redevelopment agreement due to its failure to timely pay property taxes as required by the
agreement. As of December 15, 2009, the Company had not paid its most recent property tax
installment in the amount of approximately $130,000, which was due September 30, 2009, plus accrued
interest. Furthermore, the Company failed to timely file with Jasper County an annual report
required by the agreement, but which report was subsequently filed after the filing deadline. The
Company has not received notice from Jasper County declaring an event of default under the
agreement or otherwise indicating that it intends to pursue any remedies against the Company,
including requiring the Company repay the cost of the sewer improvements. However, in the event
that Jasper County elects to seek repayment of such improvement costs, the Company will not likely
have available cash on hand to pay such obligation, which could have a material adverse effect on
the companys ability to continue to operate.
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Commodity Price Risk Protection
We seek to minimize the risks from fluctuations in the prices of raw material inputs, such as
soybean oil, and finished products, such as biodiesel, through the use of derivative instruments.
In practice, as markets move, we actively manage our risk and adjust hedging strategies as
appropriate. Although we believe our hedge positions accomplish an economic hedge against our
future purchases, they do not qualify for hedge accounting, which would match the gain or loss on
our hedge positions to the specific commodity purchase being hedged. We treat our hedge positions
as non-hedge derivatives, which means as the current market price of our hedge positions changes,
the gains and losses are immediately recognized in our cost of goods sold. The immediate
recognition of hedging gains and losses under our treatment of our hedge positions can cause net
income to be volatile from quarter to quarter due to the timing of the change in value of the
derivative instruments relative to the cost and use of the commodity being hedged.
For the fiscal year ended September 30, 2009 we recognized a net gain of $1,171,039 on our
derivative instruments. This is due primarily to realized gains on our hedging positions taken with
respect to home heating oil and soybean oil. There is currently no futures market for biodiesel.
Home heating oil is high sulfur diesel, which is the closest commodity to biodiesel for which there
is such a futures market. Therefore, we entered into certain derivative instruments with respect
to home heating oil to hedge against fluctuations in the sale price of our biodiesel.
There are several variables that could affect the extent to which our derivative instruments
are impacted by price fluctuations in the cost of soybean oil, natural gas or biodiesel. However,
it is likely that commodity cash prices will have the greatest impact on the derivative instruments
with delivery dates nearest the current cash price. As we move forward, additional protection may
be necessary. As the prices of these hedged commodities move in reaction to market trends and
information, our statement of operations will be affected depending on the impact such market
movements have on the value of our derivative instruments. Depending on market movements, crop
prospects and weather, these price protection positions may cause immediate adverse effects, but
are intended to produce long-term positive growth for the Company.
As of September 30, 2009, the Company did not have any outstanding derivative contracts due to
its almost exclusive operation under tolling arrangements for the fiscal year ended September 30,
2009 and its intent to continue to operate in such a manner through the first quarter of the fiscal
year ended September 30, 2010.
Distribution to Unit Holders
As of September 30, 2009, the board of directors of the Company had not declared any
dividends.
Critical Accounting Estimates
Management uses 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.
Revenue Recognition
Revenue from the production of biodiesel and its co-products is recorded when title transfers
to customers. Biodiesel and its co-products are generally shipped FOB from the plant.
Derivative Instruments and Hedging Activities
Current accounting guidance requires a company to evaluate its contracts to determine whether
the contracts are derivatives. Certain derivative contracts may be exempt as normal purchases or
normal sales, which 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. At this time, our forward
contracts related to the purchase of soy oil and natural gas are considered normal purchases and,
therefore, are exempted from the accounting and reporting requirements that would be required if
they were considered derivative instruments.
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Impairment of long-lived assets
Long-lived assets, including property, plant and equipment, are evaluated for impairment on
the basis of undiscounted cash flows whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An impaired asset is written down to our
estimated fair market value based on the best information available. Considerable management
judgment is necessary to estimate discounted future cash flows and may differ from actual cash
flows.
Recently Adopted Accounting Standards
The content included in ASC Topic 825, related to Interim Disclosures about Fair Value of
Financial Instruments became effective for interim reporting periods ending after June 30, 2009,
and it did not have a material impact on our financial position or results of operations. ASC
Topic 825, requires disclosures about fair value of financial instruments in interim and annual
financial statements.
Effective with the quarter ended June 30, 2009, we adopted ASC Topic 855, Subsequent Events
and it did not have a material impact on our financial position or results of operations. ASC
Topic 855 establishes general standards of accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles a replacement of SFAS No. 162 (SFAS
168). Under SFAS 168, the FASB Accounting Standards Codification (Codification) became the
source of authoritative U.S. GAAP recognized by the FASB applied by nongovernmental entities.
Rules and interpretive releases of the SEC under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants. The Codification superseded all then-existing
non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting
literature not included in the Codification will become non-authoritative. SFAS 168 was effective
for financial statements issued for interim and annual periods ending after September 15, 2009. In
the FASBs view, the issuance of SFAS 168 and the Codification will not change GAAP, except for
those nonpublic nongovernmental entities that must now apply the American Institute of Certified
Public Accountants Technical Inquiry Service Section 5100, Revenue Recognition, paragraphs 38-76.
The adoption of SFAS 168 did not have a material impact on our financial position or results of
operations.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of
1934 and are not required to provide information under this item.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Members
Central Iowa Energy, LLC
Central Iowa Energy, LLC
We have audited the balance sheets of Central Iowa Energy, LLC as of September 30, 2009 and 2008,
and the related statements of operations, members equity and cash flows for the years then ended.
These financial statements are the responsibility of the Companys management. 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 (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes 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 Central Iowa Energy, LLC as of September 30, 2009 and 2008, and
the results of its operations and its cash flows for the years then ended in conformity with U.S.
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as
a going concern. As discussed in Note 9 to the financial statements, the Company has suffered
losses from operations and has experienced significant increases in the input costs for its
products. This has created liquidity issues and caused the Company to be in violation of its bank
debt covenants and there is no assurance that such violations will be waived which together raise
substantial doubt about the Companys ability to continue as a going concern. Managements plans in
regard to these matters are also described in Note 9. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
We were not engaged to examine managements assessment of the effectiveness of Central Iowa Energy,
LLCs internal control over financial reporting as of September 30, 2009 included in Item 9AT of
the 10-K and, accordingly, do not express an opinion thereon.
/s/ McGladrey & Pullen LLP
Davenport, Iowa
December 28, 2009
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CENTRAL IOWA ENERGY, LLC
Balance Sheets
September 30, | September 30, | |||||||
2009 | 2008 | |||||||
ASSETS |
||||||||
Current Assets |
||||||||
Cash and equivalents |
$ | 410,540 | $ | 690,509 | ||||
Due from broker |
75 | 218,680 | ||||||
Trade accounts receivable related party, less allowance for doubtful
accounts of $1,021,916 and none in 2009 and 2008, respectively |
161,974 | 1,200,587 | ||||||
Federal incentive receivable |
1,063 | 457,218 | ||||||
Prepaid expenses |
141,411 | 62,610 | ||||||
Derivative instruments |
| 70,556 | ||||||
Inventories |
226,871 | 7,776,472 | ||||||
Total current assets |
941,934 | 10,476,632 | ||||||
Property and Equipment |
||||||||
Land and improvements |
7,680,111 | 7,680,111 | ||||||
Office equipment |
40,603 | 40,603 | ||||||
Office building |
629,300 | 629,300 | ||||||
Plant and process equipment |
32,748,111 | 32,593,225 | ||||||
Construction in process |
| 47,083 | ||||||
41,098,125 | 40,990,322 | |||||||
Less accumulated depreciation |
6,365,941 | 3,798,838 | ||||||
Net property and equipment |
34,732,184 | 37,191,484 | ||||||
Other Assets |
||||||||
Financing costs, net of amortization |
150,472 | 307,046 | ||||||
Restricted cash |
460,188 | | ||||||
Total other assets |
610,660 | 307,046 | ||||||
Total Assets |
$ | 36,284,778 | $ | 47,975,162 | ||||
LIABILITIES AND EQUITY |
||||||||
Current Liabilities |
||||||||
Current maturities of long-term debt |
$ | 23,977,472 | $ | 24,811,856 | ||||
Revolving line of credit |
550,000 | 3,000,000 | ||||||
Accounts payable |
515,732 | 1,111,983 | ||||||
Accounts payable related party |
487,660 | 423,041 | ||||||
Accrued interest payable |
110,094 | 162,146 | ||||||
Accrued expenses |
379,192 | 278,012 | ||||||
Total current liabilities |
26,020,150 | 29,787,038 | ||||||
Long-Term Debt, less current maturities |
| | ||||||
Deferred Grant Financing |
745,000 | 745,000 | ||||||
Commitments and Contingencies |
||||||||
Members Equity |
||||||||
Member contributions, net of costs related to capital contributions,
26,672 units outstanding |
23,849,120 | 23,849,120 | ||||||
Deficit accumulated |
(14,329,492 | ) | (6,405,996 | ) | ||||
Total members equity |
9,519,628 | 17,443,124 | ||||||
Total Liabilities and Members Equity |
$ | 36,284,778 | $ | 47,975,162 | ||||
Notes to Financial Statements are an integral part of this Statement.
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CENTRAL IOWA ENERGY, LLC
Statement of Operations
Year Ended | Year Ended | |||||||
September 30, | September 30, | |||||||
2009 | 2008 | |||||||
Revenues |
||||||||
Sales to related party |
$ | 9,494,268 | $ | 75,113,873 | ||||
Federal incentives |
1,190,260 | 9,448,686 | ||||||
10,684,528 | 84,562,559 | |||||||
Cost of Goods Sold |
14,844,628 | 82,373,776 | ||||||
Gross Profit (Loss) |
(4,160,100 | ) | 2,188,783 | |||||
Operating Expenses |
||||||||
Professional fees |
607,931 | 271,915 | ||||||
General and administrative |
1,385,831 | 2,148,843 | ||||||
Total |
1,993,762 | 2,420,758 | ||||||
Operating Loss |
(6,153,862 | ) | (231,975 | ) | ||||
Other Income (Expenses) |
||||||||
Interest income |
14,301 | 38,945 | ||||||
Interest (expense) |
(1,783,935 | ) | (2,221,408 | ) | ||||
Total |
(1,769,634 | ) | (2,182,463 | ) | ||||
Net Income (Loss) |
$ | (7,923,496 | ) | $ | (2,414,438 | ) | ||
Weighted Average Units Outstanding |
26,672 | 26,672 | ||||||
Net Loss Per Unit Basic and Diluted |
$ | (297.07 | ) | $ | (90.52 | ) | ||
Notes to Financial Statements are an integral part of this Statement.
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CENTRAL IOWA ENERGY, LLC
Statement of Cash Flows
Year Ended | Year Ended | |||||||
September 30, | September 30, | |||||||
2009 | 2008 | |||||||
Cash Flows from Operating Activities |
||||||||
Net loss |
$ | (7,923,496 | ) | $ | (2,414,438 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities: |
||||||||
Depreciation and amortization |
2,723,677 | 2,627,221 | ||||||
Change in assets and liabilities |
||||||||
Due from broker |
218,605 | 107,392 | ||||||
Accounts receivable |
1,038,613 | (41,403 | ) | |||||
Other receivable |
456,155 | 592,044 | ||||||
Inventories |
7,549,601 | (1,859,720 | ) | |||||
Prepaid expenses |
(78,801 | ) | 23,423 | |||||
Derivative instruments |
70,556 | (790,038 | ) | |||||
Accounts payable |
(596,245 | ) | 73,529 | |||||
Accrued expenses |
101,180 | 190,574 | ||||||
Accrued interest payable |
(52,052 | ) | (41,946 | ) | ||||
Net cash provided by (used in) operating activities |
3,507,793 | (1,533,362 | ) | |||||
Cash Flows from Investing Activities |
||||||||
Capital expenditures |
(43,190 | ) | (76,688 | ) | ||||
Sales tax refund from equipment purchases |
| 461,517 | ||||||
Increase in restricted cash |
(460,188 | ) | | |||||
Net cash provided by (used in) investing activities |
(503,378 | ) | 384,829 | |||||
Cash Flows from Financing Activities |
||||||||
Proceeds (payments) on revolving line of credit, net |
(2,450,000 | ) | 1,400,000 | |||||
Proceeds from long-term debt |
| 400,000 | ||||||
Payments for long-term debt |
(834,384 | ) | (2,229,683 | ) | ||||
Net cash used in financing activities |
(3,284,384 | ) | (429,683 | ) | ||||
Net Decrease in Cash |
(279,969 | ) | (1,578,216 | ) | ||||
Cash and cash equivalents Beginning of Period |
690,509 | 2,268,725 | ||||||
Cash and cash equivalents End of Period |
$ | 410,540 | $ | 690,509 | ||||
Supplemental Disclosure of Cash Flow Information, |
||||||||
Cash payments for interest, net of amount capitalized |
$ | 1,835,987 | $ | 2,186,645 | ||||
Supplemental Disclosure of Noncash Investing and Financing Activities |
||||||||
Capital expenditure reimbursement included in accounts payable |
$ | 64,613 | $ | | ||||
Notes to Financial Statements are an integral part of this Statement.
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CENTRAL IOWA ENERGY, LLC
Statement of Changes in Members Equity (Deficit)
Membership | ||||||||||||||||||||
Member | Units Earned But | Retained | Total Members | |||||||||||||||||
Member units | Contributions | Not Issued | (Deficit) | Equity | ||||||||||||||||
Balance September 30, 2007 |
26,672 | 23,849,120 | | (3,991,558 | ) | 19,857,562 | ||||||||||||||
Net (loss) |
| | | (2,414,438 | ) | (2,414,438 | ) | |||||||||||||
Balance September 30, 2008 |
26,672 | 23,849,120 | | (6,405,996 | ) | 17,443,124 | ||||||||||||||
Net (loss) |
| | | (7,923,496 | ) | (7,923,496 | ) | |||||||||||||
Balance September 30, 2009 |
26,672 | $ | 23,849,120 | $ | | $ | (14,329,492 | ) | $ | 9,519,628 | ||||||||||
Notes to Financial Statements are an integral part of this Statement.
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CENTRAL IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
September 30, 2009 and 2008
NOTES TO FINANCIAL STATEMENTS
September 30, 2009 and 2008
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPAL BUSINESS ACTIVITY Central Iowa Energy, LLC, (an Iowa Limited Liability Company) was
organized with the intentions of developing, owning and operating a 30 million gallon biodiesel
manufacturing facility near Newton, Iowa. The Company commenced operations in April 2007.
USE OF ESTIMATES Management uses estimates and assumptions in preparing these financial
statements in accordance with generally accepted accounting principles of the United States of
America. 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.
Actual results could differ from those estimates.
REVENUE RECOGNITION Revenues are recognized when the customer has taken title and has assumed the
risks and rewards of ownership, prices are fixed or determinable, and collectibility is reasonably
assured.
FEDERAL INCENTIVE PAYMENTS AND RECEIVABLES Revenue from federal incentive programs is recorded
when the Company has sold blended biodiesel and satisfied the reporting requirements under the
applicable program. When it is uncertain that the Company will receive full allocation and
payment due under the federal incentive program, it derives an estimate of the incentive revenue
for the relevant period based on various factors including the most recently used payment factor
applied to the program. The estimate is subject to change as management becomes aware of increases
or decreases in the amount of funding available under the incentive programs or other factors that
affect funding or allocation of funds under such programs.
CASH AND EQUIVALENTS The Company considers all highly liquid debt instruments with a maturity of
three months or less to be cash and equivalents.
The Company maintains its accounts primarily at two financial institutions. At times throughout
the year, the Companys cash and equivalents balances may exceed amounts insured by the Federal
Deposit Insurance Corporation.
ACCOUNTS RECEIVABLE Accounts receivable are presented at face value, net of the allowance for
doubtful accounts. The allowance for doubtful accounts is established through provisions charged
against income and is maintained at a level believed adequate by management to absorb estimated bad
debts based on historical experience and current economic conditions.
During the quarter ended December 31, 2008 a customer defaulted on a fixed price contract for the
delivery of 500,000 gallons of biodiesel. In accordance with the terms of the contract the penalty
for not accepting delivery of the product is computed based on the difference between the contract
price and the market value of the product on the date of the default. The Company is currently
going through arbitration in accordance with the terms of the contract to collect the $1,021,916
shortfall. While the Company believes that the amount is due under the terms of the contract, due
to the uncertainty surrounding the outcome of the arbitration proceeding and the financial
viability of the customer the entire balance has been reserved. Sales for the year ended September
30, 2009 have been reported net of this allowance.
The Companys policy is to charge simple interest on trade receivables past due balances. Accrual
of interest is discontinued when management believes collection is doubtful. Receivables are
considered past due based upon payment terms set forth at the date of the related sale. The Company
has no receivables accruing interest at September 30, 2009.
INVENTORIES Inventories are valued at the lower of cost or market using the first-in, first-out
(FIFO) method.
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CENTRAL IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
September 30, 2009 and 2008
NOTES TO FINANCIAL STATEMENTS
September 30, 2009 and 2008
DERIVATIVE INSTRUMENTS The Company accounts for derivative instruments and hedging activities
in accordance with Accounting Standards Codification (ASC) Topic No. 815, Derivatives and Hedging.
ASC 815 requires a company to evaluate its contracts to determine whether the contracts are
derivatives. Certain contracts that literally meet the definition of a derivative may be exempted
from ASC 815 as normal purchases or normal sales. Normal purchases and normal sales are contracts
that provide for the purchases 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 of ASC
815.
The Company enters into option contracts in order to reduce the risk caused by market fluctuations
of soybean oil, heating oil and natural gas. These contracts are used to fix the purchase price of
the Companys anticipated requirements of soybean oil and natural gas in production activities and
to manage exposure to changes in biodiesel prices. The fair value of these contracts is based on
quoted prices in active exchange-traded or over-the-counter markets. The fair value of the
derivatives is continually subject to change due to the changing market conditions. Although the
Company believes its derivative positions are economic hedges, none have been designated as a hedge
for accounting purposes and derivative positions are recorded on the balance sheet at their fair
market value, with changes in fair value recognized in current period earnings in cost of goods
sold. The unrealized gain related to derivative contracts is recorded as a separate asset on the
balance sheets.
The following amounts have been included in cost of goods sold for the year ended September 30,
2009 and 2008:
Year Ended | Year Ended | |||||||
September 30, | September 30, | |||||||
2009 | 2008 | |||||||
Realized gain/(loss) |
$ | 1,241,595 | $ | (2,907,871 | ) | |||
Change in unrealized gain/(loss) |
(70,556 | ) | 790,038 | |||||
Net gain (loss) |
$ | 1,171,039 | $ | (2,117,833 | ) | |||
PROPERTY AND EQUIPMENT Property and equipment is carried at cost. Depreciation and amortization
are provided over estimated useful lives by use of the straight line method. Maintenance and
repairs are expensed as incurred; major improvements and betterments are capitalized. The Company
initiated operations on April 3, 2007 and began depreciating the portion of the plant in service at
that time.
Depreciation is computed using the straight-line method over the following estimated useful lives:
Land improvements |
15-20 years | |||
Office building |
10-20 years | |||
Office equipment |
5 years | |||
Plant and process equipment |
10-20 years |
The Company reviews its property and equipment for impairment whenever events indicate that the
carrying amount of the asset may not be recoverable. An impairment loss is recorded when the sum of
the future cash flows is less than the carrying amount of the asset. The amount of the loss is
determined by comparing the fair market values of the asset to the carrying amount of the asset. No
loss has been recorded during the years ended September 30, 2009 or 2008.
RESTRICTED CASH Restricted cash consists of a certificate of deposit totaling approximately
$400,000 and an escrow account totaling approximately $60,188 at September 30, 2009. These funds
have been restricted for purposes in accordance with the terms of a loan agreement with a third
party lender. As of September 30, 2009 and 2008 there are no other bank or legal restrictions
regarding cash.
FINANCING COSTS Financing costs and loan origination fees are stated at cost and are amortized
using the effective interest method over the life of the loan agreements. Amortization commenced as
the Company borrowed funds on the loans. Amortization for the years ended September 30, 2009 and
2008 was $156,574 and $76,709, respectively.
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CENTRAL IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
September 30, 2009 and 2008
NOTES TO FINANCIAL STATEMENTS
September 30, 2009 and 2008
FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value of financial instruments is
determined by reference to various market data and other valuation techniques as appropriate. The
carrying value of cash and equivalents, due from broker, receivables and accounts payable
approximates the fair value because of the short maturity of these financial instruments. The
carrying value of the debt also approximates fair value as the interest rate reprices when market
interest rates change. The fair value of the derivate instruments is based on quoted prices in
active exchange-traded or over-the-counter markets.
The Company follows the guidance set forth in the FASB Codification Topic 820 for assets and
liabilities recognized at fair value on a recurring basis. Topic 820 establishes a framework for
measuring fair value and requires enhanced disclosures about assets and liabilities carried at fair
value.
As defined in Topic 820, fair value is the price that would be received to sell and asset or paid
to transfer a liability in the principal or most advantageous market for the asset or liability in
an orderly transaction between market participants at the measurement date. Topic 820 establishes a
fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad
levels as follows:
Level 1 Quoted prices are available in active markets for identical assets or liabilities as of
the reported date. The types of assets and liabilities included in Level 1 are highly liquid and
actively traded instruments with quoted prices, such as commodity derivative contracts listed on
the Chicago Board of Trade.
Level 2 Pricing inputs are other than quoted prices in active markets, but are either directly or
indirectly observable as of the reported date. The types of assets and liabilities included in
Level 2 are typically either comparable to actively traded securities or contracts, or priced with
models using highly observable inputs.
Level 3 Significant inputs to pricing have little or no observability as of the reporting date.
The types of assets and liabilities included in Level 3 are those with inputs requiring significant
management judgment or estimation, such as the complex and subjective models and forecasts used to
determine the fair value of financial transmission rights.
As of September 30, 2009, the Company did not have any assets or liabilities which would require
disclosure.
DEFERRED GRANT FINANCING Pursuant to a private redevelopment agreement dated November 21, 2006,
Jasper County agreed to construct sewer improvements for the Companys biodiesel project site. The
agreement authorizes the County to finance these improvements through the issuance of bonds or
notes. In return for these improvements, the Company was required to construct a thirty million
gallon per year biodiesel plant requiring a total investment of at least $38,000,000 and to create
at least twenty new full-time jobs at our plant and maintain such jobs until June 30, 2015. Also,
the Company was required to enter into an assessment agreement with Jasper County to establish a
minimum actual value of our property and related improvements for the purposes of the calculation
and assessment of our real property taxes. In the event of default the Company would be required
to pay the County for the improvements. For financial statement purposes the costs of the
improvements have been capitalized in land improvements and the obligation will be shown as a
long-term liability until the obligation is reduced or expires.
INCOME TAXES The Company is organized as a limited liability company under state law and is
treated as a partnership for income tax purposes. Under this type of organization, the Companys
earnings pass through to the partners and are taxed at the partner level. Accordingly, no income
tax provision has been calculated. Differences between 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 and accelerated
depreciation for tax purposes as compared to straight line depreciation for financial statement
purposes.
RECENTLY ADOPTED ACCOUNTING STANDARDS The content included in ASC Topic 825, related to Interim
Disclosures about Fair Value of Financial Instruments became effective for interim reporting
periods ending after June 15, 2009 and it did not have a material impact on the Companys financial
position or results of operations. ASC Topic 825, Interim Disclosures about Fair Value of
Financial Instruments require disclosures about fair value of financial instruments in interim and
annual financial statements.
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CENTRAL IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
September 30, 2009 and 2008
NOTES TO FINANCIAL STATEMENTS
September 30, 2009 and 2008
Effective with the quarter ended June 30, 2009, the Company adopted ASC Topic 855, Subsequent
Events and it did not have a material impact on its financial position or results of operations.
ASC 855 establishes general standards of accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles a replacement of SFAS No. 162 (SFAS 168),
which became effective for financial statements issued for interim and annual periods ending after
September 15, 2009. Under SFAS 168, the FASB Accounting Standards Codification (Codification)
became the primary source of authoritative U.S. GAAP recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. As of the effective
date, the Codification superseded all existing non-SEC accounting and reporting standards. All
other non-grandfathered non-SEC accounting literature not included in the Codification became
non-authoritative. In the FASBs view, the issuance of SFAS 168 and the Codification will not
change GAAP, except for those nonpublic nongovernmental entities that must now apply the American
Institute of Certified Public Accountants Technical Inquiry Service Section 5100, Revenue
Recognition, paragraphs 38-76. The adoption of SFAS 168 does not have a material impact on our
financial position or results of operations.
NOTE 2: INVENTORIES
Inventories consist of the following as of September 30, 2009 and 2008:
2009 | 2008 | |||||||
Raw materials |
$ | 162,086 | $ | 1,895,423 | ||||
Work in process |
| 140,398 | ||||||
Finished goods |
64,785 | 5,740,651 | ||||||
Total |
$ | 226,871 | $ | 7,776,472 | ||||
NOTE 3: MEMBERS EQUITY
The Company was formed on March 31, 2005 to have a perpetual life. The Company has one class of
membership unit with each unit representing a pro rata ownership interest in the Companys capital,
profit, losses and distributions.
NOTE 4: RELATED PARTY TRANSACTIONS
In August 2006, the Company entered into a management and operational services agreement with REG
for the overall management of the Company. The entity provides a general manager, an operations
manager, acquires feed stocks and the basic chemicals necessary for operations and performs
administrative, sales and marketing functions. The Company pays a per gallon fee based on the
number of gallons of biodiesel produced. In addition, the agreement provides for the payment of a
yearly bonus based upon the Companys net income. Total fees expensed under the agreement for the
year ended September 30, 2009 and 2008 were approximately $59,000 and $1,129,715, respectively.
The agreement will renew annually unless terminated by either party upon one years prior written
notice. On April 7, 2009 the Company received a written notice of termination from REG due to
changes in the biodiesel market since the original agreements were signed. Therefore the current
agreement will expire on May 1, 2010. REG has proposed that the parties review and cooperate to
negotiate a new contract mutually beneficial to the Company and REG; however, there is no guarantee
that a new contract will be entered into between the parties.
In November 2008, the Company entered into a Toll Processing Agreement with REG for the delivery of
corn oil to the Company for pre-treatment processing. REG agrees to pay the Company a fixed
processing fee per pound of corn oil delivered minus the amount from the sale of materials obtained
from the pre-treatment processing.
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CENTRAL IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
September 30, 2009 and 2008
NOTES TO FINANCIAL STATEMENTS
September 30, 2009 and 2008
In January 2009, the Company entered into an additional Toll Processing Agreement with REG for the
delivery of various feedstocks to the Company for processing into biodiesel meeting certain
specifications. REG agrees to pay a fixed fee per gallon produced from said feedstocks. The
Company will retain all co-products produced as a result of the processing at no additional cost.
The term of the agreement continues from January 2009 until March 30, 2010 and shall continue
thereafter on a month to month basis unless terminated in writing by either party at least one
month in advance of the termination date. The Company also entered into an addendum to the
agreement which provides for the processing of certain other feedstocks into biodiesel. The
Company shall pay to REG a by-product payment for the co-products produced and sold from the
processing of this additional feedstock. All other terms of the agreement are unchanged.
On November 20, 2009, the Company entered into a Second Amended and Restated Asset Purchase
Agreement which supersedes the original Asset Purchase Agreement the Company entered into on May 8,
2009 and the first Amended and Restated Asset Purchase Agreement entered into on August 7, 2009,
and pursuant to which the Company anticipates consolidating its business and operations with REG
under REG Newco, Inc. (Newco), a Delaware corporation. The proposed consolidation will occur
through the acquisition by REG Newton, LLC, a wholly-owned subsidiary of Newco, of substantially
all of the Companys assets and certain liabilities (the Transaction). The Transaction also
provides for REGs merger with and into a wholly-owned subsidiary of Newco, with REG being the
surviving entity (the REG Merger). Additionally, two other potential transactions involving REG
and Newco are contemplated in the Second Amended and Restated Asset Purchase Agreement: (i) the
acquisition by REG Wall Lake, LLC, a wholly-owned subsidiary of Newco, of substantially all of the
assets of, and the assumption of certain liabilities of, Western Iowa Energy, LLC, an Iowa limited
liability company (WIE), and (ii) the merger of REG Danville, LLC, a wholly-owned subsidiary of
Newco, with and into Blackhawk Biofuels, LLC, a Delaware limited liability company (Blackhawk)
with Blackhawk being the surviving entity (together with the REG Merger, the Common Plan
Transactions). The closing of the REG Merger is a condition to the closing of the Transaction;
however, the closings of the other Common Plan Transactions are not conditions to the closing of
the Transaction. Accordingly, it is possible that REG may be consolidated under Newco with the
business and operations of any one or more of CIE, WIE and Blackhawk.
The Second Amended and Restated Asset Purchase Agreement provides that at the closing of and in
consideration of the Transaction, the Company will receive an aggregate of 4,414,345 shares of
Common Stock of Newco and 164,197 shares of Preferred Stock of Newco (subject to adjustment for
fractional shares). Upon closing of the Transaction and the Common Plan Transactions, the Company
will hold in the aggregate approximately 1.20% of the total issued and outstanding shares of Newco
Preferred Stock and approximately 11.89% of the issued and outstanding shares of Newco Common
Stock. The Company expects to distribute two percent of these Newco shares to its financial advisor
for certain financial advisory services rendered in connection with the Transaction and the Company
may also be required to liquidate or hold back additional Newco shares to satisfy any creditors of
the Company that remain following the close of the Transaction. It is expected that the balance of
the Companys Newco shares will be distributed to the Companys unit holders in proportion to their
respective positive capital account balances in connection with the Companys anticipated
dissolution, liquidation and winding up following the close of the Transaction. The closing of the
Transaction is conditioned upon the receipt of certain regulatory approvals, including without
limitation the SECs approval of Registration Statement on Form S-4 registering the shares of Newco
stock issuable in consideration of the Transaction and describing the terms of the proposed
consolidations; the approval of the unit holders of the Company of the Transaction; and the
approval of the shareholders of REG of the Transaction, among other things. If the Transaction is
duly approved by the Companys unit holders, the Company intends to seek unit holder approval of
the Companys dissolution, liquidation and winding up (if not otherwise obtained in connection with
approval of the Transaction) and to thereafter liquidate, windup, dissolve and terminate its
existence as soon as practicable following closing of the Transaction. Until the Company is
dissolved and its existence is terminated after closing of the Transaction, Newco has agreed to pay
certain mutually agreeable ongoing costs related to the Company for a period up to six months
following closing of the Transaction.
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CENTRAL IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
September 30, 2009 and 2008
NOTES TO FINANCIAL STATEMENTS
September 30, 2009 and 2008
NOTE 5: REVOLVING LINE OF CREDIT
The Company had a $2,000,000 revolving line of credit commitment with F & M Bank Iowa. Advances
under the agreement are limited based upon inventories and accounts receivable. The Company was
required to make quarterly interest payments at a variable rate equal to the LIBOR rate plus 3.25%.
The note was secured by substantially all assets of the Company. In October 2007, the Company
entered into an amended and restated master loan agreement, an amended third supplement to the
amended and restated master loan agreement and an amended and restated revolving line of credit
note with F&M Bank Iowa. Under these agreements, the revolving line of credit was increased to
$4,500,000 for working capital purposes related to the operation of the plant. The Company
continued to make quarterly interest payments at a variable rate equal to the LIBOR rate plus 3.25%
and continued to pay an unused commitment fee on the average daily unused portion of the line of
credit at a rate of 0.35% per annum, payable in quarterly installments. In April 2008, the Company
received a notice from the lender that the interest rate increased by 2% due to its default under
the loan agreement (See Note 9). In October 2008, the Company entered into a first and second
amendment to the amended and restated master loan agreement. Under these agreements, the revolving
line of credit was decreased to $2,000,000, the interest rate was amended to be equal to 4% above
the LIBOR rate and at no time less than 6%, interest must be paid monthly, the outstanding
principal balance and all accrued interest is payable in full in October 2009, the note is secured
by an amended and restated mortgage, and the tangible net worth covenant was amended. The Company
continues to pay an unused commitment fee on the average daily unused portion at the new rate of
0.50% per annum, payable in quarterly installments. (See Note 6 for covenants) As of September 30,
2009, approximately $550,000 was outstanding under the revolving line of credit.
NOTE 6: LONG-TERM DEBT
Long-term obligations of the Company are summarized as follows at September 30, 2009 and 2008:
2009 | 2008 | |||||||
Mortgage Term Note payable to F & M Bank Iowa See details below |
$ | 18,616,732 | $ | 19,361,401 | ||||
Iowa Department of Economic Development See details below |
315,000 | 370,000 | ||||||
Term Revolving Note payable to F & M Bank Iowa See details below |
5,000,000 | 5,000,000 | ||||||
Equipment capital lease, due in monthly installments of $3,345
through August 2010 with a final option payment of $11,500 for the
purchase of the equipment. |
45,740 | 80,455 | ||||||
$ | 23,977,472 | $ | 24,811,856 | |||||
Due to the going concern issues addressed in Note 9, the debt has been classified as current.
The estimated maturities of long-term debt at September 30, 2009 are as follows:
2010 |
$ | 2,339,748 | ||
2011 |
2,294,008 | |||
2012 |
19,208,716 | |||
2013 |
35,000 | |||
2014 |
| |||
Thereafter |
100,000 | |||
Total long-term debt |
$ | 23,977,472 | ||
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CENTRAL IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
September 30, 2009 and 2008
NOTES TO FINANCIAL STATEMENTS
September 30, 2009 and 2008
F&M Mortgage and Revolving Term Loan
The term loan requires monthly fixed principal of $186,167 plus interest commencing June 1, 2007,
with a final payment due no later than June 1, 2012. The agreement also includes a provision for
additional payments based on the excess cash flows of the Company as defined in the agreement.
Advances under the revolving term loan are available until the expiration of the commitment on June
1, 2012, at which time any outstanding balance shall be due and payable in full. The note requires
monthly interest payments based on unpaid principal. The Company has advanced $5,000,000 on the
revolving line of credit agreement as of September 30, 2009.
The agreements provide for several different interest rate options including variable and fixed
options (5.53% variable on the term note and revolving line of credit note, as of September 30,
2009). The variable interest rate options are based on LIBOR rate and include adjustments for
performance which is based on the Companys tangible owners equity, measured quarterly. The notes
are secured by essentially all of the Companys assets. In April 2008, the Company received a
notice from the lender that the interest rate would be increased by 2% due to its default under the
loan agreement (See Note 9).
The bank note agreements for F&M Bank Iowa contains restrictive covenants which, among other
things, require the Company to maintain minimum working levels of working capital, tangible owners
equity and tangible net worth, as well as financial ratios, including a fixed charge coverage
ratio. As of September 30, 2009, the Company was in violation of the working capital, tangible net
worth, owner equity ratio and fixed charge ratio covenants.
Iowa Department of Economic Development
In July 2006, the Company entered into a financial assistance contract with the Iowa Department of
Economic Development whereby the Company has been awarded a $100,000 forgivable loan and a $300,000
non-interest bearing loan. The Company is obligated to create 28 full-time equivalent jobs, with
14 of the created jobs having starting wages, including benefits, that meet or exceed $20.64 per
hour. The note is due in monthly installments of $5,000 which began in May 2008. In September
2009, the Company received a notice of default related to the contractual obligations. The Company
only created 12 of the 14 jobs required and so pursuant to the terms of the loan agreement, the
Company will be subject to certain repayment provisions. A total of $14,000 of the $100,000
forgivable loan will be repaid along with approximately $3,300 of interest penalty. These amounts
will be combined with the $220,000 balance of the non-interest bearing loan as of September 30,
2009 and will be repaid over the remaining loan term.
NOTE 7: RETIREMENT PLAN
The Company has a 401(k) plan covering substantially all employees who meet specified age and
service requirements. Under this plan, the Company makes a matching contribution of up to 3% of
the participants eligible wages. The Company contributions for the year ended September 30, 2009
and 2008, was $14,464 and $22,875, respectively.
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CENTRAL IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
September 30, 2009 and 2008
NOTES TO FINANCIAL STATEMENTS
September 30, 2009 and 2008
NOTE 8: COMMITMENTS AND CONTINGENCIES
Utility Contracts
In July 2006, the Company executed an agreement with an unrelated party to provide the electrical
energy required by the Company for a period commencing on July 1, 2006 through July 1, 2007 and
shall continue until terminated by either party providing a 90 day advance written notice.
In November 2006, the Company executed an agreement with an unrelated party to provide the nitrogen
required by the Company for a period commencing on the date of first delivery of the product and
continuing for a period of five years and will continue thereafter until either party terminates
the agreement by providing a minimum 12 month advance written notice of intent of termination. The
Company pays a monthly service charge of $750 plus $.405 per 100 cubic feet of nitrogen used, with
adjustments permitted under conditions outlined in the agreement.
In August 2007, the Company executed an agreement with an unrelated party to provide transportation
of natural gas required by the Company for a period commencing on the date of first delivery of the
product and will continue year to year thereafter until either party terminates the agreement. The
Company pays a monthly service charge of $150 plus $.04 per 100 cubic feet of gas delivered, with
adjustments permitted under conditions outlined in the agreement.
Contingencies
On March 12, 2009 the European Commission applied temporary tariffs on imports of biodiesel from
the United States, while it continues to investigate the evidence of unfair subsidies and dumping
of United States biodiesel imports into the European Union. These tariffs went into effect March
13, 2009. In July 2009, the European Commission decided to extend these tariffs beyond their
initial July 2009 expiration date until 2014. At such time, the European Commission may determine
to impose definitive tariffs, which could last for five years. The Company will likely face
increased competition for sales of its biodiesel and international demand for its product will
likely decrease as a result of these tariffs.
If any governmental supports are modified or removed the Companys profitability will be reduced.
Because biodiesel has historically been more expensive to produce than diesel fuel, the biodiesel
industry has depended on governmental incentives that have effectively brought the price of
biodiesel more in line with the price of diesel fuel to the end user. These incentives have
supported a market for biodiesel that might not exist without the incentives. The most significant
of these incentives for biodiesel is the blenders tax credit which provides a $1.00 tax credit per
gallon of pure biodiesel, or B100, to the first blender of biodiesel with petroleum based diesel
fuel. The blenders tax credit will expire on December 31, 2009 subject to any action Congress may
take in 2010. The elimination or reduction of tax incentives to the biodiesel industry could likely
result in the Companys inability to produce and sell biodiesel profitably.
NOTE 9: GOING CONCERN
The accompanying financial statements have been prepared assuming that the Company will continue as
a going concern. From inception to September 30, 2009, the Company has generated net losses of
$14,329,492 and experienced significant fluctuations in the costs of the basic product inputs and
sales prices. In an effort to increase profit margins and reduce losses, the Company increased its
production of animal fat-based biodiesel and decreased its production of soybean oil-based
biodiesel, as animal fats are currently less costly than soybean oil. The Company also utilized
corn oil as an alternative to soybean oil as much as possible. Furthermore, the Company may scale
back the rate at which it produces biodiesel. The Company has also entered into a toll processing
agreement with a related party under which the related party may order the Company the production
of biodiesel from feedstock supplied by the related party. Under the toll processing agreement,
the Company does not pay for the cost of feedstock but does pay for the other costs associated with
biodiesel production. There is no minimum amount of tolling orders guaranteed under the toll
processing agreement. The expiration of the blenders tax credit on December 31, 2009, subject to
any action that Congress may take in 2010, may materially impair the Companys ability to
profitably produce and sell biodiesel.
The Company has also undertaken significant borrowings to finance the construction of its biodiesel
plant. The loan agreements with the Companys lender contain restrictive covenants, which require
the Company to maintain minimum levels of working capital, tangible owners equity, and tangible
net worth, as well as a fixed charge coverage financial ratio. During the period covered by this
report, the Company failed to comply with all of the restrictive covenants referenced above. The
Company has also failed to make the payments of principal required under its loan agreements with
F&M Bank since January 2009. The failure to comply with the loan covenants and the failure to make
required principal payments constitute events of default under the Companys loan agreements.
These defaults, along with the anticipated expiration of the blenders tax credit on December 31,
2009, raise doubts about whether the Company will continue as a going concern.
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CENTRAL IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
September 30, 2009 and 2008
NOTES TO FINANCIAL STATEMENTS
September 30, 2009 and 2008
On April 3, 2008, the Company was officially notified by the lender that they were in default under
the loan agreement, and on April 24, 2008 the Company received written notice from the lender that
the interest rate on all of the Companys credit facilities with the lender would be increased by
2% effective June 1, 2008 (the Rate Notice). The Rate Notice provides that the lender has agreed
to temporarily forebear from exercising some of its rights and remedies under the loan agreements
pending additional information and performance by the Company. However, in the future it is
possible that the lender may elect to exercise one or more of the other remedies provided under the
loan agreements and by applicable law, including, without limitation, acceleration of the due date
of the unpaid principal balance outstanding on the Companys real and personal property. The
Companys ability to continue as a going concern is dependent on the Companys ability to comply
with the loan covenants and the lenders willingness to waive any non-compliance with such
covenants. In October 2008, the Companys lender decreased the line of credit to $2 million.
On November 20, 2009, the Company entered into a Second Amended and Restated Asset Purchase
Agreement with a related party as discussed in Note 4. The related party would acquire
substantially all of the Companys assets, assume certain liabilities and therefore operate the
Companys biodiesel production facilities. The closing of the Second Amended and Restated Asset
Purchase Agreement is conditioned upon certain events and if successful, the Company intends to
liquidate, windup and dissolve and terminate its existence as soon as practicable following the
Companys receipt of the requisite unit holder approval for the same and closing of the asset
purchase transaction. Until the Company is dissolved and its existence is terminated after closing,
the acquiring company has agreed to pay certain mutually agreeable ongoing costs related to the
Company. Although closing is anticipated to occur in early 2010, there can be no assurances that
the transaction contemplated by the Second Amended and Restated Asset Purchase Agreement will ever
close.
In the event that the Second Amended and Restated Asset Purchase Agreement fails to close, the
Board of Directors may consider pursuing any one or more of the following courses of action;
| Raising equity through one or more private placement offerings or state registered offering of the Companys membership units; |
|
| Seeking additional sources of short-term debt financing and credit facilities; |
|
| Refinancing the current debt financing and credit facilities; or |
|
| Seeking strategic business opportunities, including with other biodiesel plants; |
There can be no assurances that if they pursue any of the foregoing courses of action that they
will be successful. They may consider pursuing other options in addition to those identified
above.
Additionally, in October 2008, they obtained approval of a pre-application for a United States
Department of Agriculture (USDA) loan guarantee. A USDA loan guarantee may make them a better
candidate to receive additional debt financing or to refinance their current long-term financing
with their current lender.
NOTE 10: SUBSEQUENT EVENTS
The Company has performed an evaluation of subsequent events through December 28, 2009, which is
the date the financial statements were issued.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A(T). CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
Our management, including our chief executive officer, John E. Van Zee, along with our chief
financial officer, Kimberly Smith, have reviewed and evaluated the effectiveness of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities
Exchange Act of 1934, as of September 30, 2009. Based on a review and evaluation, these officers
believe that our disclosure controls and procedures are effective in ensuring that material
information related to us is recorded, processed, summarized and reported within the time periods
required by the forms and rules of the Securities and Exchange Commission.
Managements Report on Internal Control over Financial Reporting
Our management, including our chief executive officer and our chief financial officer, is
responsible for establishing and maintaining adequate internal control over financial reporting for
the Company. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f)
promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the
supervision of, the Companys principal executive and principal financial officers, or persons
performing similar functions, and effected by the Companys board of directors, management and
other personnel, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with Generally
Accepted Accounting Principles and includes those policies and procedures that:
| Pertain to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets of the Company; |
| Provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with Generally Accepted Accounting
Principles, and that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company; and |
| Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Companys assets that could have a
material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because changes in conditions may occur or
the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of
September 30, 2009. In making this assessment, the Companys management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. Based on this assessment, our management concluded that, as of
September 30, 2009, our internal controls over financial reporting was effective based on such
criteria. This annual report does not include an attestation report of the Companys registered
public accounting firm regarding internal control over financial reporting. Managements report
was not subject to attestation by the Companys registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit the Company to provide only
managements report in this annual report.
This report shall not be deemed to be filed for purposes of Section 18 of the Securities
Exchange Act of 1934, or otherwise subject to the liabilities of that section, and is not
incorporated by reference into any filing of the Company, whether made before or after the date
hereof, regardless of any general incorporation language in such filing.
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Changes in Internal Control Over Financial Reporting
Our management, including our chief executive officer and our chief financial officer, has
reviewed and evaluated any changes in our internal control over financial reporting that occurred
during the fourth fiscal quarter of the fiscal year ended September 30, 2009 and there has been no
change that has materially affected or is reasonably likely to materially affect our internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.
Identification of Directors, Executive Officers and Significant Employees
The following table shows the directors, officers and significant employees of Central Iowa
Energy:
Name | Current Position with the Company | |
John E. Van Zee
|
Director, President and Chief Executive Officer | |
Kimberly Smith
|
Chief Financial Officer | |
James Johnston
|
Director and Chairman | |
William J. Horan
|
Director and Vice Chairman | |
Don Huyser
|
Director and Treasurer | |
Jeremie Parr
|
Director and Secretary | |
Craig Hamilton
|
Director | |
Scot Farver
|
Director | |
Warren L. Bush
|
Director | |
Dean Lane
|
Director | |
Denny Mauser
|
Director | |
William J. Talsma
|
Director | |
Derek Winkel
|
General Manager |
The following is a brief description of the name, age, business experience and background
of our directors, officers and significant employees.
Executive Officers and Directors
John
E. Van Zee, Director, President and Chief Executive Officer Age 57. Since February
2007, John has served as chief financial officer of the Central Iowa Water Association. From 1985
to 2006, John worked for U.S. Bank as the vice president of the banks agricultural loan department
where he supervised three employees who handled agricultural loans, farm management, and real
estate sales. He also served on the board of directors for the Central Iowa Water Association and
has for the past nine years. John has served as a Director of Central Iowa Energy since June 30,
2005. He will continue to serve as director until our 2010 annual meeting of members and until his
successor is elected and qualified, or until his earlier death, resignation, removal or
disqualification. He has served as President and Chief Executive Officer of Central Iowa Energy
since March 21, 2007. Mr. Van Zee will continue to serve as President and Chief Executive Office
until he is replaced by our board of directors.
Executive Officers
Kimberly
Smith, Chief Financial Officer Age 45. Kimberly Smith has served as the Chief
Financial Officer of Central Iowa Energy since February 21, 2007. From August 2005 to February
2007, Kimberly was employed at ITWC, Inc. as an accounting assistant where she was responsible for
maintaining inventory activity, verifying order fulfillment and issuance of customer invoices, and
compiling employee payroll time entries. From September 2003 to July 2005, Kimberly was employed
at Starr Dentistry, Inc. as a finance manager. As a finance manager, she performed all accounting
functions for the company and was responsible for daily deposit and bank reconciliation, accounts
payable, accounts receivable, and payroll analysis. From 1999 to 2006, Kimberly provided
consulting and bookkeeping services for a variety of local small businesses in Bruceville, TX and
Newton, IA through her own business, Kimberly L. Smith Accounting Services. She is a graduate of
Upper Iowa University. Ms. Smith will continue to serve as Chief Financial Officer until she is
replaced by our board of directors.
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Directors
James
Johnston, Director and Chairman of the Board Age 65. James Johnston owns and operates
a livestock and grain farm and has done so for over thirty years. Jim serves on the board of
directors for Bohemian Mutual Insurance Company and has since 1989. In addition, he serves on the
Jasper County Soil & Conservation Board, having served on that board for nearly twenty years, and
is currently serving as chairman, a position which he has held since 1994. He also serves on the
Heartland Resource Conservation and Development Board and has since 1984; he served as president of
the Heartland Resources Conservation and Development Board from 2003 to 2005. Jim has served as a
Director of Central Iowa Energy since June 30, 2005. He will continue to serve as director until
our 2012 annual meeting of members and until his successor is elected and qualified, or until his
earlier death, resignation, removal or disqualification. He has also served as Chairman of the
Board of Central Iowa Energy since June 30, 2005. Mr. Johnston will continue to serve as Chairman
until he is replaced by our board of directors.
William
J. Horan, Director and Vice Chairman of the Board Age 62. William J. Horan has been
a farmer for the past thirty-five years. He is also currently a partner in Horan Brothers
Agricultural Enterprises in Rockwell City, Iowa. William is the past president of the Iowa Corn
Growers Association and sits on the board of directors of Natural Resource Solutions, LLC; Truth
About Trade; ISU Research Park Board of Directors; the USDA DOE Technical Advisory Committee; and
The Biodiesel Group, LLC. He also sits on the board of three public reporting companies, which
include Western Iowa Energy, LLC, which he joined in November 2004; Western Dubuque Biodiesel, LLC,
which he joined in November 2005; and Iowa Renewable Energy, LLC, which he joined in April 2005.
William has served as a Director of Central Iowa Energy since June 30, 2005. He will continue to
serve as director until our 2011 annual meeting of members and until his successor is elected and
qualified, or until his earlier death, resignation, removal or disqualification. He has served as
Vice Chairman of the Central Iowa Energy since April 9, 2008. Mr. Horan will continue to serve as
Vice Chairman until he is replaced by our board of directors.
Don
Huyser, Director and Treasurer Age 50. Don Huyser owns and operates Huyser Ag, Inc. and
has since 1982. Don also serves as vice president of Killduff Feed & Grain, a position which he
has had since January 2005. As vice president of Killduff Feed & Grain, Don oversees general
business operations and company financing. Don has served as a Director of Central Iowa Energy
since June 30, 2005. He will continue to serve as director until our 2012 annual meeting of members
and until his successor is elected and qualified, or until his earlier death, resignation, removal
or disqualification. He has served as Treasurer of the Company since April 9, 2008. Mr. Huyser
will continue to serve as Treasurer until he is replaced by our board of directors.
Craig
Hamilton, Director Age 59. Craig Hamilton currently serves as the executive director
of the Jasper County Economic Development Corporation and has since July 2003. Prior to his
economic development work, Craig was employed by Iowa Telecom from September 1999 to June 2003 as
the director of community relations. From 1997 to 1999, Craig also served as vice president of the
Iowa Area Development Group. Craig has served as a Director of Central Iowa Energy since June 30,
2005. He will continue to serve as director until our 2012 annual meeting of members and until his
successor is elected and qualified, or until his earlier death, resignation, removal or
disqualification.
Jeremie
Parr, Director and Secretary Age 38. In June 2006, Jeremie joined Trisler Seeds as a
district sales manager. From July 2003 to June 2006, Mr. Parr worked for NC+ Hybrids and managed a
group of dealers that had annual sales in excess of $500,000. From September 1997 to July 2003, he
was employed by Golden Seed Company based in Cordova, Illinois. In 2003, prior to working for
Golden Seed, Jeremie was employed as a crop consultant for Prairieview Ag Service and was
responsible for the purchase, sales and application of agricultural products. Jeremie has served as
a Director of Central Iowa Energy since June 30, 2005. He will continue to serve as director until
our 2010 annual meeting of members and until his successor is elected and qualified, or until his
earlier death, resignation, removal or disqualification. He has served as Secretary of Central
Iowa Energy since June 30, 2005. Mr. Parr will continue to serve as Secretary until he is replaced
by our board of directors.
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Scot
Farver, Director Age 50. Scot Farver graduated from Iowa State University in 1984 with
a degree in Industrial Engineering. Scot operates Farver True Value, one of the largest True Value
stores in the State of Iowa. Scot has been operating Farver True Value since he opened it in 1993.
Scot has served as a Director of Central Iowa Energy since June 30, 2005. He will continue to
serve as director until our 2011 annual meeting of members and until his successor is elected and
qualified, or until his earlier death, resignation, removal or disqualification. Scot previously
served as Treasurer of Central Iowa Energy from June 30, 2005 to April 9, 2008.
Warren
L. Bush, Director Age 61. Warren L. Bush is an attorney licensed in both Iowa and
Arizona. Warren serves as a judicial magistrate for the State of Iowa and has for the past 20
years. Warren is also a self-employed attorney practicing out of offices in both Wall Lake and
Dunlap, Iowa. He began his law practice in Wall Lake in November 1974 and his law practice in
Dunlap in June 1996. Warren serves on the board of directors of The Biodiesel Group, LLC, which he
joined in April 2005. He also serves on the board of directors of three public reporting companies,
which include Western Iowa Energy, LLC, which he joined in November 2004; Western Dubuque
Biodiesel, LLC, which he joined in November 2005; and Iowa Renewable Energy, LLC, which he joined
in April 2005. He is also a principal owner of Bush Boys Enterprises, LLC, which he joined in
April 2004; Bush Boys, Inc., which he joined in May 2004; and Front Row Racing Stable, Ltd., which
he joined in September 2004. Warren has served as a Director of Central Iowa Energy since June 30,
2005. He will continue to serve as director until our 2011 annual meeting of members and until his
successor is elected and qualified, or until his earlier death, resignation, removal or
disqualification.
Dean
Lane, Director Age 56. Dean Lane is currently a farmer and has been farming for over 30
years. His current operation consists of 1,800 acres divided evenly between corn and soybeans. Dean
has served as a Director of Central Iowa Energy since June 30, 2005. He will continue to serve as
director until our 2012 annual meeting of members and until his successor is elected and qualified,
or until his earlier death, resignation, removal or disqualification.
Denny
Mauser, Director Age 61. Denny Mauser is a farmer with a 900-acre operation, including
corn, soybeans and popcorn and has farmed in Buena Vista County and Sac County, Iowa since 1973.
Denny also manages a cow-calf herd and has since 1982. Currently, Denny serves as president of the
Sac County Rural Electric Cooperative and has since July 2000. He is a member of the board of
directors of The Biodiesel Group, LLC, which he joined in April 2005. He is also member of the
board of directors of three public reporting companies, which include Western Iowa Energy, LLC,
which he joined in October 2004; Western Dubuque Biodiesel, LLC, which he joined in November 2005;
and Iowa Renewable Energy, LLC, which he joined in August 2005. Denny has served as a Director of
Central Iowa Energy since June 30, 2005. He will continue to serve as director until our 2010
annual meeting of members and until his successor is elected and qualified, or until his earlier
death, resignation, removal or disqualification.
William
J. Talsma, Director Age 52. William J. Talsma is a farmer and has been farming for
the past twenty-eight years. William is a partner in Talsma Brothers Partnership, a family farming
operation which he joined fifteen years ago. Since 2000, he has been a partner in a 7,500 sow
farrow-to-finish operation. In 2003, William also became a partner in 1-80 Farms, a family
partnership. William has served as a Director of Central Iowa Energy since June 30, 2005. He will
continue to serve as director until our 2010 annual meeting of members and until his successor is
elected and qualified, or until his earlier death, resignation, removal or disqualification.
Significant Employees
Derek
Winkel, General Manager Age 33. Derek Winkel has been employed by Renewable Energy
Group, Inc., our management and marketing firm and design-builder, as the general manager of
Central Iowa Energy since July 2006. Derek was previously employed by Broin Management, LLC as the
technical manager of Ethanol2000, LLP from April 2001 to June 2006. As technical manger, Derek was
responsible for overseeing the production and operations of a 30 million gallon per year dry-mill
ethanol facility. From February 1999 to April 2001, Derek was employed by National Starch and
Chemical Co. where he first began as a project engineer and was later promoted to department
supervisor. As department supervisor, Derek was responsible for managing a production department
with fourteen employees. He is a graduate of Iowa State University.
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Director Nomination Procedures for Members
There have not been any material changes to the procedures by which our unit holders may
nominate nominees to the Companys board of directors. Such procedures are described in our current
Amended and Restated Operating Agreement.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the Exchange Act),
requires our officers and Directors, and persons who own more than 10% of a registered class of our
equity securities to file reports of ownership and changes in ownership with the Securities and
Exchange Commission (the SEC). Officers, Directors and greater than 10% beneficial owners are
required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. To our
knowledge, and based solely on a review of the copies of such reports furnished to us and written
representations from our officers and Directors, all Section 16(a) filing requirements were
complied with during the fiscal year ended September 30, 2009.
Code of Ethics
The Company has adopted a code of ethics that applies to its principal executive officer and
principal financial officer. The Company will provide a copy of such code of ethics without charge
upon delivery of a request to Central Iowa Energy, LLC, Attn: Derek Winkel, General Manager, 3426
East 28th Street N., Newton, Iowa 50208.
Audit Committee
The board of directors has appointed Warren Bush, Jeremie Parr, and Dean Lane to the Companys
audit committee. The audit committee is exempt from the independence listing standards because our
securities are not listed on a national securities exchange or listed in an automated inter-dealer
quotation system of a national securities association or to issuers of such securities.
Nevertheless, all of the current members of our audit committee are independent within the
definition of independence provided by NASDAQ Rule 5605(a)(2). Rule 5605(c)(2), however, imposes
more stringent standards on audit committee members and provides that the audit committee must be
composed of at least three members who are independent under Rule 5605(a)(2), meets the criteria
for independence set forth in Rule 10A-3(b)(1) under the Securities Exchange Act of 1934, have not
participated in the preparation of the Companys financial statements at any time during the past
three years, and are able to read and understand fundamental financial statements. Additionally,
at least one member must have past employment experiences in finance or accounting, requisite
professional certification in accounting, or comparable experience or background. Our audit
committee is composed of three members, all of which are independent under Rule 5606(a)(2).
However, no member of our audit committee members has past employment experience in finance or
accounting as required by Rule 5606(c)(2). Therefore, our audit committee does not fully comply
with NASDAQ Rule 5606(c)(2) applicable to audit committee members.
The board of directors has determined that we do not currently have a financial expert serving
on our audit committee. We do not have a director that is a financial expert serving on our audit
committee because no member of our board of directors, other than John Van Zee, our current
President and Chief Executive Officer, has the requisite experience and education to qualify as a
financial expert as defined in Item 407 of Regulation S-K. The board of directors intends to
consider such qualifications in future nominations to our board of directors and appointments to
the audit committee. Due to the fact that none of the directors serving on our audit committee
qualifies as a financial expert, in February 2008 the audit committee engaged an advisor, Joy Lane,
to advise the audit committee on financial and audit issues on an ongoing as-needed basis. The
audit committee believes that Joy Lane would satisfy the requirements of a financial expert, as
provided in Item 407 of Regulation S-K.
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ITEM 11. EXECUTIVE COMPENSATION.
John Van Zee is currently serving as our President and Chief Executive Officer (CEO).
Kimberly Smith is currently acting as our Chief Financial Officer (CFO).
Summary Compensation Table
The following table sets forth all compensation paid or payable by the Company during the last
two fiscal years to our President and CEO, John Van Zee. As of September 30, 2009, none of our
officers had any options, warrants, or other similar rights to purchase securities of the Company.
Stock | Option | All Other | Total | |||||||||||||||||||||
Fiscal | Salary(1) | Awards | Awards | Compensation | Compensation | |||||||||||||||||||
Name and Position | Year | ($) | ($) | ($) | ($)(2) | ($) | ||||||||||||||||||
John Van Zee, President/CEO |
2009 | 600 | 0 | 0 | 3,178 | 3,778 | ||||||||||||||||||
2008 | 600 | 0 | 0 | 3,781 | 4,381 |
(1) | Pursuant to a compensation policy approved by the board of directors in April 2007 and
which remained in effect for the 2009 fiscal year, John Van Zee, in his capacity as
President and CEO of the Company, received compensation in the amount of $50 per month. |
|
(2) | Includes fees earned or paid in cash to John Van Zee in his capacity as director of the
Company at the rate of $250 per month. Also includes reimbursement at the standard IRS rate for
mileage incurred in connection with services rendered to the board of directors and the Company.
See Director Compensation below. |
Director Compensation
Our board of directors is compensated pursuant to a compensation policy approved by our board
of directors in April 2007 and which remained in effect through the fiscal year ended September 30,
2009. Pursuant to this policy, each director receives $250 per month for their services to the
board. In addition, directors are reimbursed for mileage at the standard IRS rate and for
reasonable expenses associated with their service to the Company and to the board. Each member of
the audit committee, executive committee and other committees that may be established by our board
of directors from time to time receives an additional $50 per month. The directors may also be
entitled to certain additional benefits if certain requirements are satisfied. Directors also
receive $100 per half-day and $200 per day for their attendance at pre-approved meetings, including
without limitations, certain trade association meetings at which they represent the Company. At
the end of each fiscal year, all directors are entitled to an additional benefit of $500 per
monthly board meeting attended during the periods in which the Company meets the Loan Covenant
Targets payable requirement, as defined in our financing agreement with our senior lender. At the
end of each fiscal year, all directors are also entitled to an additional benefit of $250 per
monthly board meeting attended during the periods in which the Company achieves a 25% return on
investment, as that term is defined in our financing agreement with our senior lender. Neither of
these thresholds were satisfied and, accordingly, none of our directors received these additional
benefits for the fiscal year ended September 30, 2009.
For the fiscal year ended September 30, 2009, the directors have received the following
compensation:
Fees Earned or | Additional | |||||||||||||||
Paid in Cash(1) | Compensation(2) | Total Compensation | ||||||||||||||
Director | Fiscal Year | ($) | ($) | ($) | ||||||||||||
Warren Bush |
2009 | 3,600 | 1,535 | 5,135 | ||||||||||||
Scot Farver |
2009 | 3,000 | 67 | 3,067 | ||||||||||||
Craig Hamilton |
2009 | 3,000 | 40 | 3,040 | ||||||||||||
William Horan |
2009 | 3,600 | 1,180 | 4,780 | ||||||||||||
Don Huyser |
2009 | 3,600 | 133 | 3,733 | ||||||||||||
James Johnston |
2009 | 5,300 | 5,124 | 10,424 | ||||||||||||
Dean Lane |
2009 | 3,600 | 133 | 3,733 | ||||||||||||
Denny Mauser |
2009 | 3,000 | 1,518 | 4,518 | ||||||||||||
Jeremie Parr |
2009 | 4,800 | 651 | 5,487 | ||||||||||||
William Talsma |
2009 | 3,000 | 67 | 3,067 | ||||||||||||
John Van Zee |
2009 | 3,000 | 178 | 3,178 |
(1) | Includes monthly compensation payable to directors at the rate of $250 per month and
monthly compensation payable to members of the audit committee, executive committee or
other committees established by the board of directors at a rate of $50 per month. Also
includes fees paid for attendance at meetings pre-approved by the board of directors. |
|
(2) | Includes reimbursement for mileage and other reasonable expenses incurred in connection
with services rendered to the Company and the board of directors. |
Compensation Committee Interlocks and Insider Participation
Our entire board currently acts as our compensation committee. John Van Zee, our President and
Chief Executive Officer, is an executive officer of the Company. The ownership interest of Warren Bush, Denny Mauser and William Horans in
The Biodiesel Group, LLC, an entity which received $450,000 in payments from REG for certain
development services rendered and expenses incurred in the development of our plant and other
biodiesel projects, may have given these directors an interest in certain transactions between the
Company and REG. Please see Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE Transactions with REG and Entities Affiliated with REG for a description of these
transactions.
Compensation Committee Report
The entire board currently acts as the Companys compensation committee. The compensation committee
has reviewed and discussed the compensation discussion and analysis
contained above with management. Based upon
this review and discussion, the compensation committee recommended
that the compensation discussion
and analysis be included in this annual report on Form 10-K.
Compensation Committee
Warren Bush
Scot Farver
Craig Hamilton
William Horan
Don Huyser
James Johnston
Dean Lane
Denny Mauser
Jeremie Parr
William Talsma
John Van Zee
Scot Farver
Craig Hamilton
William Horan
Don Huyser
James Johnston
Dean Lane
Denny Mauser
Jeremie Parr
William Talsma
John Van Zee
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED MEMBER MATTERS.
Security Ownership of Certain Beneficial Owners
No person or entity, including our officers and Directors, currently beneficially owns more
than 5% of our outstanding membership units.
Security Ownership of Management
As of December 1, 2009, the Companys directors and executive officers own membership units as
follows:
Amount and | ||||||||||||
Nature of | ||||||||||||
Name of | Beneficial | Percent of | ||||||||||
Title of Class | Beneficial Owner | Position | Owner(1) | Class(2) | ||||||||
Membership Units |
John E. Van Zee | President, Chief Executive | 230 | (3) | 0.86 | % | ||||||
Officer, and Director | ||||||||||||
Membership Units |
James Johnston | Chairman and Director | 340 | (4) | 1.27 | % | ||||||
Membership Units |
William J. Horan | Vice Chairman and Director | 320 | 1.20 | % | |||||||
Membership Units |
Jeremie Parr | Secretary and Director | 150 | 0.56 | % | |||||||
Membership Units |
Don Huyser | Treasurer and Director | 180 | (5) | 0.67 | % | ||||||
Membership Units |
Warren L. Bush | Director | 580 | (6) | 2.17 | % | ||||||
Membership Units |
Craig Hamilton | Director | 180 | 0.67 | % | |||||||
Membership Units |
Scot Farver | Director | 323 | (7) | 1.21 | % | ||||||
Membership Units |
Dean Lane | Director | 180 | (8) | 0.67 | % | ||||||
Membership Units |
Denny Mauser | Director | 320 | (9) | 1.20 | % | ||||||
Membership Units |
William J. Talsma | Director | 310 | (10) | 1.16 | % | ||||||
Membership Units |
Kimberly Smith | Chief Financial Officer | | | ||||||||
Totals: |
3,113 | 11.67 | % | |||||||||
(1) | Beneficial ownership is determined in accordance with SEC rules
and generally includes voting and investment power with respect
to the securities. |
|
(2) | Based on 26,672 units issued and outstanding. |
|
(3) | Includes units owned by Kathy Van Zee, John Van Zees wife. |
|
(4) | Includes units owned by Linda L. Johnston, James Johnstons wife, and units owned by
Rustic Ridge Subdivision, LLC, of which James Johnston is a principal. |
|
(5) | Includes units owned jointly with Sherry Huyser, Don Huysers wife. |
|
(6) | Includes units held by Bush Boys Enterprises, LLC, of which Warren Bush is a principal. |
|
(7) | Includes units owned by Francine C. Farver, Scot Farvers wife. |
|
(8) | Includes units owned jointly with Joy Candie Lane, Dean Lanes wife. |
|
(9) | Includes units jointly owned with LaRae Mauser, Denny Mausers wife, and units owned
by Eden Hayes Farms, of which Denny Mauser is a principal. |
|
(10) | Includes units owned by GeorgAnne Talsma, Bill Talsmas wife, and units owned by
Talsma Brothers Partnership, of which Bill Talsma is a principal. |
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
Transactions with REG and Entities Affiliated with REG
The Biodiesel Group, LLC (TBG) is an entity currently owned by Warren Bush, Denny Mauser and
William Horan. There were also two other owners of TBG through 2007, including Tom Schroeder.
Messrs. Bush, Mauser, and Horan currently serve as directors on our board. Mr. Schroeder previously
served as a director on our board until his resignation in April 2008. In addition to its
principals serving on our board of directors, we contracted with TBG for consulting services,
including assistance with negotiation of various contracts, assistance in the planning of our
equity marketing effort, and assistance in securing debt financing services. Certain principals of
TBG informed us that Renewable Energy Group, Inc. (REG) and TBG had an agreement pursuant to
which TBG received a total of $450,000 from REG for development services and expenses incurred in
connection with the development of our plant and several other biodiesel projects. The $450,000
was paid by REG to TBG in multiple installments made from December 6, 2005 through October 12,
2007. It is our understanding that the October 12, 2007 payment was the last payment. The payments
received by TBG from REG may have given Messrs. Bush, Schroeder, Mauser and Horan an interest in
the following transactions between REG and the Company. REG, also serves as our current plant
manager and product marketer under the MOSA.
Second Amended and Restated Asset Purchase Agreement. On November 20, 2009, the Company
entered into a Second Amended and Restated Asset Purchase Agreement with an effective date of May
8, 2009 with Renewable Energy Group, Inc. (REG), REG Newco, Inc. (REG Newco) and REG Newton,
LLC (the Second Amended and Restated Asset Purchase Agreement) which superseded the original
Asset Purchase Agreement between the same parties entered into on May 8, 2009 and the Amended and
Restated Asset Purchase Agreement between the same parties executed on August 7, 2009, and pursuant
to which the Company anticipates consolidating its business and operations with REG under REG
Newco, a Delaware corporation, through the sale of substantially all of its assets in exchange for
certain shares of REG Newcos Common Stock and Preferred Stock, for which no specific value is
assigned in the Second Amended and Restated Asset Purchase Agreement.
See Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview
Proposed Consolidation with REG for more information regarding
the proposed consolidation.
Management and Operational Services Agreement. The Company and REG entered into a Management
and Operational Services Agreement (MOSA) on August 22, 2006, pursuant to which REG provides the
Company plant management, product sales and marketing, feedstock and chemical procurement, and
other administrative services. As of our fiscal year ended September 30, 2009, the MOSA was still
in effect and we had incurred fees payable to REG under the MOSA equal to approximately $58,512 for
the fiscal year ended September 30, 2009. The MOSA was also in effect as of our fiscal year ended
September 30, 2008, and we had incurred fees payable to REG under the MOSA equal to approximately
$1,129,715 for the fiscal year ended September 30, 2008.
Toll Processing Agreements. In January 2009, we entered into a toll processing agreement
with REG Marketing & Logistics, LLC (REG Marketing), an entity affiliated with REG, pursuant to
which REG Marketing has the right to order from the Company the production of biodiesel meeting
certain specifications and yield requirements from certain types of feedstock supplied by REG
Marketing, in exchange for which we are entitled to receive a fixed fee per gallon of biodiesel
produced. We also entered into four addendums to the toll processing agreement which provides for
the processing of certain other feedstocks into biodiesel meeting certain specifications and yield
requirements and which extends the initial term of the agreement. The term of this toll processing
agreement will continue until March 30, 2010 and will continue thereafter month-to-month unless
terminated by either party at least one month in advance of the termination date. The toll
processing agreement does not guarantee that we will receive any minimum amount of biodiesel
orders. For the fiscal year ended September 30, 2009, we
received approximately $1,703,000 in toll processing fees under this
agreement.
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In November 2008, we entered into a toll processing arrangement with REG Processing Systems,
LLC, an entity affiliated with REG, for the pre-treatment processing of corn oil from time to time,
for which we receive a fixed fee per pound of corn oil delivered minus the amount from the
sale of materials obtained from the pre-treatment processing. The toll processing agreement does
not guarantee that we will receive any minimum amount of corn oil
tolling orders. For the fiscal year ended September 30, 2009 we
received approximately $130,000 in processing fees under this
agreement.
Director Independence
Board of Directors
Our board of directors is exempt from independence listing standards because the Companys
securities are not listed on a national securities exchange or listed on an automated inter-dealer
quotation system at a national securities association or to issuers of securities. Please see ITEM
10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE above for a description of our
current directors. All of our directors are independent, as defined by NASDAQ Rule 5605(a)(2), with
the exception of John Van Zee who is not considered independent under NASDAQ Rule 5605(a)(2) due to
his status as President and Chief Executive Officer of the Company.
Audit Committee
The audit committee is exempt from independence listing standards because the Companys
securities are not listed on a national securities exchange or listed in an automated inter-dealer
quotation system of a national securities association or to issuers of such securities.
Nevertheless, all of the current members of our audit committee are independent within the
definition of independence provided by NASDAQ Rule 5605(a)(2).
However, Rule 5605(c)(2) imposes more stringent standards on audit committee members and
provides that the audit committee must be composed of at least three members which (i) are
independent under Rule 5605(a)(2), (ii) meets the criteria for independence set forth in Rule
10A-3(b)(1) under the Securities Exchange Act of 1934; (iii) have not participated in the
preparation of the Companys financial statements at any time during the past three years; and (iv)
are able to read and understand fundamental financial statements. Additionally, at least one
member must have past employment experience in finance or accounting, requisite professional
certification in accounting or comparable experience or background. Our audit committee is
composed of three members. However, no member of our audit committee has past employment experience
in finance or accounting as required by Rule 5605(c)(2). Therefore, our audit committee does not
comply with the requirements of Rule 5605(c)(2) applicable to audit committee members.
In addition, our audit committee charter requires a majority of our audit committee to be
independent as defined in the charter. One reason that a director may not be independent under our
audit committee charter is that he has accepted payments from the Company in excess of $60,000,
other than for board or committee services and certain other types of compensation. Warren Bush is
not independent under our audit committee charter because he previously received approximately
$65,000 in compensation and membership unit awards under our consulting agreement with The
Biodiesel Group, LLC, of which he is an owner, and an additional $20,000 for legal services
previously rendered to the Company. Our other two audit committee members are independent under our
audit committee charter. Therefore, we are in compliance with our audit committee charter by having
a majority of independent directors on the audit committee.
Our audit committee charter is not available on our website, but it was previously attached as
Appendix I to our 2008 Definitive Proxy Statement filed with the SEC on January 28, 2008.
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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees
The aggregate fees billed by the principal independent registered public accounting firm
McGladrey & Pullen, LLP to the Company for the fiscal years ended September 30, 2008 and September
30, 2009 are as follows:
Fiscal | ||||||||
Category | Year | Fees | ||||||
Audit Fees(1) |
2009 | $ | 80,150 | |||||
2008 | $ | 76,200 | ||||||
Audit-Related Fees |
2009 | $ | 17,283 | (2) | ||||
2008 | $ | 1,300 | ||||||
Tax Fees |
2009 | | ||||||
2008 | | |||||||
All Other Fees |
2009 | | ||||||
2008 | |
(1) | Audit fees include review of regulatory filings, quarterly financial statement reviews
and research and consultation related to financial statement and filings. |
|
(2) | Includes fees paid in connection with review of joint proxy statement and prospectus on
Form S-4 related to the Companys proposed consolidation with REG. |
Prior to engagement of its principal independent registered public accounting firm to perform
audit services for the Company for fiscal year 2009, such firm was pre-approved by the Companys
audit committee.
One hundred percent (100%) of all audit services and audit-related services were pre-approved
by our audit committee.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
The following exhibits are filed as part of, or are incorporated by reference into, this
report:
Exhibit No. | Description | Method of Filing | ||||
31.1 | Certificate Pursuant to 17 CFR 240 15d-14(a)
|
* | ||||
31.2 | Certificate Pursuant to 17 CFR 240 15d-14(a)
|
* | ||||
32.1 | Certificate Pursuant to 18 U.S.C. Section 1350
|
* | ||||
32.2 | Certificate Pursuant to 18 U.S.C. Section 1350
|
* |
(*) | Filed herewith. |
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
CENTRAL IOWA ENERGY, LLC |
||||
Date: December 29, 2009 | /s/ John Van Zee | |||
John Van Zee | ||||
President and Director (Principal Executive Officer) |
||||
Date: December 29, 2009 | /s/ Kimberly Smith | |||
Kimberly Smith | ||||
(Principal Financial and Accounting Officer) |
In accordance with the Exchange Act, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: December 29, 2009
|
/s/ John Van Zee
(Principal Executive Officer) |
|||
Date: December 29, 2009
|
/s/ Jim Johnston
|
|||
Date: December 29, 2009
|
/s/ Scot Farver
|
|||
Date: December 29, 2009
|
/s/ Jeremie Parr
|
|||
Date: December 29, 2009
|
/s/ Warren L. Bush
|
|||
Date: December 29, 2009
|
/s/ Craig Hamilton
|
|||
Date: December 29, 2009
|
/s/ William J. Horan
|
|||
Date: December 29, 2009
|
/s/ Don Huyser
|
|||
Date: December 29, 2009
|
/s/ Dean Lane
|
|||
Date: December 29, 2009
|
/s/ Denny Mauser
|
|||
Date: December 29, 2009
|
/s/ William J. Talsma
|
79