Attached files
file | filename |
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EX-32.2 - Lincolnway Energy, LLC | v173997_ex32-2.htm |
EX-31.1 - Lincolnway Energy, LLC | v173997_ex31-1.htm |
EX-32.1 - Lincolnway Energy, LLC | v173997_ex32-1.htm |
EX-31.2 - Lincolnway Energy, LLC | v173997_ex31-2.htm |
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended December 31, 2009
|
or
|
¨
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from ______________________ to
_______________________
Commission
File Number: 000-51764
LINCOLNWAY
ENERGY, LLC
(Exact
name of registrant as specified in its charter)
Iowa
|
20-1118105
|
(State or other jurisdiction of incorporation or organization)
|
(I.R.S. Employer Identification No.)
|
59511 W. Lincoln Highway, Nevada, Iowa
|
50201
|
(Address of principal executive offices)
|
(Zip Code)
|
515-232-1010
(Registrant's
telephone number, including area code)
N/A
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
þ Yes ¨ No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
¨ Yes ¨ No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, 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 ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer þ
|
Smaller
reporting company ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). ¨ Yes þ No
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 42,049 membership units outstanding at
February 1, 2010.
LINCOLNWAY
ENERGY, LLC
FORM
10-Q
For
the Quarter Ended December 31, 2009
INDEX
Page
|
|||
Part I. | Financial Information | ||
Item
1.
|
Unaudited
Financial Statements
|
||
a)
Balance Sheets
|
2
|
||
b)
Statements of Operations
|
4
|
||
c)
Statements of Cash Flows
|
5
|
||
d)
Notes to Unaudited Financial Statements
|
6
|
||
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
13
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
24
|
|
Item
4.
|
Controls
and Procedures
|
27
|
|
Part II. | Other Information | ||
Item
1.
|
Legal
Proceedings
|
27
|
|
Item 1A.
|
Risk
Factors
|
28
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
29
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
29
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
29
|
|
Item
5.
|
Other
Information
|
29
|
|
Item
6.
|
Exhibits
|
29
|
|
Signatures
|
|||
Exhibits
Filed With This Report
|
|||
Rule
13a-14(a) Certification of President and Chief Executive
Officer
|
E-1
|
||
Rule
13a-14(a) Certification of Chief Financial Officer
|
E-3
|
||
Section
1350 Certification of President and Chief Executive
Officer
|
E-5
|
||
Section
1350 Certification of Chief Financial Officer
|
E-6
|
PART
I - FINANCIAL INFORMATION
Item
1. Unaudited Financial Statements.
Lincolnway
Energy, LLC
Balance
Sheets
December 31, 2009
|
September 30, 2009
|
|||||||
(Unaudited)
|
||||||||
ASSETS
(Note 3)
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
and cash equivalents
|
$ | 5,160,412 | $ | 5,824,947 | ||||
Due
from broker
|
1,002,191 | 565,276 | ||||||
Derivative
financial instruments (Note 8)
|
55,375 | - | ||||||
Trade
and other accounts receivable (Note 7)
|
5,789,398 | 3,772,183 | ||||||
Inventories
(Note 4)
|
3,662,395 | 2,485,372 | ||||||
Prepaid
expenses and other
|
262,018 | 197,047 | ||||||
Total
current assets
|
15,931,789 | 12,844,825 | ||||||
PROPERTY
AND EQUIPMENT
|
||||||||
Land
and land improvements
|
7,580,868 | 7,580,868 | ||||||
Buildings
and improvements
|
1,604,305 | 1,604,305 | ||||||
Plant
and process equipment
|
74,861,439 | 74,853,995 | ||||||
Office
furniture and equipment
|
355,654 | 355,654 | ||||||
84,402,266 | 84,394,822 | |||||||
Accumulated
depreciation
|
(29,197,051 | ) | (27,101,259 | ) | ||||
55,205,215 | 57,293,563 | |||||||
OTHER
ASSETS
|
||||||||
Certificate
of deposit, at cost, restricted (Note 5)
|
351,000 | 351,000 | ||||||
Financing
costs, net of amortization of $176,986 and $166,260
|
294,976 | 305,702 | ||||||
Other
|
297,011 | 297,011 | ||||||
942,987 | 953,713 | |||||||
$ | 72,079,991 | $ | 71,092,101 |
See Notes
to Unaudited Financial Statements.
2
December 31, 2009
|
September 30, 2009
|
|||||||
(Unaudited)
|
||||||||
LIABILITIES
AND MEMBERS’ EQUITY
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Accounts
payable
|
$ | 1,125,152 | $ | 877,216 | ||||
Accounts
payable, related parties (Note 6)
|
913,101 | 298,533 | ||||||
Current
maturities of long-term debt (Note 5)
|
1,301,554 | 3,825,357 | ||||||
Accrued
expenses
|
1,036,084 | 948,309 | ||||||
Derivative
financial instruments (Note 8)
|
- | 224,850 | ||||||
Total
current liabilities
|
4,375,891 | 6,174,265 | ||||||
NONCURRENT
LIABILITIES
|
||||||||
Long-term
debt, less current maturities (Note 5)
|
13,231,084 | 14,488,584 | ||||||
Other
|
450,000 | 450,000 | ||||||
Total
noncurrent liabilities
|
13,681,084 | 14,938,584 | ||||||
COMMITMENTS
AND CONTINGENCY (Notes 7 and 10)
|
||||||||
MEMBERS’
EQUITY
|
||||||||
Member
contributions, 42,049 units issued and outstanding
|
38,990,105 | 38,990,105 | ||||||
Retained
earnings
|
15,032,911 | 10,989,147 | ||||||
54,023,016 | 49,979,252 | |||||||
$ | 72,079,991 | $ | 71,092,101 |
3
Statements
of Operations
Three Months
|
Three Months
|
|||||||
Ended
|
Ended
|
|||||||
December 31, 2009
|
December 31, 2008
|
|||||||
(Unaudited)
|
||||||||
Revenues
(Notes 2 and 7)
|
$ | 31,721,872 | $ | 29,362,052 | ||||
Cost
of goods sold
|
26,706,819 | 33,681,071 | ||||||
Gross
profit (loss)
|
5,015,053 | (4,319,019 | ) | |||||
General
and administrative expenses
|
743,105 | 655,565 | ||||||
Operating
income (loss)
|
4,271,948 | (4,974,584 | ) | |||||
Other
income (expense):
|
||||||||
Interest
income
|
7,393 | 14,667 | ||||||
Interest
expense
|
(235,577 | ) | (300,444 | ) | ||||
(228,184 | ) | (285,777 | ) | |||||
Net
income (loss)
|
$ | 4,043,764 | $ | (5,260,361 | ) | |||
Weighted
average units outstanding
|
42,049 | 42,049 | ||||||
Net
income (loss) per unit - basic and diluted
|
$ | 96.17 | $ | (125.10 | ) |
4
Statements
of Cash Flows
Three Months
|
Three Months
|
|||||||
Ended
|
Ended
|
|||||||
December 31, 2009
|
December 31, 2008
|
|||||||
(Unaudited)
|
||||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net
income (loss)
|
$ | 4,043,764 | $ | (5,260,361 | ) | |||
Adjustments
to reconcile net income (loss) to net cash provided by (used
in)
|
||||||||
operating
activities:
|
||||||||
Depreciation
and amortization
|
2,106,518 | 2,111,124 | ||||||
Loss
on disposal of property and equipment
|
- | 3,599 | ||||||
Changes
in working capital components:
|
||||||||
(Increase)
decrease in due from broker
|
(436,915 | ) | 3,400,115 | |||||
(Increase)
decrease in trade and other accounts receivable
|
(2,017,215 | ) | 781,655 | |||||
(Increase)
decrease in inventories
|
(1,177,023 | ) | 136,204 | |||||
(Increase)
in prepaid expenses and other
|
(64,971 | ) | (115,252 | ) | ||||
Increase
(decrease) in accounts payable
|
247,936 | (774,670 | ) | |||||
Increase
(decrease) in accounts payable, related party
|
614,568 | (413,305 | ) | |||||
Increase
(decrease) in accrued expenses
|
87,775 | (100,408 | ) | |||||
(Decrease)
in derivative financial instruments
|
(280,225 | ) | (3,126,837 | ) | ||||
(Decrease)
in accrued loss on purchase commitments
|
- | (1,027,397 | ) | |||||
Net
cash provided by (used
in) operating activities
|
3,124,212 | (4,385,533 | ) | |||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Purchase
of property and equipment
|
(7,444 | ) | (601,241 | ) | ||||
Net
cash (used in) investing activities
|
(7,444 | ) | (601,241 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Payments
on long-term borrowings
|
(3,781,303 | ) | (1,280,809 | ) | ||||
Net
cash (used in) financing activities
|
(3,781,303 | ) | (1,280,809 | ) | ||||
Net
(decrease) in cash and cash equivalents
|
(664,535 | ) | (6,267,583 | ) | ||||
CASH
AND CASH EQUIVALENTS
|
||||||||
Beginning
|
5,824,947 | 8,711,048 | ||||||
Ending
|
$ | 5,160,412 | $ | 2,443,465 | ||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW
|
||||||||
INFORMATION,
cash paid for interest
|
$ | 250,563 | $ | 304,440 |
See Notes
to Unaudited Financial Statements.
5
Lincolnway
Energy, LLC
Notes
to Unaudited Financial Statements
Note
1.
|
Nature
of Business and Significant Accounting
Policies
|
Principal business
activity: Lincolnway Energy, LLC (the Company), located in
Nevada, Iowa, was formed in May 2004 to pool investors to build a 50 million
gallon annual production dry mill corn-based ethanol plant. The
Company began making sales on May 30, 2006 and became operational during the
quarter ended June 30, 2006.
Basis of presentation and
other information:
The
consolidated balance sheet as of September 30, 2009 was derived from the
Company’s audited balances as of that date. The accompanying
financial statements as of and for the three months ended December 31, 2009 and
2008 are unaudited and reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the financial position and operating results for the
interim periods. These unaudited financial statements and notes
should be read in conjunction with the audited financial statements and notes
thereto, for the year ended September 30, 2009 contained in the Company’s Annual
Report on Form 10-K. The results of operations for the
interim periods presented are not necessarily indicative of the results for the
entire year.
Use of
estimates: The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Income
taxes: The Company is organized as a partnership for federal
and state income tax purposes and generally does not incur income
taxes. Instead, the Company’s earnings and losses are included in the
income tax returns of the members. Therefore, no provision or
liability for federal or state income taxes has been included in these financial
statements.
Earnings per
unit: Basic and diluted earnings/loss per unit have been
computed on the basis of the weighted average number of units outstanding during
each period presented.
Fair Value of financial
instruments: The carrying amounts of cash and cash
equivalents, derivative financial instruments, trade accounts receivable,
accounts payable and accrued expenses approximate fair value. The
carry amount of long-term debt approximates fair value because the interest
rates fluctuate with market rates or the fixed rates are based on current rates
offered to the Company for debt with similar terms and maturities.
Subsequent
events: Management has evaluated potential subsequent events
through the date of this filing, which is the date the financial statements were
issued.
6
Lincolnway
Energy, LLC
Notes
to Unaudited Financial Statements
Note
2.
|
Revenue
by product is as follows:
|
(Excludes hedging activity)
|
Three Months
|
Three Months
|
||||||
Ended
|
Ended
|
|||||||
(In thousands)
|
December 31, 2009
|
December 31, 2008
|
||||||
Ethanol
|
$ | 26,412 | $ | 23,240 | ||||
Distiller's
Grains
|
4,836 | 5,723 | ||||||
Other
|
474 | 372 |
Note
3.
|
Members’
Equity
|
The
Company was formed on May 19, 2004. It was initially capitalized by
the issuance of 1,924 membership units totaling $962,000 to the founding members
of the Company. The Company has one class of membership
units. A majority of the Board of Directors owns a membership
interest in the Company. The Company is authorized to issue up to
45,608 membership units without member approval.
Income
and losses are allocated to all members based on their pro rata ownership
interest. All unit transfers are effective the last day of the
month. Units may be issued or transferred only to persons
eligible to be members of the Company and only in compliance with the provisions
of the operating agreement.
Note
4.
|
Inventories
|
Inventories
consist of the following as of:
December 31,
|
September 30,
|
|||||||
2009
|
2009
|
|||||||
Raw
materials, including corn, coal, chemicals and supplies
|
$ | 2,163,784 | $ | 1,503,410 | ||||
Work
in process
|
810,897 | 567,782 | ||||||
Ethanol
and distillers grains
|
687,714 | 414,180 | ||||||
Total
|
$ | 3,662,395 | $ | 2,485,372 |
7
Lincolnway
Energy, LLC
Notes
to Unaudited Financial Statements
Note
5.
|
Long-Term
Debt
|
Long-term
debt consists of the following as of:
December 31, 2009
|
September 30, 2009
|
|||||||
Construction
term loan. (A)
|
$ | 11,500,000 | $ | 15,250,000 | ||||
Construction/revolving
term loan. (C)
|
- | - | ||||||
Note
payable to contractor, interest-only quarterly payments at
5%
|
||||||||
due
through maturity date of November 2014, secured by real
|
||||||||
estate
and subordinate to financial institution debt commitments. (B
)
|
1,216,781 | 1,216,781 | ||||||
Note
payable to contractor, unsecured, interest-only quarterly
|
||||||||
payments
at 4% due through maturity date of May 2021
|
1,250,000 | 1,250,000 | ||||||
Note
payable to Iowa Department of Economic
Development. (D)
|
205,000 | 212,500 | ||||||
Note
payable to Iowa Department of
Transportation. (E)
|
360,857 | 384,660 | ||||||
14,532,638 | 18,313,941 | |||||||
Less
current maturities
|
(1,301,554 | ) | (3,825,357 | ) | ||||
13,231,084 | $ | 14,488,584 |
(A)
|
The
Company has a construction and term loan with a financial
institution. Borrowings under the term loan include a variable
interest rate based on the one-month LIBOR index rate plus
3.30%. The rate will be reset automatically without notice to
the Company, on the first “US Banking Day” of each succeeding week, and
each change shall be applicable to all outstanding balances as of that
date. The agreement requires 30 principal payments of
$1,250,000 per quarter commencing in December 2006 through March 2013. In
order to alleviate some of the interest rate risk, the Company on July 25,
2008, fixed a portion of the loan or $7,750,000 at an interest rate of
6.62%, through July 2011. Upon maturity the fixed portion of the loan will
revert back to a variable rate. The same payment amortization
schedule will apply. The agreement requires the maintenance of
certain financial and nonfinancial covenants. Borrowings
under this agreement are collateralized by substantially all of the
Company’s assets. As of December 31, 2009 the Company has made
principal payments of $27,500,000, since the inception of the
loan.
|
(B)
|
The
Company has a $1,100,000 subordinate note payable dated November 17, 2004
to an unrelated third party. Quarterly interest payments began
on March 31, 2007. The third party allowed the Company to
include the accrued interest of $116,781 through December 2006 into the
principal of the note. Principal is due in full at maturity on November
17, 2014.
|
8
Lincolnway
Energy, LLC
Notes
to Unaudited Financial Statements
(C)
|
The
Company has a $10,000,000 construction/revolving term credit facility with
a financial institution which expires on September 1,
2016. Borrowings under the credit facility agreement include a
variable interest rate based on the one-month LIBOR index rate plus
3.30%. The rate will be reset automatically without notice to
the Company, on the first “US Banking Day” of each succeeding week, and
each change shall be applicable to all outstanding balances as of that
date. Borrowings are subject to borrowing base restrictions as
defined in the agreement. The credit facility and revolving
credit agreement require the maintenance of certain financial and
nonfinancial covenants. The variable interest rate will be
based on the Borrowings under this agreement are collateralized by
substantially all of the Company’s assets. There was no balance
outstanding as of December 31,
2009.
|
On July
3, 2007 the $351,000 revolving credit agreement was cancelled. This
agreement was for the benefit of a letter of credit that was required by an
unrelated third party to lease rail cars. An amendment was made to
the lease agreement on June 19, 2007, that allowed the Company to purchase a
certificate of deposit for $351,000 in lieu of the letter of credit that is
pledged as collateral on the railcar lease. The Company has classified this
certificate of deposit as restricted cash in other assets.
(D)
|
The
Company also has a $300,000 loan agreement with the Iowa Department of
Economic Development (IDED). The $300,000 loan is
noninterest-bearing and due in monthly payments of $2,500 beginning
December 2006 and a final payment of $152,500 due November
2012. Borrowings under this agreement are collateralized by
substantially all of the Company’s assets and subordinate to the above
financial institution debt and construction and revolving loan/credit
agreements included in (A) and (C).
|
(E)
|
The
Company entered into a $500,000 loan agreement with the Iowa Department of
Transportation (IDOT) in February 2005. The proceeds were
disbursed upon submission of paid invoices. Interest at 2.11%
began accruing on January 1, 2007. Principal payments will be
due semiannually through July 2016. The loan is secured by all
rail track material constructed as part of the plan
construction. The debt is subordinate to the above financial
institution debt and construction and revolving loan/credit agreements
included in (A) and (C).
|
Note
6.
|
Related-Party
Transactions
|
The
Company has an agreement with the Heart of Iowa Coop (HOIC), a member of the
Company, to provide 100% of the requirement of corn for use in the operation of
the ethanol plant. The Company purchased corn totaling $18,333,716
for the three months ended December 31, 2009. There were corn
purchases of $20,343,437 for the three months ended December 31,
2008. As of December 31, 2009, the Company has one corn cash contract
with HOIC amounting to 404,538 bushels, for a commitment of $1,557,471 and
several basis contracts representing approximately 900,000 bushels of
corn. The contracts mature on various dates through March
2010. The Company also has made some miscellaneous purchases from
HOIC (storage fees, fuel and propane costs) amounting to $26,640 and $23,161 for
the three months ended December 31, 2009 and 2008,
respectively. As of December 31, 2009 the amount due to HOIC is
$900,323.
The
Company is also purchasing propane from Prairie Land Cooperative, a member of
the Company. Total purchases for the three months ended December 31,
2009 and 2008 is $13,355 and $344,141, respectively. As of
December 31, 2009 the amount due to Prairie Land Cooperative is
$12,778.
9
Lincolnway
Energy, LLC
Notes
to Unaudited Financial Statements
Note
7.
|
Commitments
and Major Customer
|
The
Company had an agreement with an unrelated entity and major customer for
marketing, selling, and distributing all of the ethanol produced by the
Company. Under this pooling arrangement, the Company paid the entity
$.01 (one cent) per gallon for each gallon of ethanol sold. For the
three months ended December 31, 2009 and 2008 the Company has expensed none and
$132,404, respectively, under this agreement. Revenues with this customer were
none and $23,240,072 for the three months ended December 31, 2009 and 2008,
respectively. There was no trade accounts receivable due from the
customer as of December 31, 2009.
On
September 25, 2009, the Company entered into a new agreement with an unrelated
entity. The agreement became effective on October 1,
2009. The unrelated entity will be responsible for marketing and
purchasing all of the ethanol produced by the company. For the three
months ended December 31, 2009 and 2008 the Company has expensed $168,893 and
none, respectively, under this agreement for marketing fees. Revenues
with this customer were $26,412,341 and none for the three months ended December
31, 2009 and 2008, respectively. Trade accounts receivable of
$5,083,251 was due from the customer as of December 31, 2009.
The
Company has an agreement with an unrelated entity for marketing, selling and
distributing the distiller’s grains. For the three months ended December 31,
2009 and 2008, the Company has expensed marketing fees of $73,720 and $95,972,
respectively, under this agreement. Revenues with this customer
were $4,836,023 and $5,723,098 for the three months ended December 31, 2009 and
2008, respectively. Trade accounts receivable of $439,709 was due
from the customer as of December 31, 2009.
The
Company has an agreement with an unrelated party to provide the coal supply for
the ethanol plant. For the three months ended
December 31, 2009 and 2008 the Company has purchased $1,416,512 and $1,530,915,
respectively, of coal under this contract.
The
Company has entered into a fixed contract with a supplier of anhydrous
ammonia. The contract is for a minimum purchase of 720,000 pounds at
the rate of $.20 per pound. The term of the contract is from January
1, 2010 through March 31, 2010. The minimum future purchase
commitment is $144,000.
Note
8.
|
Risk
Management
|
The
Company’s activities expose it to a variety of market risks, including the
effects of changes in commodity prices. These financial exposures are
monitored and managed by the Company as an integral part of its overall risk
management program. The Company’s risk management program focuses on
the unpredictability of commodity markets and seeks to reduce the potentially
adverse effects that the volatility of these markets may have on its operating
results.
The
Company maintains a risk management strategy that uses derivative instruments to
minimize significant, unanticipated earnings fluctuations caused by market
fluctuations. The Company’s specific goal is to protect the Company
from large moves in the commodity costs.
To reduce
price risk caused by market fluctuations, the Company generally follows a policy
of using exchange-traded futures and options contracts to minimize its net
position of merchandisable agricultural commodity inventories and forward
purchases and sales contracts. Exchange traded futures and options
contracts are designated as non-hedge derivatives and are valued at market price
with changes in market price recorded in operating income through cost of goods
sold for corn derivatives and through revenue for ethanol
derivatives.
10
Lincolnway
Energy, LLC
Notes
to Unaudited Financial Statements
The
effects on operating income from derivative activities is as
follows:
Three Months
|
Three Months
|
|||||||
Ended
|
Ended
|
|||||||
December 31, 2009
|
December 31, 2008
|
|||||||
Increase
(decrease) in revenue due to derivatives related to ethanol
sales:
|
||||||||
Realized
|
$ | - | $ | 27,767 | ||||
Unrealized
|
- | (368 | ) | |||||
Total
effect on revenue
|
$ | - | $ | 27,399 | ||||
(Increase)
decrease in cost of goods sold due to derivates related to corn
costs:
|
||||||||
Realized
|
$ | (278,175 | ) | $ | (1,714,538 | ) | ||
Unrealized
|
521,475 | (1,978,663 | ) | |||||
Total
effect on cost of goods sold
|
243,300 | (3,693,201 | ) | |||||
Total
increase (decrease) to operating income due to derivative
activities
|
$ | 243,300 | $ | (3,665,802 | ) |
Unrealized
gains and losses on forward contracts, in which delivery has not occurred, are
deemed “normal purchases and normal sales”, and therefore are not marked to
market in the Company’s financial statements but are subject to a lower of cost
or market assessment.
Note
9.
|
Fair
Value Measurements
|
Fair
value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date. In determining fair value, the Company uses various
methods including market, income and cost approaches. Based on these
approaches, the Company often utilizes certain assumptions that market
participants would use in pricing the asset or liability, including assumptions
about risk and/or the risks inherent in the inputs to the valuation
technique. These inputs can be readily observable,
market-corroborated, or generally unobservable inputs. The Company
utilizes valuation techniques that maximize the use of observable inputs and
minimize the use of unobservable inputs. Based on the observability
of the inputs used in the valuation techniques, the Company is required to
provide the following information according to the fair value
hierarchy. The fair value hierarchy ranks the quality and reliability
of the information used to determine fair values. Financial assets
and liabilities carried at fair value will be classified and disclosed in one of
the following three categories:
Level 1 -
|
Valuations
for assets and liabilities traded in active markets from readily available
pricing sources for market transactions involving identical assets or
liabilities.
|
Level 2 -
|
Valuations
for assets and liabilities traded in less active dealer or broker
markets. Valuations are obtained from third-party pricing
services for identical or similar assets or
liabilities.
|
11
Lincolnway
Energy, LLC
Notes
to Unaudited Financial Statements
Level 3 -
|
Valuations
incorporate certain assumptions and projections in determining the fair
value assigned to such assets or
liabilities.
|
A
description of the valuation methodologies used for instruments measured at fair
value, including the general classification of such instruments pursuant to the
valuation hierarchy, is set forth below. These valuation
methodologies were applied to all of the Company’s financial assets and
financial liabilities carried at fair value.
Derivative financial
instruments: Commodity futures and exchange-traded commodity
options contracts are reported at fair value utilizing Level 1
inputs. For these contracts, the Company obtains fair value
measurements from an independent pricing service. The fair value
measurements consider observable data that may include dealer quotes and live
trading levels from the CBOT and NYMEX and over-the–counter
markets.
The
following table summarizes the financial assets measured at fair value on a
recurring basis as of December 31, 2009, segregated by the level of the
valuation inputs within the fair value hierarchy utilized to measure fair
value:
Total
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||
Assets,
derivative financial instruments
|
$ | 55,375 | $ | 55,375 | $ | - | $ | - |
Certain
financial assets and financial liabilities are measured at fair value on a
nonrecurring basis; that is, the instruments are not measured at fair value on
an ongoing basis but are subject to fair value adjustments in certain
circumstances (for example, when there is evidence of
impairment). Financial assets and financial liabilities measured at
fair value on a nonrecurring basis were not significant at December 31,
2009.
Note
10.
|
Contingency
|
The
Company needs to maintain various permits to be able to maintain and continue
its operations. The permits include water and air permits from the
Iowa Department of Natural Resources. The Company has obtained these
permits, but on December 4, 2007, the Iowa Environmental Protection Commission
referred alleged environmental law violations by the Company to the Iowa
Attorney General's office for enforcement action. The referred
allegations concern wastewater releases relating to construction activities and
exceedences of iron and total suspended solid limits in the Company’s NPDES
wastewater discharge permit, and concern air permitting, emission limit
exceedences, stack testing, monitoring and reporting.
The
Company believes that it will be able to reach a settlement of all of the
allegations of the Iowa Environmental Protection Commission by the first
calendar quarter of 2010 on terms that will not have a material adverse effect
on the Company’s business or financial condition. The Company still
cannot, however, definitively predict at this time the outcome of any settlement
or other proceedings that may arise out of the allegations. The
Company was therefore unable at the time of the preparation of this report to
definitively determine what effect the proceedings of the Iowa Attorney General
will have on the Company; although, as noted above, based on the negotiations to
date, the Company believes it will be able to settle all of the allegations on
terms that will not have a material adverse effect on the Company’s business or
financial condition.
12
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
|
Cautionary
Statement on Forward Looking Statements and Industry and Market
Data
Various
discussions and statements in this Item and other sections of this quarterly
report are or contain forward looking statements that express Lincolnway
Energy's current beliefs, forecasts, projections and predictions about future
events. All statements other than statements of historical fact are
forward looking statements, and include statements with respect to financial
results and condition; anticipated trends in business, revenues, net income, net
profits or net losses; projections concerning operations, capital needs and cash
flow; investment, business, growth, expansion, acquisition and divestiture
opportunities and strategies; management's plans or intentions for the future;
competitive position or circumstances; and other forecasts, projections and
statements of expectation. Words such as "expects," "anticipates,"
"estimates," "plans," "may," "will," "contemplates," "forecasts," "future,"
"strategy," "potential," "predicts," "projects," "prospects," "possible,"
"continue," "hopes," "intends," "believes," "seeks," "should," "could,"
"thinks," "objectives" and other similar expressions or variations of those
words or those types of words help identify forward looking
statements.
Forward
looking statements involve and are subject to various material risks,
uncertainties and assumptions. Forward looking statements are
necessarily subjective and are made based on numerous and varied estimates,
projections, views, beliefs, strategies and assumptions made or existing at the
time of such statements and are not guarantees of future results or
performance. Forecasts and projections are also in all events likely
to be inaccurate, at least to some degree, and especially over long periods of
time, and in particular in a still relatively new and developing industry such
as the ethanol industry. Forecasts and projections are also currently
difficult to make with any degree of reliability or certainty given the
difficult and uncertain credit, market and other economic circumstances and
uncertainties in existence at the time of the preparation of this quarterly
report, both generally and with respect to the ethanol industry in
particular. Lincolnway Energy disclaims any obligation to update or
revise any forward looking statements based on the occurrence of future events,
the receipt of new information, or otherwise. Lincolnway Energy
cannot guarantee Lincolnway Energy's future results, performance or business
conditions, and strong or undue reliance must not be placed on any forward
looking statements.
Actual
future performance, outcomes and results may differ materially from those
suggested by or expressed in forward looking statements as a result of numerous
and varied factors, risks and uncertainties, some that are known and some that
are not, and many of which are beyond the control of Lincolnway Energy and
Lincolnway Energy's management. It is not possible to predict or
identify all of those factors, risks and uncertainties, but they include
inaccurate assumptions or predictions by management, the accuracy and
completeness of the publicly available information upon which part of Lincolnway
Energy's business strategy is based and all of the various factors, risks and
uncertainties discussed in this Item and elsewhere in this quarterly report and
in Item 1A of Lincolnway Energy's Annual Report on Form 10-K for the fiscal year
ended September 30, 2009.
13
Lincolnway
Energy may have obtained industry, market, competitive position and other data
used in this quarterly report or Lincolnway Energy's general business plan from
Lincolnway Energy's own research or internal surveys, studies conducted by other
persons and/or trade or industry associations or general publications and other
publicly available information. Lincolnway Energy attempts to utilize
third party sources of information which Lincolnway Energy believes to be
materially complete, accurate, balanced and reliable, but there is no assurance
of the accuracy, completeness or reliability of any third party
information. For example, a trade or industry association for the
ethanol industry may present information in a manner that is more favorable to
the ethanol industry than would be presented by an independent
source. Industry publications and surveys and other publicly
available information also generally state that they have obtained information
from sources believed to be reliable, but do not guarantee the accuracy and
completeness of any information.
General
Overview
Lincolnway
Energy is an Iowa limited liability company that operates a dry mill, coal fired
ethanol plant located in Story County, Iowa, near Nevada,
Iowa. Lincolnway Energy has been processing corn into fuel grade
ethanol and distillers' grains at the ethanol plant since May 22,
2006. The first full month of production at full capacity was July of
2006.
The
ethanol plant has a nameplate production capacity of 50,000,000 gallons, which,
at that capacity, would also generate approximately 136,000 tons of distillers'
grains per year. Lincolnway Energy's revenues are derived primarily
from the sale of its ethanol and distillers' grains.
Lincolnway
Energy began extracting corn oil from the syrup which is generated in the
production of ethanol in April, 2008. Lincolnway Energy estimates
that it will produce approximately 3,000 tons of corn oil per
year. Lincolnway Energy does not, however, anticipate that sales of
corn oil will be a material source of revenue for Lincolnway
Energy.
Lincolnway
Energy's ethanol is marketed by Green Plains Trading Group LLC, and Lincolnway
Energy's distillers' grains are marketed by Hawkeye Gold,
LLC. Lincolnway Energy's corn oil is marketed by FEC Solutions,
L.L.C.
Lincolnway
Energy does not currently capture or market the carbon dioxide which is produced
as part of the ethanol production process.
14
Lincolnway
Energy expects to fund its operations during the next 12 months using cash flow
from continuing operations. Lincolnway Energy also has revolving
lines of credit which are available to Lincolnway Energy.
Executive
Summary
|
Highlights
for the three months ended December 31, 2009, are as
follows:
|
|
·
|
Total
revenues increased 8.04%, or $2.4 million, compared to the 2008 comparable
period.
|
|
·
|
Total
cost of goods sold decreased 21%, or $7.0 million, compared to the 2008
comparable period.
|
|
·
|
Net
income was $4.0 million for the 2009 period, compared to net loss of $5.3
million for the 2008 period.
|
|
·
|
Ethanol
sold was 13.5 million gallons, an increase of 2% or 271,034 gallons,
compared to the 2008 comparable
period.
|
Results
of Operations
The
following table shows the results of operations and the percentages of revenues,
cost of goods sold, operating expenses and other items to total revenues in
Lincolnway Energy's statement of operations for the three
months ended December 31, 2009 and 2008 ( dollars in
thousands):
Three Months Ended December
31,
|
||||||||||||||||
(Unaudited)
|
||||||||||||||||
Income Statement Data
|
2009
|
2008
|
||||||||||||||
Revenue
|
$ | 31,722 | 100.0 | % | $ | 29,362 | 100.0 | % | ||||||||
Cost
of goods sold
|
26,707 | 84.2 | % | 33,681 | 114.7 | % | ||||||||||
Gross
profit (loss)
|
5,015 | 15.8 | % | (4,319 | ) | (14.7 | )% | |||||||||
General
and administrative expenses
|
743 | 2.3 | % | 656 | 2.2 | % | ||||||||||
Operating
income (loss)
|
4,272 | 13.5 | % | (4,975 | ) | (16.9 | )% | |||||||||
Other
(expense)
|
(228 | ) | (.07 | )% | (285 | ) | (1.1 | )% | ||||||||
Net
income (loss)
|
$ | 4,044 | 12.8 | % | $ | (5,260 | ) | (17.9 | )% |
15
The
following table shows other key data for the periods
presented:
Three Months Ended December
31,
|
||||||||
(Unaudited)
|
||||||||
Operating Data:
|
2009
|
2008
|
||||||
Ethanol
sold (gallons in thousands)
|
13,511 | 13,240 | ||||||
Average
gross price of ethanol sold (dollars per gallon)
|
$ | 1.95 | $ | 1.76 | ||||
Dry
distillers grain sold (tons)
|
30,145 | 33,900 | ||||||
Average
dry distillers grain sales price per ton
|
$ | 154.66 | $ | 161.86 | ||||
Average
corn cost per bushel
|
$ | 3.63 | $ | 4.14 |
Results
of Operations for the Three Months Ended December 31, 2009 as Compared to the
Three Months Ended December 31, 2008
Revenues. Revenues
increased by $2.4 million, or 8.04% to $31.7 million for the three months ended
December 31, 2009 from $29.4 million for the three months ended December 31,
2008. The increase in total revenues was the result of an 11% increase in
ethanol price for the three months ended December 31, 2009, when compared to the
three month ended December 31, 2008 offset by a 4% decrease in dried distillers
grains price for the comparable period.
Sales from ethanol increased $3.2
million, or 13.6%, to $26.4 million for the three months ended December 31, 2009
from $23.2 million for the three months ended December 31, 2008. The
average price of ethanol sold was $1.95 per gallon for the three months ended
December 31, 2009 compared to $1.76 per gallon for the three months ended
December 31, 2008. Ethanol sales increased .3 million gallons, or 2%
for the three months ended December 31, 2009 ,when compared to the three months
ended December 31, 2008. For more information on
the ethanol markets please refer to the next section, Risks, Trends and
Factors that May Affect Future Operating Results.
Sales
from co-products decreased by $.8 million, or 14%, to $5.2 million for the three
months ended December 31, 2009 from $6.0 million for the three months ended
December 31, 2008. The average price of dried distillers grain sold
was $154.66 per ton for the three months ended December 31, 2009, compared to
$161.86 for the prior comparable period. Dried distillers grain sales
decreased by 3,755 tons, or 11.1% for the three months ended December 31, 2009
from when compared to the three months ended December 31, 2008. Wet distiller’s
grain sales increased by 791 tons, or 17.8% for the three months ended December
31, 2009 from December 31, 2008. For the three months ended December
31, 2009 there were reported sales for excess syrup and corn oil of
$369,326. Excess syrup and corn oil sales increased by $48,462, for
the three months ended December 31, 2009 from $320,864, for the three months
ended December 31, 2008. Dried distillers grain production was lower
for the three months ended December 31, 2009, due to an increase amount of
infections that had to be treated in the fermenters. When this takes
place Lincolnway Energy needs to make an additional amount of syrup and wet
distillers grains and less of an amount of dried distillers
grains. The reason for the increase in infections is still being
researched by management.
16
Cost of goods
sold. Cost of goods sold decreased by $7.0 million, or 21.0%
to $26.7 million for the three months ended December 31, 2009 from $33.7 million
for the three months ended December 31, 2008. The decrease was
primarily due to lower corn and hedging cost, process chemical costs and ethanol
freight costs in the 2009 period compared to the 2008 period. Cost of
goods sold major components are: corn costs, process chemicals, denaturant, coal
costs, electricity, production labor, repairs and maintenance, and
depreciation.
Corn
costs decreased $5.8 million to $17.2 million for the three months ended
December 31, 2009 from $23.0 million for the three months ended December 31,
2008. Corn costs represented 64.4% of our cost of goods sold for the
three months ended December 31, 2009 compared to 68.2% for the three months
ended December 31, 2008.
The decrease in corn costs is partially
driven by a decrease in cash corn prices compared to the prior
period. The average price of corn was $3.63 per
bushel for the three months ended December 31, 2009, compared to $4.14 per
bushel for the prior comparable period. The quarter ended December 31, 2009
corn costs also included a marked to market gain of $.243 million for
derivatives relating to future deliveries of corn, compared to a $3.7 million
loss in the same quarter for the prior year. Since our derivative contracts are
marked to market each quarter, the benefits of this risk management tool can
cause corn costs to be volatile from quarter to quarter due to the timing of the
change in value of the positions relative to the cost and use of the corn
commodity being hedged. Presently, Lincolnway Energy is trading in
the spot market for corn and ethanol. For more information on the corn markets
please refer to the next section, Risks, Trends and
Factors that May Affect Future Operating Results.
Process
chemicals decreased $.6 million to $1.1 million for the three months ended
December 31, 2009 from 1.7 million for the three months ended December 31,
2008. The decrease is due to a decrease of transportation costs which
lowered the price of the chemicals for the reporting period.
Ethanol
freight costs decreased $.9 million to $1.2 million for the three months ended
December 31, 2009 from $2.1 million for the three months ended December 31,
2008. The decrease is a result of switching to a new ethanol
marketer. Our current ethanol marketer prices a majority of our ethanol
contracts at a FOB price to Nevada. The freight is built into the
price of ethanol, rather than broken out as a separate cost. Our
prior ethanol marketer sold a larger percentage on a delivered basis and the
freight cost was separate. The offset of the lower freight costs will
be offset by lower ethanol revenue. Management feels that we have
improved our profit margin on ethanol sales by switching from a pooled marketing
arrangement to a stand-alone concept. Marketing and logistics become
more efficient as freight considerations drive each trade, ensuring that product
moves to the closest geographical outlet, ultimately lowering freight costs and
receiving a better contract price. Lincolnway Energy can now accept
or decline trades based on Lincolnway Energy’s specific
economics.
17
General and administrative
expenses. General and administrative expenses increased $.087
million to $.743 million for the three months ended December 31, 2009 from $.656
million for the three months ended December 31, 2008. The net
increase is an increase in consulting fees and farm input costs.
Other income and
(expense). Interest expense decreased $.064 million to $.236
million for the three months ended December 31, 2009 from $.300 million for the
three months ended December 31, 2008. Lincolnway Energy has paid down
their debt by $6.4 million since December 31, 2008.
Risks,
Trends and Factors that May Affect Future Operating Results
Corn
In the
4th
quarter of calendar year 2009 corn values inched higher from the early October
pre-harvest lows of $3.27 per bushel for December 2009 futures. The crop was
slow to dry in the field and many weather issues prevented the combines from
getting the crop out quickly. This left the corn pipeline somewhat
lacking for most of the quarter and subsequently had futures and cash prices
rising in an attempt to satisfy the near term need for new crop
corn. By the end of the quarter, the lead month futures contract
(March 10) had risen over 90 cents per bushel to over $4.18. The
influence of the outside markets and investment money flows into commodities
certainly had something to do with this price increase in corn as
well. Crude oil futures rose over 15 dollars per barrel in the same
period. The crop size in corn was forecast at record overall
production levels and yield levels but inflation bulls and commodity trading
funds were on board to buy indexes of commodities that helped to raise the value
of corn futures.
Current
supply and demand scenarios put forth by the USDA show an excess supply of corn
in 09/10 in the amount of 1.76 billion bushels, a 91 million bushel increase
from the 08/09 crop season. 13.15 billion bushels is the current
production estimate of the crop harvested this past fall. Of that
14.91 billion bushels total available, 4.2 billion bushels is expected to be
used in the ethanol industry to produce energy and livestock feed, 5.5 billion
bushels is expected to be fed straight to livestock, 1.4 billion bushels for
food and industrial use and 2.05 billion bushels is expected to be exported
outside the US. All in all, the supply situation on the current corn
crop is adequate to cover all end-user needs as well as carry over 1.76 billion
bushels into the next year.
18
Quality
concerns continue to be a risk for Lincolnway Energy with regard to the current
corn crop. Mycotoxin issues have been found in various pockets
throughout the US; toxins that occur due to weather during the growing and
harvesting season. The unseasonably wet summer is the main cause of
problem with this year’s crop. These toxins, although under control
currently, can cause problems in the distiller’s grain feed products produced at
ethanol plants if the concentrations become high enough. Other
quality concerns with the current crop include a reduction in fermentable starch
versus the previous three years. This is due to a variety of factors
including weather, farming practices and seed varieties. A reduction
in fermentable starch can reduce the yield or total gallons of ethanol per
bushel that Lincolnway Energy, LLC is able to produce.
Lincolnway
Energy attempts to offset or hedge some of the risk involved with the changing
corn price through the trading of futures and options on the Chicago Mercantile
Exchange (CME), as well as the purchase of physical delivery contracts from
suppliers. Lincolnway Energy continues to monitor and attempt to
manage risks involved with corn production in order to attempt to ensure
adequate supply and protection against rapid price increases.
Ethanol
Ethanol
prices at the CME were on the rise in the 4th
calendar quarter of 2009, along with corn. Early in the
quarter, ethanol futures were trading near $1.69 per gallon before rallying to a
quarter high near $2.12 per gallon. By the end of December values had
dropped off to $1.93 per gallon, forced lower by yearend inventory
liquidations. The rallying gasoline markets, as well as corn played a
big part in the 4th
calendar quarter increase in ethanol values. Gasoline futures
(RBOB) on the Nymex rallied over 45 cents per gallon in the
quarter.
With
ethanol trading at a 5 to 15 cent per gallon discount to gasoline futures, the
economics of blending ethanol was profitable for the time period, especially
when the 45 cent blender’s tax credit was applied to the equation.
Going
forward, this tax credit is set to expire in 2011. We see the
expiration of this tax credit as a potential risk for the ethanol
industry. The current political atmosphere does not guarantee that
this credit will be renewed.
19
Crush
Margin
The gross
crush margin represents the biggest factor affecting the future results of
Lincolnway Energy. This margin figure represents the gross profit or
loss of buying a bushel of corn and converting it into gallons of marketable
denatured ethanol. All of the fundamental factors that influence the
corn or ethanol markets are ultimately expressed in the crush
margin. The crush margin was increasing through much of the 4th
calendar quarter. This was due mainly to the prior period of
extended negative crush margins that had forced many ethanol producers into
extended shutdowns or bankruptcy. Over 2 billion gallons of
production was forced offline in the first half of calendar year
2009. When crush margins returned to profitability, many of these
companies had difficulty securing operating capital to restart their
plants. However, the demand situation in the ethanol continued to
grow incrementally, as it has been doing for the past 5 years. The
market had a short-term supply shortfall. As such, crush margins
began to respond positively. Ultimately by the end of the 4th
calendar quarter, many of these plants did start back up, as well as some
new production. The increased production late in the 4th
calendar quarter, along with yearend inventory liquidation, forced the crush
margin back down (see chart below).
Major
factors that could continue to change the crush margin, thereby affecting future
profitability results of Lincolnway Energy, include weather affecting corn
production, changes in governmental policy, and international economic
changes. Availability of capital can also have an effect, as we saw
in 2009.
ETHANOL
AND CORN PRICE COMPARISON- CRUSH MARGIN HISTORY
Source:
Chicago Mercantile Exchange
20
Liquidity
and Capital Resources
The
following table summarizes our sources and uses of cash and cash equivalents
from our unaudited statement of cash flows for the periods presented (in
thousands):
Three Months Ended Dec 31,
|
||||||||
(Unaudited)
|
||||||||
Cash Flow Data:
|
2009
|
2008
|
||||||
Net
cash provided by (used in) operating activities
|
3,124 | (4,386 | ) | |||||
Net
cash (used in) investing activities
|
(7 | ) | (601 | ) | ||||
Net
cash (used in) financing activities
|
(3,781 | ) | (1,281 | ) | ||||
Net
increase (decrease) in cash and cash equivalents
|
(665 | ) | (6,268 | ) |
For the
three months ended December 31, 2009, net cash provided by operating activities
increased by $7.5 million, when compared to cash used by operating activities
for the three months ended December 31, 2008. The increase is primarily due to
an increase in net income for the three months ended December 31, 2009 of
$9.3 million, offset by a $2.8 million increase in trade and other accounts
receivable. The $9.3 million increase in net income is primarily
driven by improved market prices for corn and ethanol for the three months ended
December 31, 2009 compared to the prior year and for the three months ended
December 31, 2008, Lincolnway Energy experienced a $3.7 million loss due to
derivative activities.
Cash
flows used in investing activities reflect the impact of property and equipment
acquired for the ethanol plant. Net cash used in investing activities decreased
by $.594 million for the three months ended December 31, 2009 compared to cash
provided by investing activities for the three months ended December 31,
2008. The decrease is due to a decrease of property and equipment
purchases for the plant.
Cash
flows from financing activities include transactions and events whereby cash is
obtained from, or paid to, depositors, creditors or investors. Net
cash used in financing activities increased by $2.5 million for the three months
ended December 31, 2009 compared to cash used in investing activities for the
three months ended December 31, 2008. The increase is due to
an increase in payments on long-term borrowings for the three months
ended December 31, 2009, compared to cash the three months ended December 31,
2008.
After
Lincolnway Energy’s prepayment of $3.75 million in December 2009 and $1.25
million on February 10, 2010, Lincolnway Energy’s next term loan payment is not
due until March 2011.
21
As of
February 2010, Lincolnway Energy is in compliance with all bank covenants
related to bank financing.
Lincolnway
Energy’s financial position and liquidity are, and will be, influenced by a
variety of factors, including:
|
·
|
their
ability to generate cash flows from
operations;
|
|
·
|
the
level of their outstanding indebtedness and the interest they are
obligated to pay; and
|
|
·
|
their
capital expenditure requirements, which consists primarily of plant
improvements to improve
efficiencies.
|
Lincolnway
Energy expects to have available cash to meet their current anticipated
liquidity needs.
Critical
Accounting Estimates and Accounting Policies
Lincolnway
Energy's financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America and follow general
practices within the industries in which Lincolnway Energy
operates. This preparation requires management to make estimates,
assumptions, and judgments that affect the amounts reported in the financial
statements and accompanying notes. These estimates, assumptions and
judgments are based on information available as of the date of the financial
statements; accordingly, as this information changes, actual results could
differ from the estimates, assumptions, and judgments reflected in the financial
statements. Certain policies inherently have a greater reliance on
the use of estimates, assumptions, and judgments and, as such, have a greater
possibility of producing results that could be materially different than
originally reported. Management believes the following policies are
both important to the portrayal of Lincolnway Energy's financial condition and
results of operations and require subjective or complex judgments; therefore,
management considers the following to be critical accounting
policies.
Off-Balance
Sheet Arrangements
Lincolnway
Energy currently does not have any off-balance sheet
arrangements.
22
Revenue
Recognition
Revenue
from the sale of Lincolnway Energy’s ethanol and distiller’s grains is
recognized at the time title and all risks of ownership transfer to the
customers. This generally occurs upon the loading of the
product. For ethanol, title passes from Lincolnway Energy at the time
the product crosses the loading flange into either a railcar or truck. For
distiller’s grains, title passes upon the loading of distiller's grains into
trucks. For railcar shipments, this takes place when the railcar is
filled and the marketer receives written notice that they have been loaded and
are available for billing. Shipping and handling costs incurred by
Lincolnway Energy for the sale of ethanol and distiller’s grain are included in
costs of goods sold.
Lincolnway
Energy entered into a new ethanol marketing agreement with Green Plains Trade
Group LLC (GPTG) on September 25, 2009. The purchase
price payable to Lincolnway Energy will be GPTG's contract selling price for the
ethanol in question, less various costs and a fee to GPTG. The
ethanol marketing agreement includes a minimum purchase price. Title
and all risk of loss and damage to all ethanol commences at the time the ethanol
passes across the inlet flange into rail cars or tank cars of the GPTG carrier
at the Lincolnway Energy plant.
Lincolnway
Energy’s distiller’s grain production is sold to Hawkeye Gold,
LLC. Lincolnway Energy pays Hawkeye Gold, LLC a marketing fee for
dried distiller’s grains equal to the greater of 2% of the FOB plant price for
the dried distiller’s grain or a per-ton fee of $1.30 for the dried distiller’s
grain. The marketing fee for wet distiller’s grains is the greater of
3% of the FOB plant price for the wet distiller’s grains or a per-ton fee of
$1.00 for the wet distiller’s grains.
Lincolnway
Energy’s corn oil production is sold to FEC Solutions, LLC (FECS). For corn oil,
title passes upon the loading of the corn oil into the trucks. The purchase
price payable by FECS for each shipment of corn oil is the FOB sales price less
a marketing and technical assistance fee in an amount equal to 5% of the FOB
sales price.
Derivative
Instruments
Lincolnway
Energy enters into derivative contracts to hedge its exposure to price risk
related to forecasted corn needs, forward corn purchase contracts and ethanol
contracts. Lincolnway Energy does not typically enter into derivative
instruments other than for hedging purposes. All the derivative
contracts are recognized on the December 31, 2009 balance sheet at their fair
value. Although Lincolnway Energy believes its derivative positions
are economic hedges, none has been designated as a hedge for accounting
purposes. Accordingly, any realized or unrealized gain or loss
related to these derivative instruments is recorded in the statement of
operations as a component of cost of goods sold for corn derivatives and through
revenue for ethanol derivatives.
23
Item
3.
|
Quantitative
and Qualitative Disclosures About Market
Risk.
|
In
addition to the various risks inherent in Lincolnway Energy's operations,
Lincolnway Energy is exposed to various market risks. The primary
market risks arise as a result of possible changes in certain commodity prices
and changes in interest rates.
Commodity
Price Risk
|
Lincolnway
Energy is exposed to market risk with respect to the price of ethanol,
which is Lincolnway Energy's principal product, and the price and
availability of corn and coal, which are the principal commodities used by
Lincolnway Energy to produce ethanol. The other primary product
of Lincolnway Energy is distiller's grains, and Lincolnway Energy is also
subject to market risk with respect to the price for distiller's
grains. The prices for ethanol, distiller's grains, corn and
coal are volatile, and Lincolnway Energy will experience market conditions
where the prices Lincolnway Energy receives for its ethanol and
distiller's grains are declining, but the price Lincolnway Energy pays for
its corn, coal and other inputs is increasing. Lincolnway
Energy's results will therefore vary substantially over time, and include
the possibility of losses, which could be
substantial.
|
|
In
general, rising ethanol and distiller's grains prices result in higher
profit margins, and therefore represent favorable market
conditions. Lincolnway Energy is, however, subject to various
material risks related to its production of ethanol and distiller's grains
and the price for ethanol and distiller's grains. For example,
ethanol and distiller's grains prices are influenced by various factors
beyond the control of Lincolnway Energy's management, including the supply
and demand for gasoline, the availability of substitutes and the effects
of laws and regulations.
|
|
In
general, rising corn prices result in lower profit margins and,
accordingly, represent unfavorable market
conditions. Lincolnway Energy will generally not be able to
pass along increased corn costs to its ethanol
customers. Lincolnway Energy is subject to various material
risks related to the availability and price of corn, many of which are
beyond the control of Lincolnway Energy. For example, the
availability and price of corn is subject to wide fluctuations due to
various unpredictable factors, including weather conditions, crop yields,
farmer planting decisions, governmental policies with respect to
agriculture, and local, regional, national and international trade, demand
and supply. If Lincolnway Energy's corn costs were to increase
$.10 per bushel from one year to the next, the impact on cost of goods
sold would be approximately $1.95 million for the year, assuming corn use
of 19.5 million bushels during the year. Lincolnway Energy
consumed approximately 18.8 million bushels of corn during the fiscal year
ended September 30, 2009.
|
24
|
Lincolnway
Energy's average gross corn cost during the three months ended December
31, 2009 was approximately $3.63 per bushel, compared to $4.14 per bushel
for the three months ended December 31,
2008.
|
|
During
the three months ended December 31, 2009, corn prices based on the Chicago
Mercantile Exchange daily futures data ranged from a low of $3.275 per
bushel for December 2009 delivery to a high of $4.2125 per
bushel for March 2010 delivery. The corn prices based on the
Chicago Mercantile Exchange daily futures data during the three months
ended December 31, 2008 ranged from a low of $3.06 per bushel for March
2009 delivery to a high of $5.15per bushel for March 2009
delivery.
|
|
The
average price Lincolnway Energy received for its ethanol during the three
months ended December 31, 2009 was $1.95 per gallon, as compared to $1.76
per gallon during the three months ended December 31,
2008.
|
|
During
the three months ended December 31, 2009, ethanol prices based on the
Chicago Mercantile Exchange daily futures data ranged from a low of $1.71
per gallon for November 2009 delivery to a high of $2.12 per
gallon for November 2009 delivery. The ethanol prices based on
the Chicago Mercantile Exchange daily futures data during the three months
ended December 31, 2008 ranged from a low of $1.40 per gallon for March
2009 delivery to a high of $2.11 for March 2009
delivery.
|
|
Lincolnway
Energy may from time to time take various cash, futures, options or other
positions with respect to its corn needs in an attempt to minimize or
reduce Lincolnway Energy's price risks related to corn. Those
activities are, however, also subject to various material risks, including
that price movements in the cash and futures corn markets are highly
volatile and are influenced by many factors and occurrences which are
beyond the control of Lincolnway
Energy.
|
|
Although
Lincolnway Energy intends its futures and option positions to accomplish
an economic hedge against Lincolnway Energy's future purchases of corn or
futures sales of ethanol, Lincolnway Energy has chosen not to use hedge
accounting for those positions, which would match the gain or loss on the
positions to the specific commodity purchase being
hedged. Lincolnway Energy is instead using fair value
accounting for the positions, which generally means that as the current
market price of the positions changes, the realized or unrealized gains
and losses are immediately recognized in Lincolnway Energy's costs of
goods sold in the statement of operations for corn positions or as a
component of revenue in the statement of operations for ethanol
positions. The immediate recognition of gains and losses on
those positions can cause net income to be volatile from quarter to
quarter due to the timing of the change in value of the positions relative
to the cost and use of the commodity being hedged. For example,
Lincolnway Energy's net gain on corn derivative financial instruments that
was included in its cost of goods sold for the three months ended December
31, 2009 was $243,300, as opposed to the net loss of $3,693,201 for the
three months ended December 31,
2008.
|
25
|
The
extent to which Lincolnway Energy may enter into arrangements with respect
to its ethanol or corn during the year may vary substantially from time to
time based on a number of factors, including supply and demand factors
affecting the needs of customers to purchase ethanol or suppliers to sell
Lincolnway Energy raw materials on a fixed basis, Lincolnway Energy's
views as to future market trends, seasonable factors and the cost of
future contracts.
|
|
Lincolnway
Energy's cost per ton for coal under its current coal supply agreement is
subject to various fixed and periodic adjustments based on factors which
are outside of the control of Lincolnway Energy's management. The factors
include changes in certain inflation type indices, increases in
transportation costs and the quality of coal. Lincolnway
Energy's coal costs will therefore vary, and the variations could be
material. Lincolnway Energy's coal costs for the three months
ended December 31, 2009 and 2008 represented approximately 5% of
Lincolnway Energy's total cost of goods sold for that
period.
|
Interest
Rate Risk
|
Lincolnway
Energy has various loan agreements and promissory notes which expose
Lincolnway Energy to market risk related to changes in the interest rate
imposed under those loan agreements and promissory
notes.
|
The
interest rate under all of the loan agreements and promissory notes, other than
with respect to $3,750,000 of the loan with Co-Bank, are, however, fixed at
rates ranging from 0% to 6.62% per annum. The variable interest rate
for $3,750,000 of the Co-Bank loan is based on the one-month LIBOR index rate
plus 3.3% and was at 3.54% per annum as of December 31,
2009. Lincolnway Energy's outstanding loan amount with Co-Bank as of
December 31, 2009 was $11,500,000. As noted, $3,750,000 of that
amount accrues interest at the variable interest rate described
above. The remaining balance of the loan is fixed at 6.62% per annum
until July, 2011.
Lincolnway
Energy does not anticipate any material increase in interest rates during
2010.
26
Item
4.
|
Controls
and Procedures.
|
|
Evaluation
of Disclosure Controls and
Procedures
|
|
Lincolnway
Energy's management, under the supervision and with
the participation of Lincolnway Energy's president
and chief executive officer and Lincolnway Energy's chief financial
officer, have evaluated the effectiveness of Lincolnway
Energy's disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Securities Exchange
Act of 1934) as of the end of the period covered by this quarterly
report. Based on that evaluation, Lincolnway Energy's
president and chief executive officer and Lincolnway Energy's chief
financial officer have concluded that, as of the end of
the period covered by this quarterly report, Lincolnway Energy's
disclosure controls and procedures have been effective to provide
reasonable assurance that the information required to be disclosed
in the reports Lincolnway Energy files or submits under the
Securities Exchange Act of 1934 is (i) recorded,
processed, summarized and reported within the time
periods specified in the Securities and
Exchange Commission's rules and forms,
and (ii) accumulated and communicated to
management, including Lincolnway Energy's principal
executive and principal financial officers or persons performing such
functions, as appropriate, to allow timely decisions
regarding disclosure. Lincolnway Energy believes that a
control system, no matter how well designed and operated, cannot
provide absolute assurance that the objectives of the control
system are met, and no evaluation of controls can provide
absolute assurance that all control issues and instances of
fraud, if any, within a company have been
detected.
|
|
Changes
in Internal Control Over Financial
Reporting
|
|
No
change in Lincolnway Energy's internal control over financial reporting
occurred during the period covered by this quarterly report that has
materially affected, or is reasonably likely to materially affect,
Lincolnway Energy's internal control over financial
reporting.
|
PART
II - OTHER INFORMATION
Item
1.
|
Legal
Proceedings.
|
|
Except
as noted in the following paragraphs, as of the date of this quarterly
report, Lincolnway Energy was not aware of any material pending legal
proceeding to which Lincolnway Energy was a party or of which any of
Lincolnway Energy's property was the subject, other than ordinary routine
litigation, if any, that was incidental to Lincolnway Energy's
business. Except as noted in the following paragraphs, as of
the date of this quarterly report, Lincolnway Energy was not aware that
any governmental authority was contemplating any material proceeding
against Lincolnway Energy or any of Lincolnway Energy's
property.
|
27
On
December 4, 2007, the Iowa Environmental Protection Commission referred alleged
environmental law violations by Lincolnway Energy to the Iowa Attorney General's
office for enforcement action. The referred allegations concern
wastewater releases relating to construction activities and exceedences of iron
and total suspended solid limits in Lincolnway Energy's NPDES wastewater
discharge permit and also air permitting, emissions limit exceedences, stack
testing, monitoring and reporting.
Lincolnway
Energy believes that it will be able to reach a settlement of all of the
allegations of the Iowa Environmental Protection Commission by the close of the
first calendar quarter of 2010 on terms that will not have a material adverse
effect on Lincolnway Energy's business or financial
condition. Lincolnway Energy still cannot, however, definitively
predict at this time the outcome of any settlement or other proceedings that may
arise out of the allegations. Lincolnway Energy was therefore unable
at the time of the preparation of this quarterly report to definitively
determine what effect the proceedings of the Iowa Attorney General will have on
Lincolnway Energy; although, as noted above, based on the negotiations to date,
Lincolnway Energy believes it will be able to settle all of the allegations on
terms that will not have a material adverse effect on Lincolnway Energy's
business or financial condition.
As part
of the process of attempting to negotiate a settlement of the allegations
regarding emissions limit exceedences and to otherwise comply with air emissions
requirements, Lincolnway Energy filed an application with the Iowa Department of
Natural Resources on August 28, 2008 for Lincolnway Energy to obtain a new air
quality permit under the 250 ton rules which were adopted in late
2007. Lincolnway Energy believes that its current levels of emissions
would comply with the conditions of that air quality permit. There is
not, however, any assurance that the air quality permit will be issued to
Lincolnway Energy or that Lincolnway Energy will be issued a permit which would
allow emissions to the full level that would otherwise be permitted under the
250 ton rules. Lincolnway Energy may also be subject to higher
ongoing compliance and operating costs under the new air quality
permit.
Item
1A.
|
Risk
Factors.
|
|
There
have been no material changes from the risk factors as previously
disclosed in Lincolnway Energy's Form 10-K for the fiscal year ended
September 30, 2009 and filed with the Securities and Exchange Commission
on December 22, 2009.
|
|
An
investment in any membership units of Lincolnway Energy involves a high
degree of risk and is a speculative and volatile investment. An
investor could lose all or part of his or her investment in any membership
units.
|
28
Item
2.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds.
|
|
Lincolnway
Energy did not sell any membership units during the period of October 1,
2009 through December 31, 2009.
|
|
None
of Lincolnway Energy's membership units were purchased by or on behalf of
Lincolnway Energy or any affiliated purchaser (as defined in Rule
10b-18(a)(3) of the Exchange Act) of Lincolnway Energy during the period
of October 1, 2009 through December 31,
2009.
|
Item
3.
|
Defaults
Upon Senior Securities.
|
|
There
has been no material default in the payment of principal, interest, a
sinking or purchase fund installment, or any other material default not
cured within thirty days, with respect to any indebtedness of Lincolnway
Energy exceeding 5% of the total assets of Lincolnway
Energy.
|
|
No
material arrearage in the payment of dividends or any other material
delinquency has occurred with respect to any class of preferred membership
units of Lincolnway Energy which is registered or which ranks prior to any
class of registered membership units of Lincolnway
Energy.
|
Item
4.
|
Submission
of Matters to a Vote of Security
Holders.
|
|
No
matter was submitted to a vote of the members of Lincolnway Energy,
through the solicitation of proxies or otherwise, during the period of
October 1, 2009 through December 31,
2009.
|
Item
5.
|
Other
Information.
|
There was
no information required to be disclosed in a report on Form 8-K during the
period of October 1, 2009 through December 31, 2009 which was not reported on a
Form 8-K.
There
were no material changes during the period of October 1, 2009 through December
31, 2009 to the procedures by which the members of Lincolnway Energy may
recommend nominees to Lincolnway Energy's board.
Item
6.
|
Exhibits.
|
The
following exhibits are filed as part of this quarterly
report. Exhibits previously filed are
incorporated by reference, as noted.
29
Incorporated by Reference
|
||||||||||||
Exhibit
|
Filed Herewith;
|
Period
|
Filing
|
|||||||||
Number
|
Exhibit Description
|
Page Number
|
Form
|
Ending
|
Exhibit
|
Date
|
||||||
3.1
|
Articles
of Restatement
|
10-Q
|
6/30/07
|
3.1
|
8/13/07
|
|||||||
3.2
|
Amended
and Restated Operating Agreement and Unit Assignment
Policy
|
10-Q
|
6/30/07
|
3.2
|
8/13/07
|
|||||||
10.2
|
Master
Loan Agreement Between Lincolnway Energy, LLC and Farm Credit Services of
America
|
10
|
10.2
|
1/27/06
|
||||||||
10.3
|
Construction
and Term Loan Supplement Between Lincolnway Energy, LLC and FarmCredit
Services of America
|
10
|
10.3
|
1/27/06
|
||||||||
10.4
|
Construction
and Revolving Term Loan Supplement Between Lincolnway Energy, LLC and Farm
Credit Services of America
|
10
|
10.4
|
1/27/06
|
||||||||
10.5
|
Loan
Agreement Between Lincolnway Energy, LLC and Iowa Department of
Transportation
|
10
|
10.5
|
1/27/06
|
||||||||
10.7
|
Distiller's
Grain Marketing Agreement Between Lincolnway Energy, LLC and Hawkeye Gold,
LLC
|
10-K
|
9/30/07
|
10.7
|
12/21/07
|
|||||||
*10.9
|
Coal
Supply Agreement Between Lincolnway Energy, LLC and Williams Bulk
Transfer, Inc. See Exhibit 10.9.1 for an amendment to this
agreement.
|
10
|
10.9
|
1/27/06
|
||||||||
*10.9.1
|
Amendment
Number One
to
Coal Supply Agreement Between Lincolnway Energy, LLC and Williams Bulk
Transfer, Inc.
|
10-K
|
9/30/07
|
10.9.1
|
12/21/07
|
30
10.10
|
Loan
Agreement Between Lincolnway Energy, LLC and Iowa Department of Economic
Development
|
10
|
10.10
|
1/27/06
|
||||||||
10.11
|
Amended
and Restated Grain Handling Agreement Between Lincolnway Energy, LLC and
Heart of Iowa Cooperative
|
10
|
10.11
|
1/27/06
|
||||||||
10.13
|
Industry
Track Contract Between Lincolnway Energy, LLC and Union Pacific
Railroad
|
10-Q
|
6/30/06
|
10.13
|
8/14/06
|
|||||||
*10.15
|
Ethanol
Marketing Agreement Between Lincolnway Energy, LLC and Green Plains Trade
Group LLC
|
10-K
|
9/30/09
|
10.15
|
12/22/09
|
|||||||
31.1
|
Rule
13a-14(a) Certification of President and Chief Executive
Officer
|
E-1
|
||||||||||
31.2
|
Rule
13a-14(a) Certification of Chief Financial Officer
|
E-3
|
||||||||||
32.1
|
Section
1350 Certification of President and Chief Executive
Officer
|
E-5
|
||||||||||
32.2
|
|
Section
1350 Certification of Chief Financial Officer
|
|
E-6
|
|
|
|
|
*
|
Material
has been omitted pursuant to a request for confidential treatment and such
material has been filed separately with the Securities and Exchange
Commission.
|
[THE
REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
31
SIGNATURES
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
LINCOLNWAY
ENERGY, LLC
|
||
February
12, 2010
|
By:
|
/s/ Richard
Brehm
|
Name: Richard
Brehm
|
||
Title: President
and Chief
|
||
Executive
Officer
|
||
February
12, 2010
|
By:
|
/s/ Kim
Supercynski
|
Name: Kim
Supercynski
|
||
Title: Chief
Financial Officer
|
32
EXHIBIT
INDEX
Exhibits
Filed With Form 10-Q
of
Lincolnway Energy, LLC
For
the Quarter Ended December 31, 2009
Description of Exhibit.
|
Page
|
|||
31.
|
Rule
13a-14(a)/15d-14(a) Certifications
|
|||
31.1
|
Rule
13a-14(a) Certification of President and Chief Executive
Officer
|
E-1
|
||
31.2
|
Rule
13a-14(a) Certification of Chief Financial Officer
|
E-3
|
||
32.
|
Section
1350 Certifications
|
|||
32.1
|
Section
1350 Certification of President and Chief Executive
Officer
|
E-5
|
||
32.2
|
Section
1350 Certification of Chief Financial Officer
|
E-6
|
33