Attached files
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EX-31.1 - EXHIBIT 31.1 - FIRST UNITED ETHANOL LLC | c10330exv31w1.htm |
EX-32.1 - EXHIBIT 32.1 - FIRST UNITED ETHANOL LLC | c10330exv32w1.htm |
EX-31.2 - EXHIBIT 31.2 - FIRST UNITED ETHANOL LLC | c10330exv31w2.htm |
EX-32.2 - EXHIBIT 32.2 - FIRST UNITED ETHANOL LLC | c10330exv32w2.htm |
EX-10.3 - EXHIBIT 10.3 - FIRST UNITED ETHANOL LLC | c10330exv10w3.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, 2010
o | Transition report under Section 13 or 15(d) of the Exchange Act. |
For the transition period from to
Commission file number 000-53039
FIRST UNITED ETHANOL, LLC
(Name of registrant as specified in its charter)
Georgia (State or other jurisdiction of incorporation or organization) |
20-2497196 (I.R.S. Employer Identification No.) |
|
4433 Lewis B. Collins Road, Pelham, Georgia (Address of principal executive offices) |
31779 (Zip Code) |
(229) 522-2822
(Registrants telephone number)
(Registrants telephone number)
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 | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
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 March 31, 2010, the aggregate market value of the membership units held by non-affiliates
(computed by reference to the most recent offering price of such membership units) was $29,230,362.
As of December 29, 2010, there were 81,984 membership units outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant has incorporated by reference into Part III of this Annual Report on Form 10-K
portions of its definitive proxy statement to be filed with the Securities and Exchange Commission
within 120 days after the close of the fiscal year covered by this Annual Report.
INDEX
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Exhibit 10.3 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
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FORWARD LOOKING STATEMENTS
Some of the statements in this report may contain forward-looking statements that reflect our
current view on future events, future business, industry and other conditions, our future
performance, and our plans and expectations for future operations and actions. In some cases you
can identify forward-looking statements by the use of words such as may, should, anticipate,
believe, expect, plan, future, intend, could, estimate, predict, hope,
potential, continue, or the negative of these terms or other similar expressions. Many of
these forward-looking statements are located in this report under Item 1, Business; Item 2,
Properties and Item 7, Managements Discussion and Analysis of Financial Condition and Results
of Operations, but they may appear in other sections as well.
These forward-looking statements are only our predictions and involve numerous assumptions,
risks and uncertainties. Important factors that could significantly affect our assumptions, plans,
anticipated actions and future financial and other results include, among others, those matters set
forth in the section of this report in Item 1ARisk Factors. You are urged to consider all of
those risk factors when evaluating any forward-looking statement, and we caution you not to put
undue reliance on any forward-looking statements.
You should read this report thoroughly with the understanding that our actual results may
differ materially from those set forth in the forward-looking statements for many reasons,
including events beyond our control and assumptions that prove to be inaccurate or unfounded. We
cannot provide any assurance with respect to our future performance or results. Our actual results
or actions may differ materially from these forward-looking statements for many reasons, including
the following factors:
| Changes in our business strategy or capital improvements; |
| Volatility of corn, natural gas, ethanol, unleaded gasoline, oil, distillers grain
and other commodities prices; |
| Limitations and restrictions contained in the instruments and agreements governing
our indebtedness; |
| Our ability to generate sufficient liquidity to fund our operations, debt service
requirements and capital expenditures; |
| The results of our hedging transactions and other risk management strategies; |
| Our anticipated inelastic demand for corn, as it is the only available feedstock for
our plant; |
| Changes in the environmental regulations or in our ability to comply with the
environmental regulations that apply to our plant site and our operations; |
| The effects of mergers or consolidations in the ethanol industry; |
| Changes in general economic conditions or the occurrence of certain events causing
an economic impact in the agriculture, oil or automobile industries; |
| Changes in the availability of credit to support the level of liquidity necessary to
implement our risk management activities; |
| Changes in or elimination of federal and/or state laws (including the elimination of
any federal and/or state ethanol tax incentives); |
| Overcapacity within the ethanol industry; |
| Limitations on the demand for ethanol resulting from the blend wall which limits
the amount of ethanol blended into the national gasoline pool based on current 10
percent blend rate in standard vehicles; |
| Changes and advances in ethanol production technology that may make it more
difficult for us to compete with other ethanol plants utilizing such technology; |
| Our reliance on key management personnel; |
| The development of infrastructure related to the sale and distribution of ethanol;
and |
| Competition in the ethanol industry and from other alternative fuel additives. |
Our actual results or actions could and likely will differ materially from those anticipated
in the forward-looking statements for many reasons, including the reasons described in this report.
We are not under any duty to update the forward-looking statements contained in this report. We
cannot guarantee future results, levels of activity, performance or achievements. We caution you
not to put undue reliance on any forward-looking statements, which speak only as of the date of
this report. You should read this report and the documents that we reference in this report and
have filed as exhibits completely and with the understanding that our actual future results may be
materially different from what we currently expect. We qualify all of our forward-looking
statements by these cautionary statements.
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AVAILABLE INFORMATION
Information about us is also available at our website at www.firstunitedethanol.com, under
Investor Relations, which includes links to reports we have filed with 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. |
Overview
First United Ethanol, LLC (we, us, FUEL, First United, or the Company) was formed as
a Georgia limited liability company on March 9, 2005, for the purpose of raising capital to
develop, construct, own and operate a 100 million gallon per year ethanol plant near Camilla,
Georgia. Plant operations and the production of ethanol and distillers grains commenced on October
10, 2008. In our second year of plant operation we processed approximately 32 million bushels of
corn producing 90 million gallons of denatured fuel grade ethanol, 250,000 tons of dried distillers
grains and 75,000 tons of wet distillers grains.
On June 7, 2010 we amended our Senior Credit Agreement and our Accounts Agreement with WestLB.
Pursuant to the amended agreements, we are required to maintain a certain level of working capital.
In the event we are unable to meet the level of working capital required under the amended loan
agreements we will be assessed a five percent (5%) fee on the outstanding loans for any quarter we
are not in compliance. The Company did not meet the working capital deficit requirement of
($9,000,000) as of September 30, 2010. The resulting penalty interest of approximately $1,375,000
has been charged as a penalty fee as of September 30, 2010 and included as a long term liability.
This fee payment is in addition to the interest we are required to pay on our outstanding debt
pursuant to our original loan agreements. This additional interest fee has been accrued and will be
due February 2015, the final maturity date our outstanding loans with West LB. Furthermore, and
regardless of whether we have maintained the required level or working capital, we will be required
to make an additional quarterly principal payment of $150,000 toward our outstanding working
capital loan balance. This arrangement is distinct from the borrowing base formula and borrowing
base certificates previously utilized to monitor compliance with our working capital loans. This
amendment also removed the borrowing base default triggers from the terms of the loan, thereby
removing the requirement for waivers. Throughout our fiscal year ended September 30, 2010, we have
made every payment of principal or interest to our lender.
In the late summer of 2010, the Company hired an outside 3rd party to look at the
efficiency of the plant and provide suggestions and solutions to increase the operational
effectiveness. These studies have been completed and outlined several areas where the Company
could make improvements. Some of the improvements were immediately implemented with positive
results already being shown. The Company believes that with improvements already implemented and
the additional improvement being made, that the operational efficiency of the plant will increase
significantly, allowing the plant to run profitably. Additionally, the Companys profitability is
also dependent upon a number of other factors noted elsewhere in these financial statements,
including stable and positive crush margins. In addition, the Company is continually exploring
different avenues on its working capital line of credit and to ensure enough funding for the debt
reserve fund. These options may include negotiating different terms with the lender, raising
additional capital or subordinated debt, finding another funding source for working capital or a
combination of the above. Management is aggressively looking at its different options and
anticipates finding a solution to their liquidity issues. Management believes that once they solve
their working capital needs, they will be able to better manage the commodity risk by being able to
utilize futures and options more frequently and to lock in positive crush margin. By being able to
better take advantage of positive crush margin and with the plant running more efficiently,
management believes together this will provide enough cash flow and liquidity for the plant.
However, there can be no assurances that such operational efficiencies will provide the Company
with sufficient additional cash flow to fund its operations for fiscal year 2011.
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Deregistration
We are currently in the process of requesting approval from the Securities and Exchange
Commission to engage in a reclassification and reorganization of the Companys membership units.
The proposed transaction will provide for the reclassification of the Companys membership units
into three separate and distinct classes.
If the proposed reclassification is approved by the Securities and Exchange Commission as well
as the Companys members, we expect that each member of record holding 100 or more units will
receive one Class A unit for each common equity unit held by such unit holder prior to the
reclassification; each member of record holding 21 to 99 units will receive one Class B unit for
each common equity unit held by such unit holder immediately prior to the reclassification; and
each member of record holding 20 or fewer units will receive one Class C unit for each common
equity unit held by such unit holder immediately prior to the reclassification.
If the Companys members approve the requisite amendment to the Companys operating agreement
and the reclassification is implemented, the Company anticipates having fewer than 300 unit holders
of record of its common equity units and fewer than 500 unit holders of record of each of the
additional classes, which would enable the Company to voluntarily terminate the registration of its
units under the Securities and Exchange Act of 1934.
We expect that the classes of units will be distinguished from one another based on voting
rights. If the Companys members approve the proposed amendment to the Companys operating
agreement and the reclassification is implemented, we expect that Class A unit holders would be
entitled to vote on all matters for which unit holder approval is required under the Companys
operating agreement or state law; Class B unit holders would be entitled to vote on the election of
the Companys governors and the voluntary dissolution of the Company; and Class C unit holders
would be entitled to vote only on the voluntary dissolution of the Company. With respect to
potential future dividends, each membership unit will receive its equal portion of a declared
dividend, regardless of its class.
Principal Products and Markets
The principal products we produce are ethanol and distillers grains.
Ethanol
Ethanol is ethyl alcohol, a fuel component made primarily from corn and various other grains,
which can be used as: (i) an octane enhancer in fuels; (ii) an oxygenated fuel additive for the
purpose of reducing ozone and carbon monoxide vehicle emissions; and (iii) a non-petroleum-based
gasoline substitute. Ethanol produced in the United States is primarily used for blending with
unleaded gasoline and other fuel products. The principal purchasers of ethanol are generally
wholesale gasoline marketers or blenders. The principal markets for our ethanol are petroleum
terminals in the continental United States.
Approximately 83% of our total revenue was derived from the sale of ethanol during our fiscal
year ended September 30, 2010. Ethanol sales accounted for approximately 82% of our total revenue
for our fiscal year ended September 30, 2009.
Distillers Grains
A principal co-product of the ethanol production process is distillers grains, a high protein,
high-energy animal feed supplement primarily marketed to the dairy, poultry and beef industries.
Distillers grains contain by-pass protein that is superior to other protein supplements such as
cottonseed meal and soybean meal. By-pass proteins are more digestible to the animal, thus
generating greater lactation in milk cows and greater weight gain in beef cattle. Distillers
grains can also be included in the rations of breeder hens, broilers and laying hens which can
potentially contain up to 20% distillers grains. Dry mill ethanol processing creates three forms
of distillers grains: Distillers Wet Grains (DWS), Distillers Modified Wet Grains (DMWS) and
Distillers Dried Grains with Solubles (DDGS). DWS is processed corn mash that contains
approximately 70% moisture. DWS has a shelf life of approximately three days and can be sold only
to farms within the immediate vicinity of an ethanol plant. DMWS is DWS that has been dried to
approximately 50% moisture. DMWS have a slightly longer shelf life of approximately ten days and
are often sold to nearby markets. DDGS is DWS that has been dried to approximately 12% moisture.
DDGS has a much longer shelf life and may be sold and shipped to any market regardless of its
vicinity to an ethanol plant. Currently, 77% of the distillers grains we produce are sold as DDGS
and 23% of the distillers grains we produce are sold as wetcake or DWS. By selling a percentage
of our distillers grains as wetcake we are able increase the capacity of our plant.
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Approximately 17% of our total revenue was derived from the sale of distillers grains during
our fiscal year ended September 30, 2010. Distillers grains sales accounted for approximately 18%
of our total revenue for our fiscal year ended September 30, 2009.
Ethanol and Distillers Grains Markets
As described below in Distribution of Principal Products, we market and distribute our
ethanol through a third party. Whether or not ethanol or distillers grains produced by our ethanol
plant are sold in local markets will depend on the relative prices of the rail market and truck
market for our products. We independently market our distillers grains.
Our ethanol and distillers grains are primarily sold in the domestic market, however, as
domestic production of ethanol and distillers grains continues to expand, we anticipate increased
international sales of our products. Currently, the United States ethanol industry exports a
significant amount of distillers grains to Mexico, Canada and China. Management anticipates that
demand for distillers grains in the Asian market may continue to increase in the future as
distillers grains are used in animal feeding operations in China. During our fourth quarter of
2010, the ethanol industry experienced increased ethanol exports to Europe. These ethanol exports
benefited ethanol prices in the United States. We anticipate that ethanol exports will remain
steady in our 2011 fiscal year.
Our regional market is within a 450-mile radius of our plant and is serviced by rail. We have
a railroad loop track at our plant so we are capable of loading unit trains allowing us to more
effectively reach regional and national markets. Our regional markets include large cities that are
subject to anti-smog measures such as either carbon monoxide or ozone non-attainment areas.
Currently, most of our ethanol and distillers grains are being shipped by truck to local markets.
Distribution of Principal Products
Our ethanol plant is located near Camilla, Georgia in Mitchell County, in southwestern
Georgia. We selected the Camilla site because of its proximity to existing ethanol consumption and
accessibility to road and rail transportation. It is served by OmniTrax on the Georgia and Florida
Railway which provides connections to the CSX Railway and the Norfolk and Southern Railway. Our
site is in close proximity to major highways that connect to major petroleum terminals such as
Atlanta, Birmingham, Columbia, Jacksonville, Spartanburg, Tallahassee and Tampa. There are
approximately 70 terminals within a 250 mile radius of our plant; therefore, we believe we have a
competitive advantage over some of our competitors because we are able to truck ethanol to these
terminals cheaper than our competitors can transport it by rail to the same terminals.
Ethanol Distribution
We have an ethanol marketing agreement with Eco-Energy, Inc. (Eco) for the purpose of
marketing and distributing all of the ethanol we produce at the plant. We pay a fee of $0.01 per
net gallon of ethanol purchased for rail and $0.012 per net gallon of ethanol purchased for
outbound trucks. The term of the agreement was renewed in October 2010 and will continue until
October 2012. Under the agreement Eco is responsible for all transportation arrangements for the
distribution of ethanol.
Distillers Grains Distribution
We independently market the distillers grains we produce. We are currently taking advantage of
the local truck market for distillers grains.
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New Products and Services
On September 1, 2010 Airgas Carbonic, Inc. (Airgas) commenced operations at the carbon
dioxide facility it has constructed near our plant. Pursuant to our agreement with Airgas, the
carbon dioxide facility will purify, liquefy, refine and store carbon dioxide produced as a
co-product of our ethanol production process. We expect the new carbon dioxide facility to be
another source of revenue for our company.
Sources and Availability of Raw Materials
Corn Supply
The major raw material required for our ethanol plant to produce ethanol and distillers grains
is corn. To produce 100 million gallons of ethanol per year, our ethanol plant needs approximately
36 million bushels of corn per year, or approximately 100,000 bushels per day, as the feedstock for
our dry milling process. The grain supply for our plant is being obtained primarily from regional
and national rail markets through Palmetto, our grain procurement agent.
We are significantly dependent on the availability and price of corn. By purchasing corn from
local producers we are able to save freight expense compared to corn delivered to our facility by
rail from the Midwest. However, a portion of our freight savings is offset by the stronger basis
in our local corn market. We augment our local corn purchases with corn from other areas, such as
the eastern Corn Belt states of Indiana, Ohio and Illinois.
Our grain procurement agreement with Palmetto is for a term that runs through December 31,
2010, at which point we anticipate renewing the agreement. Palmetto uses its best efforts in
obtaining grain at the lowest possible quotes available in the Midwest rail grain market for our
approval. We enter into grain purchase contracts with the third party suppliers identified by
Palmetto. Palmetto charges an introducing broker fees to third party suppliers. We have the right
to purchase grain in situations where Palmetto is not involved in the transaction and Palmetto
cannot charge a brokerage fee to the third party supplier. We expect to continue our partnership
with Palmetto on a more limited basis as we develop our in-house grain procurement staff.
On December 10, 2010, the United States Department of Agriculture (USDA) released its Crop
Production report, which estimated the 2010 grain corn crop at approximately 12.5 billion bushels.
The December 2010 estimate of the 2010 corn crop is approximately 4.3% lower than the USDAs
estimate of the 2009 record setting corn crop of 13.1 billion bushels. Corn prices can be volatile
as a result of a number of factors, the most important of which are weather, current and
anticipated stocks, domestic and export prices and supports and the governments current and
anticipated agricultural policy. The price of corn was volatile during our 2010 fiscal year and we
anticipate that it will continue to be volatile in the future. Increases in the price of corn
significantly increase our cost of goods sold. If these increases in cost of goods sold are not
offset by corresponding increases in the prices we receive from the sale of our products, these
increases in cost of goods sold can have a significant negative impact on our financial
performance.
Utilities
Natural Gas. Natural gas is an important input commodity to our manufacturing process.
We estimate that our annual natural gas usage is approximately 3,400,000 Million British Thermal
Units annually and constitutes 10% of our annual total production cost. We use natural gas to
produce process steam and to dry our distillers grain products to a moisture content at which they
can be stored for long periods of time, and can be transported greater distances, so that we can
market the product to broader livestock markets, including poultry and swine markets in the
continental United States. We entered into a natural gas facilities agreement and natural gas
supply and capacity agreement with the City of Camilla.
Electricity. We require a significant amount of electrical power to operate the
plant. We have entered into a contract for electric service and an excess facilities charge
agreement with Georgia Power Company (Georgia Power). During the term of the contract, we pay
monthly charges calculated in accordance with the applicable rules, regulations and rate schedules.
Pursuant to the facilities charge agreement, Georgia Power has installed facilities on our
premises. We compensate Georgia Power for the cost of installing the facilities in the amount of
approximately $2,058,000 in three annual payments of approximately $686,000. The first annual
payment became due one year after the installation of permanent meter facilities. We also
compensate Georgia Power for the allocated costs of operating and maintaining the facilities and we
will pay ongoing annual facilities charges of $95,000.
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Water. We obtain water for our plant from two high capacity wells located in close
proximity to the site. Our plant requires approximately 900 gallons per minute. That is
approximately 1,300,000 gallons per day. In July 2007 we obtained from the State of Georgia a
permit to use groundwater in a specified amount exceeding our water usage. As a condition of the
permit, we are required to actively implement a water conservation plan approved by the State of
Georgia.
Much of the water used in an ethanol plant is recycled back into the process. There are,
however, certain areas of production where fresh water is needed. Those areas include boiler
makeup water and cooling tower water. Boiler makeup water is treated on-site to minimize all
elements that will harm the boiler and recycled water cannot be used for this process. Cooling
tower water is deemed non-contact water because it does not come in contact with the mash, and,
therefore, can be regenerated back into the cooling tower process. The makeup water requirements
for the cooling tower are primarily a result of evaporation.
Patents, Trademarks, Licenses, Franchises and Concessions
We do not currently hold any patents, trademarks, franchises or concessions. We were granted
a perpetual and royalty free license by ICM to use certain ethanol production technology necessary
to operate our ethanol plant. The cost of the license granted by ICM was included in the amount we
paid to Fagen to design and build our ethanol plant and expansion.
Seasonality Sales
We experience some seasonality of demand for our ethanol and distillers grains. Since ethanol
is predominantly blended with gasoline for use in automobiles, ethanol demand tends to shift in
relation to gasoline demand. As a result, we experience some seasonality of demand for ethanol in
the summer months related to increased driving and, as a result, increased gasoline demand. In
addition, we experience some increased ethanol demand during holiday seasons related to increased
gasoline demand.
Competition
We are competing with numerous other ethanol producers. Ethanol is a commodity product, like
corn, which means our ethanol plant competes with other ethanol producers on the basis of price
and, to a lesser extent, delivery service. As a destination plant, we believe First United Ethanol
is able to compete favorably with other ethanol producers due to our proximity to ethanol markets
and multiple modes of transportation. However, we face higher costs for our corn when compared to
Midwest ethanol producers with access to corn produced in close proximity to their ethanol plants.
Our competitive position in the ethanol industry has been our ability to offset any higher corn
costs with increased transportation savings due to our close proximity to blending terminals.
The following table identifies the majority of the largest ethanol producers in the United
States along with their production capacities.
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U.S. FUEL ETHANOL PRODUCTION CAPACITY
BY TOP PRODUCERS
Producers of Approximately 400
BY TOP PRODUCERS
Producers of Approximately 400
million gallons per year (mmgy) or more
Under Construction/ | ||||||||
Current Capacity | Expansions | |||||||
Company | (mmgy) | (mmgy) | ||||||
POET Biorefining |
1,629.0 | 5.0 | ||||||
Archer Daniels Midland |
1,450.0 | 275 | ||||||
Valero Renewable Fuels |
1,130.0 | |||||||
Green Plains Renewable Energy |
657.0 |
Updated: November 11, 2010
Competition from Alternative Fuels
Alternative fuels and ethanol production methods are continually under development by ethanol
and oil companies. The major ethanol and oil companies have significantly greater resources than
we have to develop alternative products and to influence legislation and public perception of
ethanol.
One current trend in ethanol production research is to develop an efficient method of
producing ethanol from cellulose-based biomass, such as agricultural waste, forest residue,
municipal solid waste, and energy crops. The biomass trend is driven by the fact that
cellulose-based biomass is generally cheaper than corn, and producing ethanol from cellulose-based
biomass would create opportunities to produce ethanol in areas which are unable to grow corn.
Distillers Grains Competition
Ethanol plants in the Midwest produce the majority of distillers grains and primarily compete
with other ethanol producers in the production and sales of distillers grains. Our location in
southwest Georgia distinguishes our facility from distillers grains producers in the Midwest. We
are taking advantage of our proximity to local livestock, poultry and dairy producers by developing
a truck market for our distillers grains.
According to the Renewable Fuels Associations Ethanol Industry outlook 2010, ethanol plants
produced 25 million metric tons of distillers grains in 2008/2009 and estimates production of 29
million metric tons in 2009/2010. The primary consumers of distillers grains are dairy and beef
cattle. In recent years, an increasing amount of distillers grains have been used in the swine and
poultry markets. With the advancement of research into the feeding rations of poultry and swine,
we expect these markets to expand and create additional demand for distillers grains; however, no
assurance can be given that these markets will in fact expand, or if they do, that we will benefit
from any expansion. The market for distillers grains is generally confined to locations where
freight costs allow it to be competitively priced relative to other feed ingredients.
Research and Development
We are continually working to develop new methods of operating the ethanol plant more
efficiently. We continue to conduct research and development activities in order to realize these
efficiency improvements.
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Governmental Regulation and Federal Ethanol Supports
Federal Ethanol Supports
The ethanol industry is dependent on several economic incentives to produce ethanol, including
federal tax incentives and ethanol use mandates. One significant federal ethanol support is the
Federal Renewable Fuels Standard (the RFS). The RFS requires that in each year, a certain amount
of renewable fuels must be used in the United States. The RFS is a national program that does not
require that any renewable fuels be used in any particular area or state, allowing refiners to use
renewable fuel blends in those areas where it is most cost-effective. The RFS requirement
increases incrementally each year until the United States is required to use 36 billion gallons of
renewable fuels by 2022. Starting in 2009, the RFS required that a portion of the RFS must be met
by certain advanced renewable fuels. These advanced renewable fuels include ethanol that is not
made from corn, such as cellulosic ethanol and biomass based biodiesel. The use of these advanced
renewable fuels increases each year as a percentage of the total renewable fuels required to be
used in the United States.
The RFS for 2010 was approximately 13 billion gallons, of which corn based ethanol could be
used to satisfy approximately 12 billion gallons. The RFS for 2011 is approximately 14 billion
gallons, of which corn based ethanol can be used to satisfy approximately 12.6 billion gallons.
Current ethanol production capacity exceeds the 2011 RFS requirement which can be satisfied by corn
based ethanol.
In February 2010, the EPA issued new regulations governing the RFS. These new regulations
have been called RFS2. The most controversial part of RFS2 involves what is commonly referred to
as the lifecycle analysis of green house gas emissions. Specifically, the EPA adopted rules to
determine which renewable fuels provided sufficient reductions in green house gases, compared to
conventional gasoline, to qualify under the RFS program. RFS2 establishes a tiered approach, where
regular renewable fuels are required to accomplish a 20% green house gas reduction compared to
gasoline, advanced biofuels and biomass-based biodiesel must accomplish a 50% reduction in green
house gases, and cellulosic biofuels must accomplish a 60% reduction in green house gases. Any
fuels that fail to meet this standard cannot be used by fuel blenders to satisfy their obligations
under the RFS program. The scientific method of calculating these green house gas reductions has
been a contentious issue. Many in the ethanol industry were concerned that corn based ethanol
would not meet the 20% green house gas reduction requirement based on certain parts of the
environmental impact model that many in the ethanol industry believed was scientifically suspect.
However, RFS2 as adopted by the EPA provides that corn-based ethanol from modern ethanol production
processes does meet the definition of a renewable fuel under the RFS program. Many in the ethanol
industry are concerned that certain provisions of RFS2 as adopted may disproportionately benefit
ethanol produced from sugarcane. This could make sugarcane based ethanol, which is primarily
produced in Brazil, more competitive in the United States ethanol market. If this were to occur,
it could reduce demand for the ethanol that we produce.
Many in the ethanol industry believe that it will be difficult to meet the RFS requirement in
future years without an increase in the percentage of ethanol that can be blended with gasoline for
use in standard (non-flex fuel) vehicles. Most ethanol that is used in the United States is sold
in a blend called E10. E10 is a blend of 10% ethanol and 90% gasoline. E10 is approved for use in
all standard vehicles. Estimates indicate that gasoline demand in the United States is
approximately 135 billion gallons per year. Assuming that all gasoline in the United States is
blended at a rate of 10% ethanol and 90% gasoline, the maximum demand for ethanol is 13.5 billion
gallons per year. This is commonly referred to as the blend wall, which represents a theoretical
limit where more ethanol cannot be blended into the national gasoline pool. This is a theoretical
limit because it is believed that it would not be possible to blend ethanol into every gallon of
gasoline that is being used in the United States and it discounts the possibility of additional
ethanol used in higher percentage blends such as E85 used in flex fuel vehicles. Many in the
ethanol industry believe that we will reach this blending wall in 2011, since the RFS requirement
for 2011 is 14 billion gallons, much of which will come from ethanol. The RFS requires that 36
billion gallons of renewable fuels must be used each year by 2022, which equates to approximately
27% renewable fuels used per gallon of gasoline sold. In order to meet the RFS mandate and expand
demand for ethanol, management believes higher percentage blends of ethanol must be utilized in
standard vehicles.
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Recently, the United States Environmental Protection Agency allowed the use of E15, gasoline
which is blended at a rate of 15% ethanol and 85% gasoline, in vehicles manufactured in the model
year 2007 and later. The EPA is expected to make a ruling on allowing E15 for use in vehicles
produced in model year 2001 and later by the end of 2010. However, management believes that many
gasoline retailers will refuse to provide E15 due to the fact that not all standard vehicles will
be allowed to use E15 and due to the labeling requirements the EPA may impose. The EPA is
considering instituting labeling requirements associated with E15 which may unfairly discourage
consumers from purchasing E15. As a result, the approval of E15 may not significantly increase
demand for ethanol. In addition to E15, the ethanol industry is pushing the use of an intermediate
blend of 12% ethanol and 88% gasoline called E12. Management believes that E12 may be more
beneficial to the ethanol industry than E15 because many believe that E12 could be approved for use
in all standard vehicles. Management believes this will make it easier for retailers to supply E12
compared to E15, unless E15 is approved for use in all standard vehicles. Two lawsuits were filed
on November 9, 2010 by representatives of the food industry and the petroleum industry challenging
the EPAs approval of E15. It is unclear what effect these lawsuits will have on the
implementation of E15 in the United States retail gasoline market.
In addition to the RFS, the ethanol industry depends on the Volumetric Ethanol Excise Tax
Credit (VEETC). VEETC provides a volumetric ethanol excise tax credit of 45 cents per gallon of
ethanol blended with gasoline. VEETC has been extended and is now scheduled to expire on December
31, 2011. If this tax credit is not renewed beyond the 2011 calendar year, it likely would have a
negative impact on the price of ethanol and demand for ethanol in the market. Further, elimination
of VEETC may lead to less discretionary blending of ethanol where gasoline blenders use ethanol to
reduce the cost of blended gasoline. However, due to the RFS, we anticipate that demand for
ethanol will continue to mirror the RFS requirement, even without the VEETC. If the RFS is reduced
or eliminated, the decrease in demand for ethanol related to the elimination of VEETC may be more
substantial.
Effect of Governmental Regulation
The governments regulation of the environment changes constantly. 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. It is possible that more
stringent federal or state environmental rules or regulations could be adopted, which could
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 ethanol.
Plant operations are governed by the Occupational Safety and Health Administration (OSHA). OSHA
regulations may change such that the costs of operating the plant may increase. Any of these
regulatory factors may result in higher costs or other adverse conditions effecting our operations,
cash flows and financial performance.
In late 2009, California passed a Low Carbon Fuels Standard (LCFS). The California LCFS
requires that renewable fuels used in California must accomplish certain reductions in green house
gases which is measured using a lifecycle analysis, similar to RFS2. Management believes that this
lifecycle analysis is based on unsound scientific principles that unfairly harms corn based
ethanol. Management believes that these new regulations will preclude corn based ethanol from
being used in California. California represents a significant ethanol demand market. If we are
unable to supply ethanol to California, it could significantly reduce demand for the ethanol we
produce. Currently, several lawsuits have been filed challenging the California LCFS.
United States ethanol production is currently benefited by a 54 cent per gallon tariff imposed
on ethanol imported into the United States. However, the 54 cent per gallon tariff is set to
expire at the end of the 2011 calendar year. Elimination of the tariff could lead to the
importation of ethanol produced in other countries, especially in areas of the United States that
are easily accessible by international shipping ports. Ethanol imported from other countries may
be a less expensive alternative to domestically produced ethanol and may affect our ability to sell
our ethanol profitably.
Employees
We currently have 60 full-time employees. Approximately nine of our employees are involved
primarily in management and administration, and the remaining fifty-one are involved primarily in
plant operations.
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Dependence on a Few Major Customers
As discussed above, we have entered into an ethanol marketing agreement with EcoEnergy. We
rely on EcoEnergy for the sale and distribution of our ethanol. Therefore, we are highly dependent
on EcoEnergy for the successful marketing of our ethanol. Any loss of EcoEnergy as our marketing
agent for our ethanol could have a negative impact on our revenues during the transition to a new
marketing firm.
Costs and Effects of Compliance with Environmental Laws
We are subject to extensive air, water and other environmental regulations and we require a
number of environmental permits to operate the plant. We have an in-house environmental permitting
technician to oversee our environmental permit compliance.
Alcohol Fuel Producers Permit. We are required to comply with applicable Alcohol and Tobacco
Tax and Trade Bureau (formerly the Bureau of Alcohol, Tobacco and Firearms) regulations. We have
obtained the requisite alcohol fuel producers permit. The term of the permit is indefinite until
terminated, revoked or suspended. The permit also requires that we maintain certain security
measures and secure an operations bond. There are other taxation requirements related to special
occupational tax and a special stamp tax.
SPCC and RMP. We have prepared and are implementing our spill prevention control and
countermeasure (SPCC) plan. This plan addresses pollution prevention regulations and has been
reviewed and certified by a professional engineer. The SPCC must be reviewed and updated every
five years.
Pursuant to the Clean Air Act, stationary sources, such as our plant, with processes that
contain more than a threshold quantity of regulated substances, such as anhydrous ammonia, are
required to prepare and implement a risk management plan (RMP). Since we use anhydrous ammonia,
we have established a plan to prevent spills or leaks of the ammonia and an emergency response
program in the event of spills, leaks, explosions or other events that may lead to the release of
the ammonia into the surrounding area.
Air Permits. Our plant is considered a minor source of regulated air pollutants. There are a
number of emission sources that require permitting. These sources include the boiler, ethanol
process equipment, storage tanks, scrubbers, and baghouses. We have received an air quality permit
issued by the Georgia Environmental Protection Division as well as a conditional use permit
approved by the Mitchell County Planning Commission and the Mitchell County Board of Commission.
The types of regulated pollutants emitted from our plant include particulate matter (PM10),
carbon monoxide (CO), nitrous oxides (NOx) and volatile organic compounds (VOCs).
We are subject to oversight activities by the Environmental Protection Agency (EPA). There
is always a risk that the EPA may enforce certain rules and regulations differently than Georgias
environmental administrators. Georgia 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. We had no environmental or nuisance claims during our
first two years of plant operations.
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 operation.
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Risks Relating to Our Business
If the Federal Volumetric Ethanol Excise Tax Credit (VEETC) expires on December 31, 2011, it
could negatively impact our profitability. The ethanol industry is benefited by VEETC which is a
federal excise tax credit of 45 cents per gallon of ethanol blended with gasoline. This excise tax
credit is set to expire on December 31, 2011. We believe that VEETC positively impacts the price
of ethanol. If VEETC is allowed to expire, it could negatively impact the price we receive for our
ethanol and could negatively impact our profitability.
We have a significant amount of debt, and our existing debt financing agreements contain, and
our future debt financing agreements may contain, restrictive covenants that limit distributions
and impose restrictions on the operation of our business. The use of debt financing makes it more
difficult for us to operate because we must make principal and interest payments on the
indebtedness and abide by covenants contained in our debt financing agreements. The level of our
debt may have important implications on our operations, including, among other things: (a) limiting
our ability to obtain additional debt or equity financing; (b) placing us at a competitive
disadvantage because we may be more leveraged than some of our competitors; (c) subjecting all or
substantially all of our assets to liens, which means that there may be no assets left for unit
holders in the event of a liquidation; and (d) limiting our ability to make business and
operational decisions regarding our business, including, among other things, limiting our ability
to pay dividends to our unit holders, make capital improvements, sell or purchase assets or engage
in transactions we deem to be appropriate and in our best interest.
Our financial performance is significantly dependent on corn and ethanol prices and generally
we will not be able to pass on increases in input prices to our customers. Our results of
operations and financial condition are significantly affected by the cost and supply of corn and
the market price of ethanol. Changes in the relative prices of corn and ethanol are subject to and
determined by market forces over which we have no control.
The spread between ethanol and corn prices can vary significantly. Our gross margins depend
principally on the spread between ethanol prices and corn prices. The spread between the price of
a gallon of ethanol and the cost of corn required to produce a gallon of ethanol will likely
continue to fluctuate. A protracted reduction in the spread between ethanol and corn prices,
whether a result of an increase in corn prices or a reduction in ethanol prices, would adversely
affect our results of operations and financial condition.
Risks Related to Ethanol Industry
The California Low Carbon Fuel Standard may decrease demand for corn based ethanol which could
negatively impact our profitability. Recently, California passed a Low Carbon Fuels Standard
(LCFS). The California LCFS requires that renewable fuels used in California must accomplish
certain reductions in greenhouse gases which are measured using a lifecycle analysis. Management
believes that these new regulations could preclude corn based ethanol produced in the Midwest from
being used in California. California represents a significant ethanol demand market. If the
ethanol industry is unable to supply ethanol to California, it could significantly reduce demand
for the ethanol we produce. Any decrease in ethanol demand could negatively impact ethanol prices
which could reduce our revenues and negatively impact our ability to profitably operate the ethanol
plant.
Overcapacity within the ethanol industry could cause an oversupply of ethanol and a decline in
ethanol prices. Excess capacity in the ethanol industry would have an adverse impact on our
results of operations, cash flows and general financial condition. Excess capacity may also result
or intensify from increases in production capacity coupled with insufficient demand. If the demand
for ethanol does not grow at the same pace as increases in supply, we would expect the price for
ethanol to decline.
Risks Related to Regulation and Governmental Action
Changes in environmental regulations or violations of the regulations could be expensive and
reduce our profitability. We are subject to extensive air, water and other environmental laws and
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 impacts 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. In the future, we may be
subject to legal actions brought by environmental advocacy groups and other parties for actual or
alleged violations of environmental laws or our permits. Additionally, any changes in
environmental laws and regulations, both at the federal and state level, could require us to spend
considerable resources in order to comply with future environmental regulations. The expense of
compliance could be significant enough to reduce our profitability and negatively affect our
financial condition.
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ITEM 2. | PROPERTIES. |
Our plant is located on an approximately 267 acre site in Mitchell County Georgia. The
plants address is 4433 Lewis B. Collins Road, Pelham Georgia 31779. As of our fiscal year end on
September 30, 2010, we completed our second year of plant operations. The plant consists of the
following buildings:
| A process building, which contains processing equipment, laboratories, a control
room and offices; |
| A water treatment building containing equipment for water supply and treatment; |
| A grain receiving and shipping building; and |
| An administrative building, along with furniture and fixtures, office equipment
and computer and telephone systems. |
The site also contains improvements such as a loop track, paved access road, grain silos and
ethanol storage tanks. Our plant was placed in service on October 10, 2008 and is in excellent
condition and is capable of functioning at 100 percent of its production capacity.
All of the tangible and intangible property, real and personal, owned by either First United
or its wholly owned subsidiary, Southwest Georgia, serves as the collateral for the debt financing
with WestLB, which is described below under Item 7 Managements Discussion and Analysis of
Financial Condition and Results of Operations.
ITEM 3. | Legal Proceedings. |
As of the date of this quarterly report, we are not aware of any material pending legal
proceeding to which we are a party or of which any of our property is subject, other than ordinary
routine litigation, if any, that is incidental to our business.
ITEM 4. | REMOVED AND RESERVED. |
PART II
ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS ISSUER PURCHASES OF
EQUITY SECURITIES. |
As of September 30, 2010, we had 81,984 membership units outstanding and approximately 800
unit holders of record. There is no public trading market for our units.
However, in November 2008, we established a Unit Trading Bulletin Board, a private online
matching service, in order to facilitate trading among our members. The Unit Trading Bulletin Board
consists of an electronic bulletin board on our website that provides a list of interested buyers
and a list of interested sellers, along with their non-firm price quotes. The Unit Trading Bulletin
Board does not automatically effect matches between potential sellers and buyers and it is the sole
responsibility of sellers and buyers to contact each other to make a determination as to whether an
agreement to transfer units may be reached. We do not become involved in any purchase or sale
negotiations arising from our Unit Trading Bulletin Board and have no role in effecting
transactions beyond approval, as required under our operating agreement, and the issuance of new
certificates. 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 Unit Trading Bulletin Board. In advertising our Unit Trading Bulletin Board, we do not
characterize First United Ethanol as being a broker or dealer or an exchange. We do not use the
Unit Trading Bulletin Board to offer to buy or sell securities other than in compliance with the
securities laws, including any applicable registration requirements.
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There are detailed timelines that must be followed under the Unit Trading Bulletin Board rules
and procedures with respect to offers and sales of membership units, with which all transactions
must comply. In addition, all transactions must comply with our operating agreement, and are
subject to approval by our board of directors.
The following table contains historical information by quarter for the past two years
regarding the actual unit transactions that were completed by the Companys unit-holders during the
periods specified. The Company believes providing this information is the way to most accurately
represent the current trading value of the Companys units. As of October 1, 2010, unit trading on
our qualified matching service bulletin board was halted until further notice. However, it is our
intent to resume unit trading once our currently pending deregistration process is complete.
# of | ||||||||||||||||
Quarter | Low Price | High Price | Average Price | Units Traded | ||||||||||||
2009 1st |
$ | | $ | | $ | | | |||||||||
2009 2nd |
$ | | $ | | $ | | | |||||||||
2009 3rd |
$ | | $ | | $ | | | |||||||||
2009 4th |
$ | | $ | | $ | | | |||||||||
2010 1st |
$ | | $ | | $ | | | |||||||||
2010 2nd |
$ | 700 | $ | 700 | $ | 700 | 50 | |||||||||
2010 3rd |
$ | 650 | $ | 650 | $ | 650 | 20 | |||||||||
2010 4th |
$ | 500 | $ | 500 | $ | 500 | 50 |
The following table contains the bid and asked prices that were posted on the Companys
qualified matching service bulletin board and includes some transactions that were not completed.
The Company believes the table above more accurately describes the trading value of its units as
the bid and asked prices below include some offers that never resulted in completed transactions.
The information was compiled by reviewing postings that were made on the Companys qualified
matching service bulletin board.
# of | ||||||||||||||||
Sellers Quarter | Low Price | High Price | Average Price | Units Listed | ||||||||||||
2009 1st |
$ | 1,000.00 | $ | 1,000.00 | $ | 1,000.00 | 50 | |||||||||
2009 2nd |
$ | | $ | | $ | | | |||||||||
2009 3rd |
$ | | $ | | $ | | | |||||||||
2009 4th |
$ | 770.00 | $ | 770.00 | $ | 770.00 | 50 | |||||||||
2010 1st |
$ | 1,000.00 | $ | 1,000.00 | $ | 1,000.00 | 100 | |||||||||
2010 2nd |
$ | | $ | | $ | | | |||||||||
2010 3rd |
$ | 800.00 | $ | 1,000.00 | $ | 900.00 | 215 | |||||||||
2010 4th |
$ | 1,000.00 | $ | 1,000.00 | $ | 1,000.00 | 60 | |||||||||
# of | ||||||||||||||||
Buyers Quarter | Low Price | High Price | Average Price | Units Listed | ||||||||||||
2009 1st |
$ | | $ | | $ | | | |||||||||
2009 2nd |
$ | | $ | | $ | | | |||||||||
2009 3rd |
$ | | $ | | $ | | | |||||||||
2009 4th |
$ | | $ | | $ | | | |||||||||
2010 1st |
$ | | $ | | $ | | | |||||||||
2010 2nd |
$ | | $ | | $ | | | |||||||||
2010 3rd |
$ | | $ | | $ | | | |||||||||
2010 4th |
$ | | $ | | $ | | |
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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
First United Ethanol to be deemed a publicly traded partnership.
Our Board of Directors has adopted a Membership Unit Option Plan (the Plan). The Plan
permits the company to grant unit options and units to its employees for up to two percent (2%) of
the total number of units outstanding at the close of our registered offering, or 1,532 units. We
believe that the awards will better align the performance goals of its employees with those of its
members. Option awards are generally granted with an exercise price of $1,000 per unit, and they
generally vest over three to five years of continuous service and have ten-year contractual terms.
Certain option awards may provide for accelerated vesting if there is a change in control of the
Company or the employee is terminated without cause. The following table summarizes the
outstanding units pursuant to the option agreements, as of the date of this report:
Number of securities | ||||||||||||
remaining available | ||||||||||||
for future issuance | ||||||||||||
Number of securities to | Weighted-average | under equity | ||||||||||
be issued upon exercise | exercise price of | compensation plans | ||||||||||
of outstanding options, | outstanding options, | (excluding securities | ||||||||||
warrants and rights | warrants and rights | reflected in column (a)) | ||||||||||
(a) | (b) | (c) | ||||||||||
Equity compensation
plans approved by
security holders |
0 | 0 | 0 | |||||||||
Equity compensation
plans not approved
by security holders |
951 | $ | 1,000 | 581 | ||||||||
Total |
951 | $ | 1,000 | 581 | ||||||||
We have not declared or paid any distributions on our units. Our board of directors and our
lending syndicate control the timing and amount of distributions to our unit holders, however, our
operating agreement requires the board of directors to 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 expectations with respect to our ability to make future distributions are
discussed in greater detail under Item 7 Managements Discussion and Analysis of Financial
Condition and Results of Operations.
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. |
This report contains forward-looking statements that involve future events, our future
performance and our expected future operations and actions. In some cases you can identify
forward-looking statements by the use of words such as may, will, should, anticipate,
believe, expect, plan, future, intend, could, estimate, predict, hope,
potential, continue, or the negative of these terms or other similar expressions. These
forward-looking statements are only our predictions and involve numerous assumptions, risks and
uncertainties. Our actual results or actions may differ materially from these forward-looking
statements for many reasons, including the reasons described in this report. We are not under any
duty to update the forward-looking statements contained in this report. We cannot guarantee future
results, levels of activity, performance or achievements. We caution you not to put undue reliance
on any forward-looking statements, which speak only as of the date of this report. You should read
this report and the documents that we reference in this report and have filed as exhibits,
completely and with the understanding that our actual future results may be materially different
from what we currently expect. We qualify all of our forward-looking statements by these
cautionary statements.
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Results of Operations
Comparison of Fiscal Years Ended September 30, 2010 and 2009
2010 | 2009 | |||||||||||||||
Income Statement Data | Amount | % | Amount | % | ||||||||||||
Revenues |
$ | 203,485,521 | 100.0 | % | $ | 166,561,773 | 100.0 | % | ||||||||
Cost of Goods Sold |
$ | 192,493,946 | 94.60 | % | $ | 178,695,057 | 107.3 | % | ||||||||
Gross Profit (Loss) |
$ | 10,991,575 | 5.40 | % | $ | (12,133,284 | ) | (7.3 | )% | |||||||
General and Administrative Expenses |
$ | 4,521,297 | 2.22 | % | $ | 5,123,484 | 3.1 | % | ||||||||
Operating Income (Loss) |
$ | 6,470,278 | 3.18 | % | $ | (17,256,768 | ) | (10.4 | )% | |||||||
Other (Expense) |
$ | (8,645,471 | ) | (4.25 | )% | $ | (11,208,202 | ) | (6.7 | )% | ||||||
Net (Loss) |
$ | (2,175,193 | ) | (1.07 | )% | $ | (28,464,970 | ) | (17.1 | )% | ||||||
Revenues
Our revenues from operations come from two primary sources: sales of fuel ethanol and sales of
distillers grains.
The following table shows the sources of our revenue for the fiscal year ended September 30,
2010 and 2009.
Fiscal Year End | Fiscal Year End | |||||||||||||||
September 30, 2010 | September 30, 2009 | |||||||||||||||
Revenue Source | Amount | % of Revenues | Amount | % of Revenues | ||||||||||||
Ethanol Sales |
$ | 168,892,332 | 83.00 | % | $ | 135,876,057 | 81.58 | % | ||||||||
Dried Distillers Grains Sales |
32,668,542 | 16.05 | % | 29,947,009 | 17.98 | % | ||||||||||
Wet Distillers Grains Sales |
1,622,821 | .80 | % | 370,878 | 0.23 | % | ||||||||||
Other |
301,826 | .15 | % | 367,829 | 0.21 | % | ||||||||||
Total Revenues |
$ | 203,485,521 | 100.0 | % | $ | 166,561,773 | 100.0 | % |
During our 2010 fiscal year, our total revenue increased significantly compared to our 2009
fiscal year. Management attributes this increase in total revenue primarily with a significant
increase in the average price we received per gallon of ethanol sold during the 2010 fiscal year.
Our ethanol revenue was approximately $168,892,000 for the fiscal year ended September 30, 2010 and
$135,876,000 for the fiscal year ended September 30, 2009. We sold approximately 89,000,000
gallons of ethanol during the fiscal year September 30, 2010 compared to 79,500,000 gallons of
ethanol for the same period in 2009. The average price was $1.90 per gallon for the fiscal year
ended September 30, 2010 and the average price for the same period in 2009 was $1.71 per gallon.
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Ethanol
The total gallons of ethanol that we sold during our 2010 fiscal year was approximately 12%
more than during our 2009 fiscal year. Management attributes this increase in ethanol sales with
the fact that we are now able to operate the plant at a higher run-rate than during the 2009 fiscal
year. Our total ethanol production during our 2010 fiscal year was approximately 15% higher
compared to our 2009 fiscal year. This disparity in our year over year production is primarily due
to mechanical issues that curtailed our ethanol production during our 2009 fiscal year. In
addition to the increase in the number of gallons of ethanol we sold was an increase in the average
price we received per gallon of ethanol sold during our 2010 fiscal year compared to our 2009
fiscal year of approximately 11%. Management attributes this increase in the average price we
received per gallon of ethanol with higher gasoline and corn prices and increased ethanol exports
during our 2010 fiscal year. These increases in ethanol exports and corn prices mostly occurred
during our fourth quarter of 2010.
Management anticipates that ethanol prices will remain steady during our 2011 fiscal year
given that the VEETC blenders credit has been renewed. The ethanol industry relies on the VEETC
to reduce the cost of ethanol to fuel blenders. This results in increased demand for ethanol
related to what is called discretionary blending. Discretionary blending is where fuel blenders
use ethanol to increase octane in the fuels that are produced as well as reduce the price of
gasoline. However, when the price of ethanol increases relative the price of gasoline, after
taking into account the VEETC, the amount of discretionary blending by fuel blenders decreases
thereby decreasing ethanol demand. As a result, if the VEETC is not renewed past December 31,
2011, management anticipates that the price of ethanol will decrease. Management anticipates
ethanol production will be steady during our 2011 fiscal year provided the ethanol industry can
maintain current ethanol prices. However, in the event ethanol prices decrease significantly, we
may be forced to reduce ethanol production during times when our operating margins are unfavorable.
Further, our operating margins also depend on corn prices which can affect the spread between the
price we receive for our ethanol and our raw material costs. In times when this spread decreases
or becomes negative, we may reduce or terminate ethanol production until these spreads become more
favorable.
Distillers Grains
We produce distillers grains for sale primarily in two forms, distillers dried grains with
solubles (DDGS) and wet distillers grains (WDG). During our 2010 fiscal year, we experienced a
shift in the mix of distillers grains we sold in the form of DDGS versus WDG compared to the
previous year. During our 2010 fiscal year, we sold
approximately 77% of our total distillers grains in the form of DDGS and approximately 23% of our
total distillers grains in the form of WDG. During our 2009 fiscal year, we sold approximately 95%
of our total distillers grains in the form of DDGS and approximately 5% of our total distillers
grains in the form of WDG. Management attributes this shift in the mix of our distillers grains
sales with an increase in local demand for WDG during our 2010 fiscal year compared to our 2009
fiscal year. As more of our distillers grains are shipped inside of our local market, we sell more
of our distillers grains in the wet form since it is less expensive to produce the WDG. Market
factors dictate whether we sell more DDGS versus WDG.
Despite the shift toward WDG, we sold approximately 17% more tons of DDGS during our 2010
fiscal year compared to our 2009 fiscal year. Management attributes this increase in DDGS sales
with increased production of ethanol during the 2010 fiscal year compared to our 2009 fiscal year.
As we produce more ethanol, the total tons of distillers grains that we produce also increases.
Offsetting the increase in DDGS sales was a decrease of approximately 2% in the average price we
received per ton of DDGS sold during our 2010 fiscal year compared to our 2009 fiscal year. During
our 2009 fiscal year, uncertainty existed regarding the supply of distillers grains in the market
due to the fact that many ethanol producers were reducing production during late 2008 and early
2009. Management believes this resulted in higher distillers grains prices due to increasing
demand and lower supplies during our 2009 fiscal year. Further, management believes that
distillers grains prices lag behind corn prices. As a result, distillers grains prices during our
2010 fiscal year may not have fully benefited from recent increases in corn prices that we
experienced in the second half of our 2010 fiscal year. Management believes corn prices affect the
market price of distillers grains since distillers grains are typically used as a feed substitute
for corn.
Management anticipates demand for distillers grains will remain steady or increase, especially
if corn prices trend higher during our 2011 fiscal year. Management believes that increased
revenue from distillers grains sales during times when corn prices are high helps us to somewhat
offset our increased cost of goods sold from the higher corn prices.
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Carbon Dioxide
On September 1, 2010 Airgas Carbonic, Inc. (Airgas) commenced operations at the carbon
dioxide facility it has constructed near our plant. Pursuant to our agreement with Airgas, the
carbon dioxide facility will purify, liquefy, refine and store carbon dioxide produced as a
co-product of our ethanol production process. We expect the new carbon dioxide facility to be
another source of revenue for our company.
Cost of Goods Sold
Our two primary costs of producing ethanol and distillers grains are corn costs and natural
gas costs. We experienced a decrease in our per gallon cost of goods sold for our 2010 fiscal year
compared to our 2009 fiscal year.
Our largest cost associated with the production of ethanol and distillers grains is corn
costs. Our per gallon cost of for corn during our 2010 fiscal year was approximately 5% lower than
the amount we paid during our 2009 fiscal year. Our lower per gallon cost of corn is primarily due
to increased production levels which led to a 6% increase in ethanol yield at our facility. The
total bushels of corn that we purchased during our 2010 fiscal year was approximately 8% greater
compared to our 2009 fiscal year. This increase in corn purchases was due to our increased ethanol
and distillers grains production during our 2010 fiscal year compared to our 2009 fiscal year.
Offsetting this increase in the total bushels of corn we purchased was a decrease in our average
cost per bushel of corn. However, market corn prices started to increase during our 2010 fiscal
year starting in July and continuing into the middle of December 2010. Management attributes this
increase in corn prices with uncertainty regarding weather factors that resulted in decreased
yields in some parts of the United States. This led to fears regarding an imbalance between corn
supply and demand which had a negative impact on corn prices. Management anticipates that corn
prices will continue to be volatile until corn planting and thereafter will be subject to weather
factors that may influence corn prices during the 2011 growing season.
Management anticipates that natural gas prices will remain steady during our 2011 fiscal year
unless demand significantly increases due to improved global economic conditions. Management
anticipates that our
natural gas consumption may increase during our 2011 fiscal year due to increased ethanol and
distillers grains production compared to 2010 and 2009.
Our other costs of goods sold include denaturant, process chemicals, electricity,
transportation, depreciation, hedging activity and direct labor. Together these costs represent
approximately 16% of our cost of goods sold for our 2010 fiscal year. We do not anticipate these
costs to be as volatile as our corn and natural gas expenses. However, our transportation,
electrical and denaturant costs are directly tied to the price of energy generally and, therefore,
may fluctuate along with the price of petroleum based energy products.
General and Administrative Expenses
Our general and administrative expenses as a percentage of revenues were 2.2% for the fiscal
year ended September 30, 2010 compared to 3.1% for the fiscal year ended September 30, 2009.
General and administrative expenses consist primarily of payroll, employee benefits, and
professional fees. During our fiscal year ended September 30, 2009, we incurred significant
professional fees in connection with the management of our credit agreement.
Other (Expense)
We had total other expense for the fiscal year ended September 30, 2010 of approximately
$8,645,000 compared to September 30, 2009 of approximately $11,200,000, resulting primarily from
our interest expense for the period. Interest expense for the period was approximately $9,768,000
which was offset by an unrealized gain of approximately $1,115,000 for the change in fair value of
our interest rate swap agreement.
Net (Loss)
Our net loss from operations for the fiscal year ended September 30, 2010 was approximately
1.07% of our revenues, compared to 17.1% of our revenues for the same period ended 2009. This loss
is primarily a result of slim operating margins and multiple operating issues faced at the plant.
We experienced a significant power disruption that negatively impacted the plant for an extended
period of time during the month of July 2010. We have corrected the mechanical failures and
improved staffing to ensure that the plant will run properly in the future.
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Since commencing operations in October 2008, we have successfully created robust demand in our
local markets and are now selling 95 percent of our ethanol and 100 percent of our distillers
grains to the truck market in the southeastern United States. The development of these local
markets for our products, our use of an increasing amount of local corn and a rebounding national
demand for gasoline and ethanol have created favorable operating margins for our company in the
first quarter of our fiscal year ending September 30, 2011.
Additional Information
The following table shows additional data regarding production and price levels for our
primary inputs and products for the fiscal year ended September 30, 2010 and 2009.
Twelve Months ended | Twelve Months ended | |||||||
September 30, 2010 | September 30, 2009 | |||||||
Production: |
||||||||
Ethanol sold (gallons) |
89,013,569 | 79,537,767 | ||||||
Dried distillers grains sold (tons) |
250,789 | 214,039 | ||||||
Wet distillers grains sold (tons) |
75,667 | 7,342 | ||||||
Revenues: |
||||||||
Ethanol average price per gallon |
1.897 | 1.708 | ||||||
Dried distillers grains revenue per gallon of ethanol sold |
.367 | .376 | ||||||
Wet distillers grains revenue per gallon of ethanol sold |
.018 | .005 | ||||||
Other |
.007 | .005 | ||||||
Total revenue per gallon of ethanol sold |
2.289 | 2.094 | ||||||
Costs: |
||||||||
Corn cost per gallon of ethanol sold (including freight) |
1.582 | 1.657 | ||||||
Overhead and other direct costs per gallon of ethanol sold |
.510 | .589 | ||||||
Total cost per gallon of ethanol sold |
2.092 | 2.246 |
Three Month Period Ended September 30, 2010 and 2009
The following table shows the results of our operations and the percentage of revenues, cost
of goods sold, operating expenses and other items to total revenues in our statement of operations
for the three months ended September 30, 2010 and 2009.
Quarter Ended | Quarter Ended | |||||||||||||||
September 30, 2010 | September 30, 2009 | |||||||||||||||
Income Statement Data | Amount | % | Amount | % | ||||||||||||
Revenues |
51,480,330 | 100.00 | % | 46,337,542 | 100.00 | % | ||||||||||
Cost of Goods Sold |
50,224,044 | 97.56 | % | 47,657,806 | 102.85 | % | ||||||||||
Gross (Loss) |
1,256,286 | 2.44 | % | (1,320,264 | ) | (2.85 | )% | |||||||||
General and
Administrative
Expenses |
1,354,157 | 2.63 | % | 1,270,453 | 2.74 | % | ||||||||||
Operating (Loss) |
(97,871 | ) | (0.19 | )% | (2,590,717 | ) | (5.59 | )% | ||||||||
Other (Expense) |
(3,246,304 | ) | (6.31 | )% | (1,925,519 | ) | (4.16 | )% | ||||||||
Net (Loss) |
(3,344,175 | ) | (6.50 | )% | (4,516,236 | ) | (9.75 | )% | ||||||||
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The following table shows additional data regarding the percentage of change from September
30, 2010 from September 30, 2009, in production and price levels for our primary inputs and
products.
Percentage of Increase (Decrease) for | |||
comparison of Three Months Ended | |||
September 30, 2010 to | |||
September 30, 2009 | |||
Production: |
|||
Ethanol sold (gallons) |
2.1 | % | |
Dried distillers grains sold (tons) |
16.7 | % | |
Wet distillers grains sold (tons) |
376.2 | % | |
Revenues: |
|||
Ethanol average price per gallon |
8.7 | % | |
Dried distillers grains revenue per gallon of ethanol sold |
13.4 | % | |
Wet distillers grains revenue per gallon of ethanol sold |
180.0 | % | |
Other Revenue |
(17.7 | %) | |
Total revenue per gallon of ethanol sold |
8.9 | % | |
Costs: |
|||
Corn cost per gallon of ethanol sold (including freight) |
.6 | % | |
Overhead and other direct costs per gallon of ethanol sold |
12.7 | % | |
Total cost per gallon of ethanol sold |
3.6 | % |
Changes in Financial Condition for Fiscal Years Ended September 30, 2010 and 2009
We experienced an increase in our current assets at September 30, 2010 compared to our fiscal
year ended September 30, 2009. We had approximately $586,000 more cash on hand at September 30,
2010 compared to September 30, 2009. We also experienced an increase of approximately $2,241,000
in inventory at September 30, 2010 compared to September 30, 2009. Additionally, at September 30, 2010 we had accounts
receivable of approximately $5,088,000 compared to $4,081,000 accounts receivable at September 30,
2009.
Our net property and equipment was slightly lower at September 30, 2010 compared to September
30, 2009 as a result of additions of property and equipment, offset by our current year
depreciation.
We experienced an increase in our total current liabilities at September 30, 2010 compared to
September 30, 2009. We experienced an increase of approximately $1,877,000 in the current portion
of our long-term debt at September 30, 2010 compared to September 30, 2009. Accounts payable and
accrued expenses also increased by approximately $2,736,000 at September 30, 2010 compared to
September 30, 2009.
We experienced a decrease in our long-term liabilities as of September 30, 2010 compared to
September 30, 2009, primarily as a result of decreases in our long-term notes payable. At
September 30, 2010, we had approximately $94,482,000 outstanding in the form of long-term loans,
compared to approximately $103,325,000 at September 30, 2009. This decrease is attributed to
payments on our long-term loans.
Liquidity and Capital Resources
The accompanying financial statements have been prepared assuming that the Company will
continue as a going concern. For the year ending September 30, 2010, the Company has generated
losses of approximately $2,175,000 and has experienced liquidity restraints due to limits on its
working capital line of credit. These liquidity restraints raise concern about whether the Company
will continue as a going concern.
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On June 7, 2010 we amended our Senior Credit Agreement and our Accounts Agreement with WestLB.
Pursuant to the amended agreements, we are required to maintain a certain level of working capital.
In the event we are unable to meet the level of working capital required under the amended loan
agreements we will be assessed a five percent (5%) fee on the outstanding loans for any quarter we
are not in compliance. The Company did not meet the working capital deficit requirement of
($9,000,000) as of September 30, 2010. The resulting penalty interest of approximately $1,375,000
has been charged to interest expense as of September 30, 2010 and included as a long term
liability. This fee payment is in addition to the interest we are required to pay on our
outstanding debt pursuant to our original loan agreements. This additional interest fee has been
accrued and will be due February 2015, the final maturity date our outstanding loans with West LB.
Furthermore, and regardless of whether we have maintained the required level or working capital, we
will be required to make an additional quarterly principal payment of $150,000 toward our
outstanding working capital loan balance. This arrangement is distinct from the borrowing base
formula and borrowing base certificates previously utilized to monitor compliance with our working
capital loans. This amendment also removed the borrowing base default triggers from the terms of
the loan, thereby removing the requirement for waivers. Throughout our fiscal year ended September
30, 2010, we have made every payment of principal or interest to our lender.
In the late summer of 2010, the Company hired an outside 3rd party to look at the
efficiency of the plant and provide suggestions and solutions to increase the operational
effectiveness. These studies have been completed and outlined several areas where the Company
could make improvements. Some of the improvements were immediately implemented with positive
results already being shown. The Company believes that with improvements already implemented and
the additional improvement being made, that the operational efficiency of the plant will increase
significantly, allowing the plant to run profitably. Additionally, the Companys profitability is
also dependent upon a number of other factors noted elsewhere in these financial statements,
including stable and positive crush margins. In addition, the Company is continually exploring
different avenues on its working capital line of credit and to ensure enough funding for the debt
reserve fund. These options may include negotiating different terms with the lender, raising
additional capital or subordinated debt, finding another funding source for working capital or a
combination of the above. Management is aggressively looking at its different options and
anticipates finding a solution to their liquidity issues. Management believes that once they solve
their working capital needs, they will be able to better manage the commodity risk by being able to
utilize futures and options more frequently and to lock in positive crush margin. By being able to
better take advantage of positive crush margin and with the plant running more efficiently,
management believes together this will provide enough cash flow and liquidity for the plant.
However, there can be no assurances that such operational efficiencies will provide the Company
with sufficient additional cash flow to fund its operations for fiscal year 2011.
The following table shows cash flows for the fiscal years ended September 30, 2010 and 2009:
Year ended September 30, | ||||||||
2010 | 2009 | |||||||
Net cash from (used for) operating activities |
$ | 7,896,288 | $ | (23,157,338 | ) | |||
Net cash (used for) investing activities |
$ | (75,804 | ) | $ | (5,284,882 | ) | ||
Net cash provided by (used for) financing activities |
$ | (7,234,018 | ) | $ | 20,756,242 |
Cash Flow From (Used For) Operations
We experienced a significant increase in net cash from operating activities of approximately
$31,000,000 during our fiscal year ended September 30, 2010 as compared to the same period of 2009.
This change in cash from our operating activities resulted primarily from a positive swing of
approximately $23,000,000 in our gross margin for our 2010 fiscal year compared to our 2009 fiscal
year and an increase in our accounts payable. During our 2010 fiscal year, our capital needs were
being adequately met primarily through cash from our credit facilities and through our operating
activities.
Cash Flow Used For Investing Activities
We experienced a decrease in the cash we used for investing activities during our 2010 fiscal
year compared to our 2009 fiscal year primarily due to less property and equipment purchased for
our 2010 fiscal year and less funding of the cash reserve fund.
Cash Flow From (Used In) Financing Activities
We received significantly less cash for financing activities during our 2010 fiscal year
compared to our 2009 fiscal year primarily as a result of our long-term debt obligations being
finalized during our fiscal year ended September 30, 2009. Our cash used for activities during our
2010 fiscal year primarily related to paying down our long-term debt.
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Financial Results
During our fiscal year ended September 30, 2010 we incurred a net loss of approximately
$2,200,000. This loss was after our payment of interest expense of approximately $9,768,000. From
fiscal year ended September 30, 2009 to the fiscal year ended September 30, 2010, we generated
approximately $203,500,000 revenue from operations. Our net loss for the fiscal year ended
September 30, 2010 is primarily a consequence of slim operating margins in conjunction with
significant interest expense associated with our existing debt obligations.
As of September 30, 2010, we have total assets of approximately $170,700,000 consisting
primarily of inventory and property and equipment. Our current assets for the same period are
approximately $16,600,000, consisting primarily of accounts receivable and inventory. As of
September 30, 2010, we have current liabilities of approximately $40,200,000 consisting primarily
of accounts payable, a revolving line of credit, accrued expenses, and accrued interest. Our
current liabilities for the same period in 2009 were $34,800,000. Our long-term debt obligations
total approximately $94,500,000, excluding the current portion of our long-term debt. For the same
period in 2009, our long-term debt obligations were $103,000,000. Total members equity as of
September 30, 2010, was approximately $32,500,000 compared to $34,500,000 for the same period in
2009.
Senior Credit Facility
On November 20, 2007, First United and Southwest Georgia Ethanol, LLC (SWGE), our wholly
owned subsidiary, entered into a senior credit agreement with WestLB that provides for (1) a
construction loan facility in an aggregate amount of up to $100,000,000, which converted to a term
loan on February 20, 2009 (Conversion Date) that matures on February 20, 2015 (the Final
Maturity Date); and (2) a working capital loan in an aggregate amount of up to $15,000,000 which
matures February 20, 2011. The primary purpose of the credit facility was to finance the
construction and operation of the Companys ethanol plant.
The principal amount of the term loan facility is payable in quarterly payments ranging from
$1,500,000 to $1,600,000 beginning September 30, 2009, and the remaining principal amounts are
fully due and payable on February 20, 2015. Interest is payable quarterly. SWGE has the option to
select between two floating interest rate loans under the terms of the senior credit agreement:
Base Rate Loans bear interest at the Administrative Agents base rate (which is the higher of the
federal funds effective rate plus 0.50% and the Administrative Agents prime rate) plus 2.75% per
annum. Eurodollar Loans bear interest at LIBOR plus 3.75%. The Company has entered into an interest
rate swap with WestLB to effectively convert a portion of the variable rate interest into a fixed
rate, with the LIBOR component fixed at 4.04% (See Note 1).
Under the terms of the senior credit agreement, SWGE has agreed to pay a quarterly commitment
fee equal to 0.50% per annum on the unused portion of the construction loan/term loan and .20% per
annum on the unused portion of the working capital loan. SWGEs obligations under the senior credit
agreement are secured by a first-priority security interest in all of the Companys assets,
including its equity interest in SWGE.
The senior credit agreement also required SWGE to enter into an accounts agreement among SWGE,
Amarillo National Bank, as the Accounts Bank and Securities Intermediary, and WestLB as the
collateral agent and administrative agent. Among other things, the accounts agreement establishes
certain special, segregated project accounts and establishes procedures for the deposits and
withdrawals of funds into these accounts. Substantially all cash of SWGE is required to be
deposited into the project accounts subject to security interests to secure obligations in
connection with the senior credit. Funds are released from the project accounts in accordance with
the terms of the accounts agreement.
As of September 30, 2010 and 2009, the Company had drawn $13,784,129 on the $15,000,000
working capital loan.
On June 7, 2010, the Company executed the Sixth amendment to its Senior Credit Agreement and
its Fourth amendment to its Accounts Agreement with WestLB. Pursuant to the amended agreements, the
Company is required to maintain a certain level of working capital. Pursuant to the amended loan
agreements the Company is required to have a working capital deficit of ($9,000,000) or less as of
September 30, 2010, and ($7,000,000) or less as of December 31, 2010. Subsequent to December 31,
2010, the working capital deficit requirement will remain at ($7,000,000) for the term of the loan.
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The Company did not meet the working capital deficit required of ($9,000,000) as of September
30, 2010. The resulting penalty interest of approximately $1,375,000 has been charged to interest
expense as of September 30, 2010 and included as a long term liability.
Subordinated Debt
The Company has a subordinated debt financing arrangement pursuant to which the Mitchell
County Development Authority issued $10,000,000 of revenue bonds that were placed with Wachovia
Bank. The Company signed a promissory note, which is collateralized by the Companys assets and the
proceeds were placed in a Bond Trustee account with Regions Bank. The interest rate for this note
is 7.5%. The Company is required to maintain a debt service reserve with the Bond Trustee of at
least $1,180,000. This note is subordinated to the West LB debt agreement, which currently
prohibits the Company from making any debt service payments. As a result, the Bond Trustee made the
annual interest and principal payment to the bond holders of approximately $1,339,000 in December
2009 from the debt service reserve. The funds held in the Bond Trustee account are classified as
non-current restricted cash and cash equivalents in the Companys consolidated balance sheet. The
subordinated debt is a 15 year note with annual principal payments each December due to the bond
holders in 2010 of $635,000, in 2011 of $530,000, in 2012 of $570,000, in 2013 of $615,000, in 2014
of $660,000 and $6,240,000 thereafter. The $635,000 due in 2010 has been classified as a current
maturity of long-term debt per the agreement. However any payment will come from the debt service
fund due to the subordination.
On June 30, 2009, SWGE entered into a subordinated promissory note agreement in the amount of
$3,977,545 due Fagen, Inc., a related party, for the remaining design-build contract balance. The
note bears interest at 4% through June 30, 2010 and 8% thereafter through maturity on June 30,
2011. Interest is payable quarterly. The
first principal payment of $500,000 was due as of September 30, 2009 along with an annual principal
payment of $1,738,772 that was due June 30, 2010. The final payment of $1,738,772 is due June 30,
2011. This note is subordinated to the West LB debt agreement, which currently prohibits the
Company from making the principal payments on the schedule described above. The note of $3,977,545
is included in current maturities of long-term debt per the agreement. However, the earliest any
payment will likely be made is in 2014.
Other Notes Payable
The Company financed the acquisition of certain equipment through two identical notes payable
to John Deere Credit. The notes amortize over four years (maturity in August 2012) with monthly
principal and interest payments and are secured by the equipment. The interest rate is 5.3%. The
combined outstanding balance on these two notes payable is $136,244 and $202,050 as of September
30, 2010 and 2009, respectively.
Our long-term debt outstanding as of September 30, 2010 is summarized as follows:
September 30, | September 30, | |||||||
2010 | 2009 | |||||||
West LB Construction Loan, variable interest rates from 4.00% to 4.28% |
$ | 92,200,000 | 98,500,000 | |||||
Subordinated Fagen Note, interest rate of 4.0% through June 20, 2010
and 8% thereafter |
3,977,545 | 3,977,545 | ||||||
Subordinated debt facility, interest rate of 7.5% |
9,250,000 | 9,850,000 | ||||||
Notes payable John Deere Credit, interest rate of 5.3% |
136,244 | 202,050 | ||||||
115,563,789 | 112,529,595 | |||||||
Less current portion |
(11,081,911 | ) | (9,204,578 | ) | ||||
Long-term debt outstanding as of September 30: |
$ | 94,481,878 | 103,325,017 |
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Critical Accounting Estimates
Our 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 we operate. 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 our financial condition and results of operations and require subjective or complex
judgments; therefore, management considers the following to be critical accounting policies.
Revenue Recognition
The Company recognizes revenue when it is realized or realizable and earned. The Company
considers revenue realized or realizable and earned when it has persuasive evidence of an
arrangement, delivery has occurred, the sales price is fixed or determinable, and collection is
reasonably assured.
Revenue from the production of ethanol and related products is recorded at the time title and
all risks of ownership transfer to customers, which is typically upon loading and shipping of the
product shipment from the facility. Commissions are included in cost of goods sold. In addition,
shipping and handling costs incurred by the Company for the sale of ethanol and related products
are included in cost of goods sold.
Interest income is recognized as earned.
Investment in Commodities Contracts, Derivative Instruments and Hedging Activities
The Company adopted new disclosure requirements, which require entities to provide greater
transparency in interim and annual financial statements about how and why the entity uses
derivative instruments, how the instruments and related hedged items are accounted for, and how the
instruments and related hedged items affect the financial position, results of operations, and cash
flows of the entity
The Company is exposed to certain risks related to its ongoing business operations. The
primary risks that the Company manages by using forward or derivative instruments are price risk on
anticipated purchases of corn and natural gas.
The Company is subject to market risk with respect to the price and availability of corn, the
principal raw material we use to produce ethanol and ethanol by-products. In general, rising corn
prices result in lower profit margins and, therefore, represent unfavorable market conditions.
This is especially true when market conditions do not allow the Company to pass along increased
corn costs to our customers. The availability and price of corn is subject to wide fluctuations
due to unpredictable factors such as weather conditions, farmer planting decisions, governmental
policies with respect to agriculture and international trade and global demand and supply.
Certain contracts that literally meet the definition of a derivative may be exempted from
derivative accounting as normal purchases or normal sales. Normal purchases and normal sales are
contracts that provide for the purchase or sale of something other than a financial instrument or
derivative instrument that will be delivered in quantities expected to be used or sold over a
reasonable period in the normal course of business. Contracts that meet the requirements of normal
purchases or sales are documented as such and exempted from the accounting and reporting
requirements of derivative accounting.
The Company enters into firm-price purchase commitments every month with its natural gas
suppliers under which they agree to buy natural gas at a price set in advance of the actual
delivery of that natural gas to us. Under these arrangements, the Company assumes the risk of a
price decrease in the market price of natural gas between the time this price is fixed and the time
the natural gas is delivered. We account for these transactions as normal purchases, and
accordingly, do not mark these transactions to market nor do we record the commitment on the
balance sheet.
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The Company enters into short-term cash, options and futures contracts as a means of securing
corn for the ethanol plant and managing exposure to changes in commodity prices. The Company
maintains a risk management strategy that uses derivative instruments to minimize significant,
unanticipated earnings fluctuations caused by market fluctuations. The Companys specific goal is
to protect the Company from large moves in commodity costs. All derivatives will be designated as
non-hedge derivatives for accounting purposes and the contracts will be accounted for at fair
value. Although the contracts will be effective economic hedges of specified risks, they are not
designated as and accounted for as hedging instruments.
As part of its trading activity, the Company uses futures and option contracts offered through
regulated commodity exchanges to reduce risk and is exposed to risk of loss in the market value of
inventories. To reduce that risk, the Company generally takes positions using cash and futures
contracts and options.
The Company has also managed a portion of its floating interest rate exposure through the use
of interest rate derivative contracts. The Companys forward LIBOR-based contract reduces risk from
interest rate movements as gains and losses on the contract offset portions of the interest rate
variability of our variable-rate debt. The notional amount of the swap at September 30, 2010 and
2009 was $25,182,610 and $47,508,877, respectively. The effect of the swap is to limit the
interest rate exposure on the LIBOR component to a fixed rate of 4.04% compared to a variable
interest rate. The swaps notional amount will decrease quarterly to $0 by the termination date of
December 31, 2011. The counterparty to the contracts is a large commercial bank, and the Company
does not anticipate their nonperformance. The swap is designated as a non-hedge derivative and is
accounted for as mark to market. The estimated fair value of this agreement at September 30, 2010
and 2009, was a liability of approximately $657,000 and $1,772,000, respectively.
Derivatives not designated as hedging instruments at September 30, 2010 and 2009 were as follows:
Balance Sheet | September 30, | September 30, | ||||||||
Classification | 2010 | 2009 | ||||||||
Futures and options contracts |
(Current Liabilities) | $ | | $ | (61,325 | ) | ||||
Interest rate swap |
(Current Liabilities) | (525,658 | ) | (817,718 | ) | |||||
Interest rate swap |
(Non-Current Liabilities) | (131,414 | ) | (954,004 | ) |
Statement of Operations | September 30, | September 30, | ||||||||
Classification | 2010 | 2009 | ||||||||
Net realized and unrealized
gains (losses) related to
futures and options
contracts ethanol |
Revenues | $ | (13,780 | ) | $ | | ||||
Net realized and unrealized
gains related to futures and
options contracts corn |
Cost of Goods Sold | 51,203 | 1,078,187 | |||||||
Net realized and unrealized
(losses) related to the
interest rate swap |
Other non-operating (expense) | (373,490 | ) | (2,485,401 | ) |
Inventories
Ethanol and related products are stated at net realizable value. Raw materials and
work-in-process are valued using methods which approximate the lower of cost (first-in, first-out)
or market. In the valuation of inventories and purchase and sale commitments, market is based on
current replacement values except that it does not exceed net realizable values and is not less
than net realizable values reduced by allowances for approximate normal profit margin.
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Property and Equipment
Property and equipment is stated at cost. Construction in progress is comprised of costs
related to constructing the plant. Depreciation is computed using the straight-line method over
the following estimated useful lives:
Buildings |
20 Years | |||
Plant and Process Equipment |
5-20 Years | |||
Office Furniture and Equipment |
3-10 Years |
Maintenance and repairs are charged to expense as incurred; major improvements and betterments
are capitalized. The present value of capital lease obligations are classified as long-term debt
and the related assets are included in property and equipment/construction in progress.
Amortization of assets under capital lease is included in depreciation expense.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. An impairment loss would be
recognized when estimated undiscounted future cash flows from operations are less than the carrying
value of the asset group. An impairment loss would be measured by the amount by which the carrying
value of the asset exceeds the fair value of the asset. In accordance with Company policies,
management has evaluated the plant for possible impairment based on projected future cash flows
from operations. Management has determined that its projected future cash flows from operations
exceed the carrying value of the plant and that no impairment exists at September 30, 2010.
Fair Value of Financial Instruments
Financial instruments include cash and cash equivalents, derivative instruments, trade and
other receivables, accounts payable, accrued expenses and long-term debt. Management believes the
fair value of each of
these financial instruments approximates their carrying value in the balance sheet as of the
balance sheet date. The fair value of current financial instruments is estimated to approximate
carrying value due to the short-term nature of these instruments. The fair value of derivative
financial instruments is based on quoted market prices. The fair value of the long-term debt is
estimated based on anticipated interest rates which management believes would currently be
available to FUEL for similar issues of debt, taking into account the current credit risk of FUEL
and the other market factors.
Employees
We currently have 60 full-time employees. Approximately nine of our employees are involved
primarily in management and administration, and the remainder will be involved primarily in plant
operations.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements other than derivatives.
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
To the Board of Directors and Members
First United Ethanol, LLC
First United Ethanol, LLC
We have audited the accompanying consolidated balance sheets of Advanced First United Ethanol, LLC
and subsidiary as of September 30, 2010 and 2009, and the related consolidated statements of
operations, changes in members equity and cash flows for each of 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 auditing 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. The Company is not required to have, nor were we engaged to perform an audit of its
internal control over financial reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of First United Ethanol, LLC and subsidiary as of
September 30, 2010 and 2009, and the results of their operations and their cash flows for each of
the years then ended in conformity with United States 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 10 to the financial statements, the Company has suffered
losses from operations. This has created liquidity restraints due to
limits on its working capital line of credit, 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 10. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/
McGladrey & Pullen, LLP
Des Moines, Iowa
December 29, 2010
Des Moines, Iowa
December 29, 2010
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FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
September 30, 2010 | September 30, 2009 | |||||||
ASSETS |
||||||||
CURRENT ASSETS |
||||||||
Cash and cash equivalents |
$ | 586,466 | $ | | ||||
Trade receivables, net of allowance for doubtful
accounts of approximately $30,000 and $53,500, respectively |
5,088,073 | 4,080,745 | ||||||
Due from broker |
457 | 109,700 | ||||||
Inventory |
9,859,841 | 7,619,273 | ||||||
Other assets |
1,100,281 | 75,714 | ||||||
Total current assets |
16,635,118 | 11,885,432 | ||||||
PROPERTY AND EQUIPMENT |
||||||||
Office building, furniture and equipment |
1,103,781 | 808,949 | ||||||
Land and improvements |
2,508,148 | 1,000,000 | ||||||
Plant buildings and equipment |
161,482,167 | 163,069,329 | ||||||
165,094,096 | 164,878,278 | |||||||
Less accumulated depreciation |
(17,553,797 | ) | (8,840,707 | ) | ||||
147,560,299 | 156,037,571 | |||||||
RESTRICTED CASH AND CERTIFICATES OF DEPOSIT |
2,779,643 | 4,269,662 | ||||||
FINANCING COSTS, net of amortization of $2,894,432 and $1,876,558 |
3,723,702 | 4,483,577 | ||||||
TOTAL ASSETS |
$ | 170,698,762 | $ | 176,676,242 | ||||
LIABILITIES AND MEMBERS EQUITY |
||||||||
CURRENT LIABILITIES |
||||||||
Excess of outstanding checks over bank balance |
$ | | $ | 81,555 | ||||
Revolving line of credit |
13,634,129 | 13,784,129 | ||||||
Current portion of long-term debt |
11,081,911 | 9,204,578 | ||||||
Current portion of capital lease obligations |
1,706,620 | 1,019,029 | ||||||
Current portion of interest rate swap liability |
525,658 | 817,718 | ||||||
Accounts payable and accrued expenses |
11,979,176 | 9,243,647 | ||||||
Accrued interest |
847,363 | 615,625 | ||||||
Deferred revenue |
411,423 | | ||||||
Derivative financial instruments |
| 61,325 | ||||||
Total current liabilities |
40,186,280 | 34,827,606 | ||||||
INTEREST RATE SWAP LIABILITY |
131,414 | 954,004 | ||||||
CAPITAL LEASE OBLIGATIONS |
2,007,748 | 3,073,996 | ||||||
ACCRUED INTEREST |
1,374,686 | | ||||||
LONG-TERM DEBT |
94,481,878 | 103,325,017 | ||||||
TOTAL LIABILITIES |
183,182,006 | 142,180,623 | ||||||
COMMITMENTS AND CONTINGENCIES |
||||||||
MEMBERS EQUITY |
||||||||
Membership contributions, 81,984 units issued and outstanding |
77,422,691 | 77,226,361 | ||||||
Accumulated deficit |
(44,905,935 | ) | (42,730,742 | ) | ||||
Total members equity |
32,516,756 | 34,495,619 | ||||||
TOTAL LIABILITIES AND MEMBERS EQUITY |
$ | 170,698,762 | $ | 176,676,242 | ||||
See Notes to Consolidated Financial Statements.
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FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ending | Year ending | |||||||
September 30, 2010 | September 30, 2009 | |||||||
Revenues |
$ | 203,485,521 | $ | 166,561,773 | ||||
Cost of goods sold |
192,493,946 | 178,695,057 | ||||||
Gross profit (loss) |
10,991,575 | (12,133,284 | ) | |||||
General and administrative expenses |
4,521,297 | 5,123,484 | ||||||
Operating income (loss) |
6,470,278 | (17,256,768 | ) | |||||
Other income (expense) |
||||||||
Unrealized gain (loss) on interest rate swap |
1,114,650 | (1,140,395 | ) | |||||
Interest expense |
(9,767,774 | ) | (10,077,221 | ) | ||||
Interest income |
7,653 | 9,414 | ||||||
(8,645,471 | ) | (11,208,202 | ) | |||||
Net loss |
$ | (2,175,193 | ) | $ | (28,464,970 | ) | ||
Net loss per unit (Basic and Diluted) |
$ | (26.53 | ) | $ | (361.82 | ) | ||
Weighted average units outstanding |
81,984 | 78,671 | ||||||
See Notes to Consolidated Financial Statements.
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FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ending | Year ending | |||||||
September 30, 2010 | September 30, 2009 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net (loss) |
$ | (2,175,193 | ) | $ | (28,464,970 | ) | ||
Adjustments to reconcile net (loss) to net
cash provided by (used in) operating activities: |
||||||||
Depreciation |
8,698,530 | 8,800,499 | ||||||
Amortization |
1,017,875 | 1,002,161 | ||||||
Non-cash compensation expense |
196,330 | 146,175 | ||||||
Loss on sale of equipment |
5,815 | | ||||||
Unrealized (gain) loss on interest rate swap |
(1,114,650 | ) | 1,140,395 | |||||
Provision (recovery) of doubtful receivables |
(7,500 | ) | 53,468 | |||||
Changes in assets and liabilities: |
||||||||
(Increase) in trade receivables |
(999,828 | ) | (4,134,213 | ) | ||||
(Increase) decrease in due from broker |
109,243 | (109,700 | ) | |||||
(Increase) in inventory |
(2,240,568 | ) | (3,077,174 | ) | ||||
(Increase) decrease in other assets |
(1,024,567 | ) | 1,166,696 | |||||
Increase in accounts payable and
accrued expenses |
3,474,279 | 572,693 | ||||||
Increase (decrease) in accrued interest payable |
1,606,424 | (314,693 | ) | |||||
Increase in deferred revenue |
411,423 | | ||||||
Increase (decrease) in derivative financial instruments |
(61,325 | ) | 61,325 | |||||
Net cash provided by (used in) operating activities |
7,896,288 | (23,157,338 | ) | |||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Purchase of certificates of deposit |
(50,000 | ) | | |||||
Proceeds received from sale of euipment |
755 | | ||||||
Purchase of property and equipment, net of returns |
(227,828 | ) | (2,259,314 | ) | ||||
Release (funding) of restricted cash balance |
201,269 | (3,025,568 | ) | |||||
Net cash (used in) investing activities |
(75,804 | ) | (5,284,882 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Proceeds from issuance of long-term debt |
| 18,988,632 | ||||||
Payment of financing costs |
(258,000 | ) | | |||||
Repayment of long-term debt and capital lease obligations |
(6,744,463 | ) | (2,235,624 | ) | ||||
Proceeds from revolving line of credit |
| 2,384,129 | ||||||
Payments on revolving line of credit |
(150,000 | ) | (500,000 | ) | ||||
Proceeds from sale of units |
| 2,037,550 | ||||||
Excess of outstanding checks over bank balance |
(81,555 | ) | 81,555 | |||||
Net cash provided by (used in) financing activities |
(7,234,018 | ) | 20,756,242 | |||||
Increase (decrease) in cash and cash equivalents |
586,466 | (7,685,978 | ) | |||||
Cash and cash equivalents, beginning of period |
| 7,685,978 | ||||||
Cash and cash equivalents, end of period |
$ | 586,466 | $ | | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
||||||||
Cash paid for interest |
$ | 7,143,475 | $ | 9,389,753 | ||||
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES |
||||||||
Repayment of notes and interest payable paid by Bond Trustee |
$ | 1,338,750 | $ | 900,000 | ||||
Assets acquired under capital lease or financing arrangement |
| 4,612,472 | ||||||
Accrued expenses reclassed to subordinated debt |
| 3,977,544 | ||||||
Deferred revenue applied to property & equipment |
| 50,000 |
See Notes to Consolidated Financial Statements.
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FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
STATEMENT OF CHANGES IN MEMBERS EQUITY
STATEMENT OF CHANGES IN MEMBERS EQUITY
Membership | Accumulated | |||||||||||||||
Units | contributions | (deficit) | Total | |||||||||||||
Balance, September 30, 2008 |
76,610 | $ | 75,042,636 | $ | (14,265,772 | ) | $ | 60,776,864 | ||||||||
Unit-based compensation expense for unit options to employees |
146,175 | | 146,175 | |||||||||||||
Membership units issued |
5,369 | 2,032,550 | | 2,032,550 | ||||||||||||
Membership unit options exercised |
5 | 5,000 | | 5,000 | ||||||||||||
Net loss for the year ended September 30, 2009 |
| (28,464,970 | ) | (28,464,970 | ) | |||||||||||
Balance, September 30, 2009 |
81,984 | $ | 77,226,361 | $ | (42,730,742 | ) | $ | 34,495,619 | ||||||||
Unit-based compensation expense for unit options to employees |
196,330 | | 196,330 | |||||||||||||
Net loss for the year ended September 30, 2010 |
| (2,175,193 | ) | (2,175,193 | ) | |||||||||||
Balance, September 30, 2010 |
81,984 | $ | 77,422,691 | $ | (44,905,935 | ) | $ | 32,516,756 | ||||||||
See Notes to Consolidated Financial Statements.
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FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
First United Ethanol, LLC and subsidiary (the Company) is located near Camilla, Georgia. The
Company operates a 100 million gallon name plate capacity ethanol plant with distribution within
the United States. The Company formally began ethanol operations in October 2008.
The Company was formally organized as a limited liability company on March 9, 2005 under the name
Mitchell County Research Group, LLC. In September 2005, the Company formally changed its name to
First United Ethanol, LLC. In November 2007, the Companys wholly owned subsidiary, Southwest
Georgia Ethanol, LLC (SWGE) was formed in conjunction with the debt financing agreement with West
LB. First United Ethanol, LLC transferred the majority of its assets and liabilities to Southwest
Georgia Ethanol, LLC.
Basis of Presentation
The consolidated financial statements and related notes have been prepared in accordance with
accounting principles generally accepted in the United States of America.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its 100% owned
subsidiary. All material inter-company accounts and transactions are eliminated in consolidation.
Use of Estimates
The preparation of consolidated 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 the disclosures of
contingent assets and liabilities and other items, as well as the reported revenues and expenses.
Actual results could differ from those estimates.
Cash and Cash Equivalents and Restricted Cash and Certificates of Deposit
The Company considers all highly liquid investments with original maturities of three months or
less to be cash equivalents. The Companys cash balances are maintained in bank depositories and
periodically exceed federally insured limits. The Company has not experienced losses in these
accounts. The Company segregates cash held in escrow, cash restricted and certificates of deposit
restricted for use by debt agreements as non-current.
Trade Accounts Receivable
Trade accounts receivable are recorded at original invoice amounts less an estimate made for
doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management
determines the allowance for doubtful accounts by regularly evaluating individual customer
receivables and considering customers financial condition, credit history and current economic
conditions. Receivables are written off when deemed uncollectible. Recoveries of receivables
written off are recorded when received.
Inventories
Ethanol and related products, raw materials and work-in-process are valued using methods which
approximate the lower of cost (first-in, first-out) or market. In the valuation of inventories and
purchase and sale commitments, market is based on current replacement values except that it does
not exceed net realizable values and is not less than net realizable values reduced by allowances
for approximate normal profit margin.
Financing Costs
Financing costs associated with the loans discussed in Note 7 and are recorded at cost and include
expenditures directly related to securing debt financing. The Company is amortizing these costs
using the effective interest method over the term of the agreement. The financing costs are
included in interest expense in the statement of operations.
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FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the straight-line method
over the following estimated useful lives:
Buildings
|
20 Years | |
Plant and Process Equipment
|
5-20 Years | |
Office Furniture and Equipment
|
3-10 Years |
Maintenance and repairs are charged to expense as incurred; major improvements and betterments are
capitalized. The present value of capital lease obligations are classified as long-term debt and
the related assets are included in property and equipment. Amortization of assets under capital
lease is included in depreciation expense.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. An impairment loss would be
recognized when estimated undiscounted future cash flows from operations are less than the carrying
value of the asset group. An impairment loss would be measured by the amount by which the carrying
value of the asset exceeds the fair value of the asset. In accordance with Company policies,
management has evaluated the plant for possible impairment based on projected undiscounted future
cash flows from operations. Management has determined that its projected undiscounted future cash
flows from operations exceed the carrying value of the plant and that no impairment exists at
September 30, 2010.
Investment in Commodities Contracts, Derivative Instruments and Hedging Activities
The Company is exposed to certain risks related to its ongoing business operations. The primary
risks that the Company manages by using forward or derivative instruments are price risk on
anticipated purchases of corn and natural gas.
The Company is subject to market risk with respect to the price and availability of corn, the
principal raw material we use to produce ethanol and ethanol by-products. In general, rising corn
prices result in lower profit margins and, therefore, represent unfavorable market conditions.
This is especially true when market conditions do not allow the Company to pass along increased
corn costs to our customers. The availability and price of corn is subject to wide fluctuations due
to unpredictable factors such as weather conditions, farmer planting decisions, governmental
policies with respect to agriculture and international trade and global demand and supply.
Certain contracts that literally meet the definition of a derivative may be exempted from
derivative accounting as normal purchases or normal sales. Normal purchases and normal sales are
contracts that provide for the purchase or sale of something other than a financial instrument or
derivative instrument that will be delivered in quantities expected to be used or sold over a
reasonable period in the normal course of business. Contracts that meet the requirements of normal
purchases or sales are documented as such and exempted from the accounting and reporting
requirements of derivative accounting.
The Company enters into firm-price purchase commitments every month with its natural gas suppliers
under which they agree to buy natural gas at a price set in advance of the actual delivery of that
natural gas to us. Under these arrangements, the Company assumes the risk of a price decrease in
the market price of natural gas between the time this price is fixed and the time the natural gas
is delivered. The Company accounts for these transactions as normal purchases, and accordingly,
does not mark these transactions to market nor does the Company record the commitment on the
balance sheet.
The Company enters into short-term cash, options and futures contracts as a means of securing corn
pricing for the ethanol plant and managing exposure to changes in commodity prices. The Company
maintains a risk management strategy that uses derivative instruments to minimize significant,
unanticipated earnings fluctuations caused by market fluctuations. The Companys specific goal is
to protect the Company from large moves in commodity costs. All derivatives will be designated as
non-hedge derivatives for accounting purposes and the contracts will be accounted for at fair
value. Although the contracts will be effective economic hedges of specified risks, they are not
designated as and accounted for as hedging instruments.
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FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
As part of its trading activity, the Company uses futures and option contracts offered through
regulated commodity exchanges to reduce risk and is exposed to risk of loss in the market value of
inventories. To reduce that risk, the Company generally takes positions using cash and futures
contracts and options.
To ensure an adequate supply of corn to operate the plant, the Company enters into contracts to
purchase corn from local farmers and its major suppliers. At September 30, 2010, the Company had
fixed price contracts totaling approximately $6,594,000 based upon the average per bushel price.
The Company has also managed a portion of its floating interest rate exposure through the use of
interest rate derivative contracts. The Companys forward LIBOR-based contract reduces risk from
interest rate movements as gains and losses on the contract offset portions of the interest rate
variability of our variable-rate debt. The notional amount of the swap at September 30, 2010 and
2009 was $25,182,610 and $47,508,877, respectively. The effect of the swap is to limit the
interest rate exposure on the LIBOR component to a fixed rate of 4.04% compared to a variable
interest rate. The swaps notional amount will decrease quarterly to $0 by the termination date of
December 31, 2011. The counterparty to the contracts is a large commercial bank, and the Company
does not anticipate their nonperformance. The swap is designated as a non-hedge derivative and is
accounted for as mark to market. The estimated fair value of this agreement at September 30, 2010
and 2009, was a liability of approximately $657,000 and $1,772,000, respectively.
Derivatives not designated as hedging instruments at September 30, 2010 and 2009 were as follows:
Balance Sheet | September 30, | September 30, | ||||||||
Classification | 2010 | 2009 | ||||||||
Futures and options contracts |
(Current Liabilities) | $ | | $ | (61,325 | ) | ||||
Interest rate swap |
(Current Liabilities) | (525,658 | ) | (817,718 | ) | |||||
Interest rate swap |
(Non-Current Liabilities) | (131,414 | ) | (954,004 | ) |
Statement of | ||||||||||
Operations | September 30, | September 30, | ||||||||
Classification | 2010 | 2009 | ||||||||
Net realized and unrealized
(Losses) related to futures
and options contracts
ethanol |
Revenue | $ | (13,780 | ) | $ | | ||||
Net realized and unrealized
gains related to futures and
options contracts corn |
Cost of Goods Sold | 51,203 | 1,078,187 | |||||||
Net realized and unrealized
(losses) related to the
interest rate swap |
Other non-operating (expense) | (373,490 | ) | (2,485,401 | ) |
Revenue Recognition
The Company recognizes revenue when it is realized or realizable and earned. The Company considers
revenue realized or realizable and earned when it has persuasive evidence of an arrangement,
delivery has occurred, the sales price is fixed or determinable, and collection is reasonably
assured.
Revenue from the production of ethanol and related products is recorded at the time title and all
risks of ownership transfer to customers, which is typically upon loading and shipping of the
product from the facility. Commissions are included in cost of goods sold. In addition, shipping
and handling costs incurred by the Company for the sale of ethanol and related products are
included in cost of goods sold.
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FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
Revenue Recognition
Revenue by product is as follows for the years ending September 30, 2010 and 2009:
2010 | 2009 | |||||||
Ethanol |
$ | 168,878,551 | $ | 135,876,057 | ||||
Distillers Grain |
34,291,364 | 30,317,887 | ||||||
Other |
315,606 | 367,829 | ||||||
Total |
$ | 203,485,521 | $ | 166,561,773 | ||||
Interest income is recognized as earned.
Net Loss per Membership Unit
For purposes of calculating basic and diluted net loss per member unit, units subscribed and issued
by the Company are considered outstanding on the effective date of issue and are weighted by days
outstanding.
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 Companys 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.
Management has evaluated the Companys tax positions under the Financial Accounting Standards Board
issued guidance on accounting for uncertainty in income taxes and concluded that the Company has
taken no uncertain tax positions that require adjustment to the financial statements to comply with
the provisions of this guidance. With few exceptions, the Company is no longer subject to income
tax examinations by the U.S. Federal, state or local authorities for the years before 2007.
Fair Value of Financial Instruments
Financial instruments include cash and cash equivalents, derivative instruments, trade receivables,
accounts payable, accrued expenses. Management believes the fair value of each of these financial
instruments approximates their carrying value on the balance sheet as of the balance sheet date.
The fair value of current financial instruments is estimated to approximate carrying value due to
the short-term nature of these instruments. The Company believes it is not practical to estimate
the fair value of the long-term debt.
Risks and Uncertainties
The Company has certain risks and uncertainties that it will experience during volatile market
conditions, which can have a severe impact on operations. The Companys revenues are derived from
the sale and distribution of ethanol and distiller grains to customers primarily located in the
United States. Corn for the production process is supplied to the plant primarily from local
agricultural producers and from purchases on the open market.
The Companys operating and financial performance is largely driven by the prices at which we sell
ethanol and the net expense of corn. The price of ethanol is influenced by factors such as supply
and demand, weather, government policies and programs, and unleaded gasoline and the petroleum
markets, although since 2005 the prices of ethanol and gasoline began a divergence with ethanol
selling for less than gasoline at the wholesale level. Excess ethanol supply in the market, in
particular, puts downward pressure on the price of ethanol. Our largest cost of production is corn.
The cost of corn is generally impacted by factors such as supply and demand, weather, government
policies and programs, and our risk management program used to protect against the price volatility
of these commodities.
The current U.S. economic condition has reduced the nations demand for energy. In addition, the
VEETC credit of $0.45 is set to expire in December 2011, creating additional uncertainty to the
future of ethanol production. The ethanol boom of recent years has spurred overcapacity in the
industry and production capacity is currently exceeding the RFS mandates. As such, the Company may
need to evaluate whether crush margins will be sufficient to operate the plant and generate enough
debt service. In the event crush margins become negative for an extended period of time, the
Company may be required to reduce capacity or shut down the plant. The Company will continue to
evaluate crush margins on a regular basis. Based on the Companys operating plan and the borrowing
capacity, management believes it has the capital to meet its obligations throughout the next twelve
month period.
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FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 2. INVENTORIES
A summary of inventories at September 30, 2010 and September 30, 2009 is as follows:
September 30, | September 30, | |||||||
2010 | 2009 | |||||||
Corn |
$ | 4,943,188 | $ | 3,958,543 | ||||
Denaturant and chemical supplies |
432,434 | 287,640 | ||||||
Work in process |
1,902,712 | 1,095,000 | ||||||
Ethanol |
1,618,807 | 1,649,895 | ||||||
Distiller grains |
962,700 | 628,195 | ||||||
Total |
$ | 9,859,841 | $ | 7,619,273 | ||||
NOTE 3. MEMBERS EQUITY
As specified in the Companys Operating Agreement, voting rights are one vote for each voting unit
registered in the name of such Member as shown on the Membership Registration maintained by the
Company. Income and losses of the Company shall be allocated among the Members in proportion to
each Members respective percentage of Units when compared with the total Units issued. The
Companys cash flow shall first be applied to the payment of the Companys operating expenses
(including debt service) and then to maintenance of adequate cash reserves as determined by the
Board of Directors in its sole discretion, shall be distributed from time to time to the Members in
proportion to their respective percentage Units. No member has the right to demand and receive any
distribution from the Company other than in cash. No distribution shall be made if, as a result
thereof, the Company would be in violation of any loan agreement, or if the Companys total assets
would be less than the sum of its total liabilities.
Transfer, disposition or encumbrance of membership units are subject to certain significant
restrictions, including a restriction that prohibits disposals without approval by the Board of
Directors.
Initial investors purchased 600 units at $333.33 per unit in March 2005 and 2,000 units at $500 per
unit in September 2005. In conjunction with a filing with the U.S. Securities and Exchange
Commission, the Company issued 74,010 units at an offering price of $1,000 per unit closing in June
2007. In May 2009, the Company issued 5,369 units at an offering price of $500 per unit for
investments up to $1,000,000 and an offering price of $333 per unit for investments exceeding
$1,000,000 in conjunction with a private placement. Also during the year ending September 30,
2009, 5 units were issued upon the partial exercise of a unit option under the Companys Unit
Option Plan (see Note 5).
In August 2010, the Board of Directors voted to begin the process of reclassification and
reorganization of the Companys membership units. The Company filed a definitive proxy statement
with the SEC on October 15, 2010 giving notice to the unit holders of a special meeting in which
they will be asked to approve a proposed Third Amended and Restated Operating Agreement. The
result of such amendment and restatement will be the reclassification of the Companys units into
newly authorized Class A, Class B and Class C Units. If the transaction is completed, the units of
the Companys unit holders of record who hold 100 or more of common equity units will be renamed as
Class A Units. Unit holders of record who hold at least 99 units but no more than 21 units will
receive one Class B Unit for each common equity unit held by such unit holders immediately prior to
the effective time of the reclassification. Unit holders of record who hold 20 or fewer units will
receive one Class C Unit for each common equity unit held by such unit holders immediately prior to
the effective time of the reclassification. The effect of the reclassification will be to reduce
the recorded number of unit holders of the Companys common equity units to less than 300. This
would enable the Company to voluntarily terminate the registration of its units under the
Securities and Exchange Act of 1934 and remove its public reporting obligations.
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FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 4. RELATED PARTIES
An entity which has common ownership with Fagen, Inc., the Companys principal vendor in the
construction of the ethanol facility, is also a Member of the Company and holds approximately 1.2%
of the outstanding units. In addition, the Company has a subordinated promissory note due Fagen,
Inc. in the amount of $3,977,545 as of September 30, 2010 and 2009.
The Company purchased corn at market prices in the amount of $1,990,862 and $1,432,101 for the
years ending September 30, 2010 and 2009, respectively, from certain Directors in the normal course
of business.
NOTE 5. UNIT OPTION PLAN
The Company adopted the First United Ethanol, LLC Membership Unit Option Plan (the Plan) during
April 2007. The Plan permits the grant of unit options and units to its employees for up to 1,532
units. The Company believes that such awards better align the interests of its employees with
those of its members. Option awards are generally granted with an exercise price equal to the
market price of the Companys units at the date of grant; those option awards generally vest over
three to five years of continuous service and have ten-year contractual terms. Certain option
awards provide for accelerated vesting if there is a change in control or termination without cause
(as defined in the Plan).
Accounting standards require an entity to measure the cost of employee services received in
exchange for the award of equity instruments based on the fair value of the award on the date of
grant. The expense is to be recognized over the period during which an employee is required to
provide services in exchange for the award.
The Company uses a Black-Scholes option-pricing model in order to calculate the compensation costs
of employee stock-based compensation. Such model requires the use of subjective assumptions,
including the expected life of the option, the expected volatility of the underlying unit, and the
expected dividend on the unit as discussed below. There were no options granted during the year
ending September 30, 2010 and 383 units granted during the year ending September 30, 2009.
Because the Company did not have specific historical or implied volatility information available
due to beginning operations in October 2008, expected volatility was based on the historical, or
implied volatility of similar entities with publicly available share or option prices. The expected
term represents the estimated average period of time that the options remain outstanding using the
simplified method. The risk-free rate of return reflects the weighted average interest rate
offered for zero coupon treasury bonds over the expected term of the options.
Accounting standards require forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those estimates. Based on
historical experience, the Company estimated future non-vested option forfeitures at 0% as of
September 30, 2010 and 2009. The fair value of options granted for the year ended September 30,
2009 for the awards granted in 2009 was approximately $600 per unit based on the following
assumptions in the Black Scholes Model:
2009 | ||||
Expected volatility |
66 | % | ||
Expected dividends |
| |||
Expected term (in years) |
6 | |||
Risk-free interest rate |
2.96 | % |
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FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
A summary of option activity under the Plan as of September 30, 2010 and 2009, and changes during
the years then ended is presented below:
Weighted- | ||||||||||||
Weighted- | Average | |||||||||||
Average | Remaining | |||||||||||
Exercise | Contractual | |||||||||||
Options | Units | Price | Term | |||||||||
Outstanding at September 30, 2008 |
573 | 1,000 | 9.25 | |||||||||
Granted |
383 | 1,000 | 10 | |||||||||
Exercised |
(5 | ) | 1,000 | | ||||||||
Forfeited |
| | | |||||||||
Outstanding at September 30, 2009 |
951 | 1,000 | 8.80 | |||||||||
Outstanding at September 30, 2010 |
951 | 1,000 | 7.80 | |||||||||
Exercisable at September 30, 2010 |
682 | $ | 1,000 | $ | | |||||||
As of September 30, 2010, there was approximately $170,000 of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the Plan. That cost is
expected to be recognized over a period of 2 years.
NOTE 6. LEASES
The Company leases operating machinery under a lease agreement with De Lage Landen which is
accounted for as a capital lease. The lease will expire in 2013. The assets have a capitalized cost
of $157,664 included in property and equipment as of September 30, 2010 and 2009. Accumulated
depreciation totaled $31,532 and $15,766 for the years ending September 30, 2010 and 2009,
respectively.
The Company entered into an Excess Facilities Charge Agreement with Georgia Power Company in which
Georgia Power installed a power substation to augment the Companys power system. The cost of the
substation is charged to the Company over a three year period requiring annual payments of
principal and interest totaling $686,309 beginning June 30, 2009. The Company has accounted for
this agreement as a capital lease. The present value of future payments due under the lease of
$1,834,512 is included in property and equipment as of September 30, 2010 and 2009. Accumulated
depreciation totaled $183,451 and $91,726 for the years ending September 30, 2010 and 2009,
respectively.
The Company also entered into a Natural Gas Facilities Agreement with the City of Camilla for a
high pressure gas main to serve the plant and purchase natural gas from the City of Camilla. The
City of Camilla owns and operates the gas main and leases its usage to the Company. The agreement
calls for a monthly facilities charge, in addition to the normal consumption charges, equal to the
cost of the installation of the gas main over an 80 month period beginning June 2009 and requiring
principal and interest payments of approximately $43,000 each month. The Company has accounted for
the facilities lease charges as a capital lease. The present value of future payments under the
lease of $2,777,960 is included in as an asset in property and equipment as of September 30, 2010
and 2009. Accumulated depreciation totaled $277,796 and $138,898 for the years ending September 30,
2010 and 2009, respectively.
September 30, | September 30, | |||||||
2010 | 2009 | |||||||
De Lage Landen Financial Services,
60 months, interest rate of 7.5% |
$ | 96,778 | $ | 126,327 | ||||
Georgia Power Substation lease, 36 months,
interest rate of 5.85% |
1,299,364 | 1,299,364 | ||||||
Natural Gas Facilities lease, 80 months,
interest rate of 6.59% |
2,318,226 | 2,667,334 | ||||||
3,714,368 | 4,093,025 | |||||||
Less current portion |
(1,706,620 | ) | (1,019,029 | ) | ||||
$ | 2,007,748 | $ | 3,073,996 | |||||
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FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Future minimum payments, by year, under the capital lease are due as follows:
Year ending September 30: |
||||
2011 |
$ | 1,927,359 | ||
2012 |
554,743 | |||
2013 |
548,406 | |||
2014 |
516,722 | |||
2015 |
516,722 | |||
Thereafter |
167,593 | |||
Total future minimum lease payments |
4,231,545 | |||
Amounts representing interest |
(517,177 | ) | ||
Present value of future net minimum lease payments |
$ | 3,714,368 | ||
The Company also entered into operating leases with Trinity Industries Leasing Company for the use
of rail cars and tanker cars. The tanker car lease expires November 2017 and the rail car lease
expires February 2012. During the year ending September 30, 2009, the Company determined that a
portion of the tanker cars under the non-cancelable lease will not be utilized and have no future
benefit. Accordingly, the Company recorded a liability and a charge to income in the amount
$745,000 for the future lease payments associated with the unused tanker cars. The remaining
accrual as of September 30, 2010 and 2009 was $149,000 and $745,000, respectively. In February and
March 2010, the Company signed sublease agreements for a portion of the tanker cars through
December 2010 and March 2012 and recorded sublease income for the year ending September 30, 2010 of
approximately $294,000. The total remaining minimum lease commitments under non-cancelable
operating leases are as follows:
Year ending September 30: |
||||
2011 |
$ | 1,874,000 | ||
2012 |
1,042,000 | |||
2013 |
447,000 | |||
2014 |
447,000 | |||
2015 |
447,000 | |||
Thereafter |
522,000 | |||
Total minimum operating lease payments |
$ | 4,779,000 | ||
NOTE 7. DEBT FINANCING ARRANGEMENTS
The Companys long-term debt outstanding as of September 30, 2010 and 2009 is summarized as
follows:
September 30, | September 30, | |||||||
2010 | 2009 | |||||||
West LB Term Loan, variable interest rates from 4.00% - 4.28% |
$ | 92,200,000 | $ | 98,500,000 | ||||
Subordinated Fagen note, 4% through June 30, 2010 and 8% thereafter |
3,977,545 | 3,977,545 | ||||||
Subordinated debt facility, interest rate of 7.5%, described below |
9,250,000 | 9,850,000 | ||||||
Notes payable John Deere Credit, interest rate of 5.3%, described below |
136,244 | 202,050 | ||||||
105,563,789 | 112,529,595 | |||||||
Less current portion |
(11,081,911 | ) | (9,204,578 | ) | ||||
$ | 94,481,878 | $ | 103,325,017 | |||||
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FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
The maturities of long-term debt at September 30, 2010 are as follows:
Year ending September 30: |
||||
2011 |
$ | 11,081,911 | ||
2012 |
6,996,878 | |||
2013 |
6,970,000 | |||
2014 |
6,715,000 | |||
2015 |
67,560,000 | |||
Thereafter |
6,240,000 | |||
Total |
$ | 105,563,789 | ||
West LB Credit Arrangement Senior Debt
SWGE entered into a senior credit agreement that provided for (1) a construction loan facility in
an aggregate amount of up to $100,000,000, which converted to a term loan on February 20, 2009
(Conversion Date) that matures on February 20, 2015 (the Final Maturity Date); and (2) a
working capital loan in an aggregate amount of up to $15,000,000 which matures February 20, 2011.
The primary purpose of the credit facility was to finance the construction and operation of the
Companys ethanol plant.
The principal amount of the term loan facility is payable in quarterly payments ranging from
$1,500,000 to $1,600,000 beginning September 30, 2009, and the remaining principal amounts are
fully due and payable on February 20, 2015. Interest is payable quarterly. SWGE has the option to
select between two floating interest rate loans under the terms of the senior credit agreement:
Base Rate Loans bear interest at the Administrative Agents base rate (which is the higher of the
federal funds effective rate plus 0.50% and the Administrative Agents prime rate) plus 2.75% per
annum. Eurodollar Loans bear interest at LIBOR plus 3.75%. The Company has entered into an interest
rate swap with WestLB to effectively convert a portion of the variable rate interest into a fixed
rate, with the LIBOR component fixed at 4.04% (See Note 1).
Under the terms of the senior credit agreement, SWGE has agreed to pay a quarterly commitment fee
equal to 0.50% per annum on the unused portion of the construction loan/term loan and .20% per
annum on the unused portion of the working capital loan. SWGEs obligations under the senior credit
agreement are secured by a first-priority security interest in all of the Companys assets,
including its equity interest in SWGE.
The senior credit agreement also required SWGE to enter into an accounts agreement among SWGE,
Amarillo National Bank, as the Accounts Bank and Securities Intermediary, and WestLB as the
collateral agent and administrative agent. Among other things, the accounts agreement establishes
certain special, segregated project accounts and establishes procedures for the deposits and
withdrawals of funds into these accounts. Substantially all cash of SWGE is required to be
deposited into the project accounts subject to security interests to secure obligations in
connection with the senior credit. Funds are released from the project accounts in accordance with
the terms of the accounts agreement.
As of September 30, 2010 and 2009, the Company had drawn $13,784,129 on the $15,000,000 working
capital loan.
On June 7, 2010, the Company executed the Sixth amendment to its Senior Credit Agreement and its
Fourth amendment to its Accounts Agreement with WestLB. Pursuant to the amended agreements, the
Company is required to maintain a certain level of working capital. Pursuant to the amended loan
agreements, the Company is required to have a working capital deficit of ($9,000,000) or less as of
September 30, 2010, and ($7,000,000) or less as of December 31, 2010. Subsequent to December 31,
2010, the working capital deficit requirement will remain at ($7,000,000) for the term of the loan.
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FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
In the event the Company is unable to meet the level of working capital required under the amended
loan agreements the Company will be assessed a five percent (5%) interest fee on the outstanding
loans for any quarter for which it is not in compliance. This fee payment is in addition to the
interest the Company is required to pay on its outstanding debt pursuant to the original loan
agreements. This additional interest fee will be accrued and due February 2015, the final maturity
date for the Companys outstanding term loan with West LB. Furthermore, and
regardless of whether the Company has maintained the required level of working capital, the Company
will be required to make an additional quarterly principal payment of $150,000 toward its
outstanding working capital loan balance for each quarter beginning September 30, 2010. This
arrangement is distinct from the borrowing base formula and borrowing base certificates previously
utilized to monitor compliance with the Companys working capital loan. This amendment also removes
the borrowing base financial covenant from the terms of the loan, thereby removing the requirement
for waivers.
The Company did not meet the working capital deficit of ($9,000,000) required as of September 30,
2010. The resulting penalty fee of approximately $1,375,000 has been charged to interest expense
as of September 30, 2010 and included as a long term liability.
Subordinated Debt Facility
The Company has a subordinated debt financing arrangement pursuant to which the Mitchell County
Development Authority issued $10,000,000 of revenue bonds that were placed with Wachovia Bank. The
Company signed a promissory note, which is collateralized by the Companys assets and the proceeds
were placed in a Bond Trustee account with Regions Bank. The interest rate for this note is 7.5%.
The Company is required to maintain a debt service reserve with the Bond Trustee of at least
$1,180,000. This note is subordinated to the West LB debt agreement, which currently prohibits the
Company from making any debt service payments. As a result, the Bond Trustee made the annual
interest and principal payment to the bond holders of approximately $1,339,000 in December 2009
from the debt service reserve. The funds held in the Bond Trustee account are classified as
non-current restricted cash and cash equivalents in the Companys consolidated balance sheet. The
subordinated debt is a 15 year note with annual principal payments each December due to the bond
holders in 2010 of $635,000, in 2011 of $530,000, in 2012 of $570,000, in 2013 of $615,000, in 2014
of $660,000 and $6,240,000 thereafter. The $635,000 due in 2010 has been classified as a current
maturity of long-term debt per the agreement. However any payment will likely come from the debt
service fund due to the subordination.
Subordinated Fagen Note
On June 30, 2009, SWGE entered into a subordinated promissory note agreement in the amount of
$3,977,545 due Fagen, Inc., a related party, for the remaining design-build contract balance. The
note bears interest at 4% through June 30, 2010 and 8% thereafter through maturity on June 30,
2011. Interest is payable quarterly. The first principal payment of $500,000 was due as of
September 30, 2009 along with an annual principal payment of $1,738,772 that was due June 30, 2010.
The final payment of $1,738,772 is due June 30, 2011. This note is subordinated to the West LB
debt agreement, which currently prohibits the Company from making the principal and interest
payments on the schedule described above. The note of $3,977,545 is included in current maturities
of long-term debt per the agreement. However, the earliest any payment will likely be made is in
2014.
Other Notes Payable
The Company financed the acquisition of certain equipment through two identical notes payable to
John Deere Credit. The notes amortize over four years (maturity in August 2012) with monthly
principal and interest payments and are secured by the equipment. The interest rate is 5.3%. The
combined outstanding balance on these two notes payable is $136,244 and $202,050 as of September
30, 2010 and 2009, respectively.
NOTE 8. 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 utilized certain assumptions that 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 observable inputs used
in the valuation techniques, the Company is required to provide the following information according
to the fair value hierarchy.
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FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
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 Observable inputs -
|
unadjusted quoted prices in active markets for identical assets and liabilities; | |
Level 2 Observable inputs -
|
other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data; and | |
Level 3 Unobservable inputs -
|
includes amounts derived from valuation models where one or more significant inputs are unobservable. |
The Company has classified its investments in marketable securities and derivative instruments into
these levels depending on the inputs used to determine their fair values. The Companys investments
in marketable securities consist of money market funds restricted by the bond holders which are
based on quoted prices and are designated as Level 1. The Companys derivative instruments consist
of commodity positions. The fair value of the commodity positions are based on quoted prices on the
commodity exchanges and are designated as Level 1 and the fair value of the interest rate swap is
based on quoted prices on similar assets or liabilities in active markets and discounts to reflect
potential credit risk to lenders and are designated as Level 2.
The following table summarizes fair value measurements by level at September 30, 2010:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets: |
||||||||||||||||
Investments in marketable
securities, included in
restricted cash |
$ | 258,476 | $ | | $ | | $ | 258.476 | ||||||||
Total assets |
$ | 258,476 | $ | | $ | | $ | 258,476 | ||||||||
Liabilities: |
||||||||||||||||
Derivative instruments: |
||||||||||||||||
Interest rate swap |
$ | | $ | 657,072 | $ | | $ | 657,072 | ||||||||
Total liabilities |
$ | | $ | 657,072 | $ | | $ | 657,072 | ||||||||
The following table summarizes fair value measurements by level at September 30, 2009:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets: |
||||||||||||||||
Investments in
marketable securities,
included in restricted
cash |
$ | 1,597,109 | $ | | $ | | $ | 1,597,109 | ||||||||
Total assets |
$ | 1,597,109 | $ | | $ | | $ | 1,597,109 | ||||||||
Liabilities: |
||||||||||||||||
Derivative instruments: |
||||||||||||||||
Commodity positions |
$ | 61,325 | $ | | $ | | $ | 61,325 | ||||||||
Interest rate swap |
| 1,771,722 | | 1,771,722 | ||||||||||||
Total liabilities |
$ | 61,325 | $ | 1,771,722 | $ | | $ | 1,833,047 | ||||||||
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FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Certain financial assets and liabilities are measured at fair value on a non-recurring 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.
NOTE 9. COMMITMENTS AND CONTINGENCIES
Liquidity
Our liquidity, results of operations and financial performance will be impacted by many variables,
including the market price for commodities such as, but not limited to, corn, ethanol and other
energy commodities, as well as the market price for any co-products generated by the facility and
the cost of labor and other operating costs. Assuming future relative price levels for corn,
ethanol and distillers grains remain consistent with the relative price levels as of September 30,
2010, we expect operations to generate adequate cash flows to maintain operations. The assumptions
assume that we will be able to sell all the ethanol that is produced at the plant.
Commitments and Major Customers
The Company has an agreement with an unrelated entity and major customer for marketing, selling,
and distributing all of the ethanol produced by the Company. Under the agreement, the Company will
pay the entity $.01 per net gallon for each gallon of ethanol sold via railcar and $.012 per net
gallon for ethanol sold via truck. For the years ending September 30, 2010 and 2009, the Company
expensed approximately $1,125,000 and $870,000, respectively, under this agreement. Revenues with
this customer were approximately $168,879,000 and $135,876,000 for the years ending September 30,
2010 and 2009, respectively. Trade accounts receivable of approximately $2,028,000 and $2,134,000
were due from the customer as of September 30, 2010 and 2009, respectively. This agreement was
effective through October 2010, at which time it will automatically renew for an additional two
years without written notice.
The Company also has an agreement with an unrelated entity for marketing, selling and distributing
the distillers grains with solubles DDGS to the rail market and for the supply of grain to the
Company. Under the agreement, the Company will pay the entity $.50 per ton for DDGS sold and $.0025
per bushel of grain supplied. In addition, the Company is required to pay the marketer $0.01 per
bushel for non-brokered corn purchases. For the years ending September 30, 2010 and 2009, the
Company expensed approximately $115,000 and $117,000, respectively, under this agreement. There
were no revenues with this customer for the years ending September 30, 2010 and 2009 and no trade
accounts receivable due from this customer as of September 30, 2010 and 2009 as the marketer acts
purely in the broker capacity.
NOTE 10. GOING CONCERN
The accompanying financial statements have been prepared assuming that the Company will continue as
a going concern. For the year ending September 30, 2010, the Company has generated losses of
approximately $2,175,000 and has experienced liquidity restraints due to limits on its working
capital line of credit. These liquidity restraints raise concern about whether the Company will
continue as a going concern.
In the late summer of 2010, the Company hired an outside 3rd party to look at the
efficiency of the plant and provide suggestions and solutions to increase the operational
effectiveness. These studies have been completed and outlined several areas where the Company
could make improvements. Some of the improvements were immediately implemented with positive
results already being shown. The Company believes that with improvements already implemented and
the additional improvement being made, that the operational efficiency of the plant will increase
significantly, allowing the plant to run profitably. Additionally, the Companys profitability is
also dependent upon a number of other factors noted elsewhere in these financial statements,
including stable and positive crush margins. In addition, the Company is continually exploring
different avenues on its working capital line of credit and to ensure enough funding for the debt
reserve fund. These options may include negotiating different terms with the lender, raising
additional capital or subordinated debt, finding another funding source for working capital or a
combination of the above. Management is aggressively looking at its different options and
anticipates finding a solution to their liquidity issues. Management believes that once they solve
their working capital needs, they will be able to better manage the commodity risk by being able to
utilize futures and options more frequently and to lock in
positive crush margin. By being able to better take advantage of positive crush margin and with the
plant running more efficiently, management believes together this will provide enough cash flow and
liquidity for the plant. However, there can be no assurances that such operational efficiencies
will provide the Company with sufficient additional cash flow to fund its operations for fiscal
year 2011.
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Table of Contents
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
None.
ITEM 9A. | CONTROLS AND PROCEDURES. |
Disclosure Controls and Procedures
Management of First United Ethanol is responsible for maintaining disclosure controls and
procedures that are designed to ensure that information required to be disclosed in the reports
that the Company files or submits under the Securities Exchange Act of 1934 (the Exchange Act) is
recorded, processed, summarized and reported within the time periods specified in the Securities
and Exchange Commissions rules and forms. In addition, the disclosure controls and procedures
must ensure that such information is accumulated and communicated to the Companys management,
including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required financial and other required disclosures.
Our management, including our Chief Executive Officer, Murray Campbell, along with our Chief
Financial Officer, Larry Kamp, have reviewed and evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rule 13a 15(e) and Rule 15d 15(e) under the Exchange
Act of 1934, as amended) as of September 30, 2009. Based upon this review and evaluation, these
officers have concluded that our disclosure controls and procedures are effective to ensure that
information required to be disclosed in the reports that we file or submit under the Exchange Act
is recorded, processed, summarized and reported within the time periods required by the forms and
rules of the Securities and Exchange Commission; and to ensure that the information required to be
disclosed by an issuer in the reports that it files or submits under the Exchange Act is
accumulated and communicated to our management including our principal executive and principal
financial officers, or person performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.
Internal Control Over Financial Reporting
Inherent Limitations Over Internal Controls
The Companys internal control over financial reporting is designed 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. The
Companys internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the Companys assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that the Companys receipts and expenditures are being made only in accordance with
authorizations of the Companys management and directors; and
(iii) 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.
Management, including the Companys Chief Executive Officer and Chief Financial Officer, does
not expect that the Companys internal controls will prevent or detect all errors and all fraud. A
control system, no matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of internal controls can provide absolute assurance that all control
issues and instances of fraud, if any, have been detected. Also, any evaluation of the
effectiveness of controls in future periods
are subject to the risk that those internal controls may become inadequate because of changes in
business conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
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Table of Contents
Managements Annual Report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of
1934, as amended). Management conducted an evaluation of the effectiveness of the Companys
internal control over financial reporting based on the criteria set forth in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on this evaluation, management has concluded that the Companys internal
control over financial reporting was effective as of September 30, 2010.
This annual report does not include an attestation report of our registered public accounting
firm regarding internal control over financial reporting. Managements report was not subject to
attestation by our registered public accounting firm pursuant to rules of the Securities and
Exchange Commission that permit us to provide only managements report in this annual report.
Changes in Internal Control Over Financial Reporting.
There were no changes in our internal control over financial reporting during the fourth
quarter of our 2010 fiscal year, which were identified in connection with managements evaluation
required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act, that have materially
affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 9B. | OTHER INFORMATION. |
None.
PART III.
Pursuant to General Instruction G(3), we omit Part III, Items 10, 11, 12, 13 and 14 and
incorporate such items by reference to an amendment to this Annual Report on Form 10-K or to a
definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days
after the close of the fiscal year covered by this Annual Report (September 30, 2010).
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE |
The information required by this Item is incorporated by reference from the definitive proxy
statement for our 2011 Annual Meeting of Members to be filed with the Securities and Exchange
Commission within 120 days after the end of our 2010 fiscal year.
ITEM 11. | EXECUTIVE COMPENSATION |
The information required by this Item is incorporated by reference from the definitive proxy
statement for our 2011 Annual Meeting of Members to be filed with the Securities and Exchange
Commission within 120 days after the end of our 2010 fiscal year.
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS |
The information required by this Item is incorporated by reference from the
definitive proxy statement for our 2011 Annual Meeting of Members to be filed with the Securities
and Exchange Commission within 120 days after the end of our 2010 fiscal year.
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ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by this Item is incorporated by reference from the definitive proxy
statement for our 2011 Annual Meeting of Members to be filed with the Securities and Exchange
Commission within 120 days after the end of our 2010 fiscal year.
ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information required by this Item is incorporated by reference from the definitive proxy
statement for our 2011 Annual Meeting of Members to be filed with the Securities and Exchange
Commission within 120 days after the end of our 2010 fiscal year.
PART IV
ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
The following exhibits are filed as part of, or are incorporated by reference into, this
report:
Exhibit | Method of | |||||||
No. | Description | Filing | ||||||
10.1 | Fourth Amendment to Accounts Agreement between
Southwest Georgia Ethanol, LLC and WestLB Ag dated
June 7, 2010.
|
1 | ||||||
10.2 | Sixth Amendment to Senior Credit Agreement between
Southwest Georgia Ethanol, LLC and WestLB Ag dated
June 7, 2010.
|
1 | ||||||
10.3 | Grain Brokerage Agreement between Southwest Georgia
Ethanol, LLC and Palmetto Grain Brokerage, LLC
dated December 15, 2009.
|
* | ||||||
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
|
* |
(1) | Incorporated by reference to Exhibit of the same number filed with our quarterly report on
Form 10-Q filed with the Securities and Exchange Commission on August 16, 2010. |
|
(*) | 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.
FIRST UNITED ETHANOL, LLC |
||||
Date: December 29, 2010 | /s/ Murray Campbell | |||
Murray Campbell | ||||
Chief Executive Officer and Director | ||||
Date: December 29, 2010 | /s/ Lawrence Kamp | |||
Lawrence Kamp | ||||
Chief Financial 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, 2010 | /s/ Murray Campbell | |||
Murray Campbell | ||||
Chief Executive Officer and Director | ||||
Date: December 29, 2010 | /s/ Lawrence Kamp | |||
Lawrence Kamp | ||||
Chief Financial Officer | ||||
Date: December 29, 2010 | /s/ Miley Adams | |||
Miley Adams, Director | ||||
Date: December 29, 2010 | /s/ Steve Collins | |||
Steve Collins, Treasurer and Director | ||||
Date: | ||||
Mark Glass, Director | ||||
Date: December 29, 2010 | /s/ Donald Shirah | |||
Donald Shirah, Director | ||||
Date: December 29, 2010 | /s/ Tommy Hilliard | |||
Tommy Hilliard, Vice Chairman and Director | ||||
Date: December 29, 2010 | /s/ Thomas H. Dollar, II | |||
Thomas H. Dollar, II, Chairman and Director | ||||
Date: December 29, 2010 | /s/ Robert L. Holden, Sr. | |||
Robert L. Holden, Sr., Director | ||||
Date: December 29, 2010 | /s/ Kenneth Jack Hunnicutt | |||
Kenneth Jack Hunnicutt, Director | ||||
Date: | ||||
Ralph Powell, Director |
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EXHIBIT INDEX
Exhibit | Method of | |||||||
No. | Description | Filing | ||||||
10.1 | Fourth Amendment to Accounts Agreement between
Southwest Georgia Ethanol, LLC and WestLB Ag dated
June 7, 2010.
|
1 | ||||||
10.2 | Sixth Amendment to Senior Credit Agreement between
Southwest Georgia Ethanol, LLC and WestLB Ag dated
June 7, 2010.
|
1 | ||||||
10.3 | Grain Brokerage Agreement between Southwest Georgia
Ethanol, LLC and Palmetto Grain Brokerage, LLC
dated December 15, 2009.
|
* | ||||||
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
|
* |
(1) | Incorporated by reference to Exhibit of the same number filed with our quarterly report on
Form 10-Q filed with the Securities and Exchange Commission on August 16, 2010. |
|
(*) | Filed herewith. |
49