Attached files
file | filename |
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EX-31.1 - EXHIBIT 31.1 - Western Iowa Energy, L.L.C. | c17243exv31w1.htm |
EX-32.2 - EXHIBIT 32.2 - Western Iowa Energy, L.L.C. | c17243exv32w2.htm |
EX-31.2 - EXHIBIT 31.2 - Western Iowa Energy, L.L.C. | c17243exv31w2.htm |
EX-32.1 - EXHIBIT 32.1 - Western Iowa Energy, L.L.C. | c17243exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the quarterly period ended March 31, 2011.
OR
o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the transition period from to .
COMMISSION FILE NUMBER 00051965
WESTERN IOWA ENERGY, LLC
(Exact name of registrant as specified in its charter)
Iowa | 41-2143913 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
incorporation or organization) | ||
1220 S. Center Street, P.O. Box 399 | ||
Wall Lake, Iowa | 51466 | |
(Address of principal executive offices) | (Zip Code) |
(712) 664-2173
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
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 Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the Registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.:
Large Accelerated Filer o | Accelerated Filer o | Non-Accelerated Filer þ | Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date:
As of May 11, 2011, there were 26,447 membership units outstanding.
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements |
WESTERN IOWA ENERGY, LLC
CONDENSED BALANCE SHEETS
CONDENSED BALANCE SHEETS
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
(UNAUDITED) | ||||||||
ASSETS |
||||||||
CURRENT ASSETS |
||||||||
Cash and cash equivalents |
$ | 300 | $ | 61,078 | ||||
Trade accounts receivable |
951,399 | 248,928 | ||||||
Other receivables |
102,266 | 295,650 | ||||||
Incentive receivables |
224,139 | 231,949 | ||||||
Inventory |
6,702,440 | 2,612,016 | ||||||
Prepaid expenses and other assets |
616,635 | 371,746 | ||||||
Total current assets |
8,597,179 | 3,821,367 | ||||||
PROPERTY, PLANT AND EQUIPMENT |
||||||||
Land and land improvements |
1,435,928 | 1,435,928 | ||||||
Office building and equipment |
662,492 | 659,840 | ||||||
Plant and process equipment |
33,946,685 | 33,938,749 | ||||||
Construction in progress |
6,280 | | ||||||
Total, at cost |
36,051,385 | 36,034,517 | ||||||
Less accumulated depreciation |
10,461,217 | 9,901,503 | ||||||
Total property, plant and equipment |
25,590,168 | 26,133,014 | ||||||
OTHER ASSETS |
||||||||
Other investments |
128,637 | 124,078 | ||||||
Loan origination fees, net of amortization |
46,734 | 51,259 | ||||||
Total other assets |
175,371 | 175,337 | ||||||
TOTAL ASSETS |
$ | 34,362,718 | $ | 30,129,718 | ||||
LIABILITIES AND MEMBERS EQUITY |
||||||||
CURRENT LIABILITIES |
||||||||
Checks issued in excess of bank balance |
$ | 421,068 | $ | | ||||
Accounts payable: |
||||||||
Trade |
1,979,687 | 1,209,965 | ||||||
Related party |
62,902 | 13,838 | ||||||
Current portion of long-term debt |
252,222 | 259,722 | ||||||
Accrued interest |
14,639 | 6,079 | ||||||
Accrued wages and benefits |
133,722 | 61,651 | ||||||
Accrued payroll taxes |
16,794 | 2,657 | ||||||
Other current liabilities |
29,774 | 25,434 | ||||||
Total current liabilities |
2,910,808 | 1,579,346 | ||||||
LONG-TERM LIABILITIES |
||||||||
Long-term debt, less current portion above |
6,309,444 | 2,195,000 | ||||||
Total liabilities |
9,220,252 | 3,774,346 | ||||||
COMMITMENTS AND CONTINGENCIES (Note 9, 12 and Note 13) |
||||||||
MEMBERS EQUITY |
||||||||
Contributed capital |
23,516,376 | 23,516,376 | ||||||
Retained earnings |
1,626,090 | 2,838,996 | ||||||
Total members equity |
25,142,466 | 26,355,372 | ||||||
TOTAL LIABILITIES AND MEMBERS EQUITY |
$ | 34,362,718 | $ | 30,129,718 | ||||
See accompanying notes.
3
Table of Contents
WESTERN IOWA ENERGY, LLC
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended | Three Months Ended | |||||||
March 31, 2011 | March 31, 2010 | |||||||
REVENUES |
||||||||
Related parties |
$ | | $ | 3,539,041 | ||||
Unrelated parties |
8,886,323 | | ||||||
Total revenues |
8,886,323 | 3,539,041 | ||||||
COST OF SALES |
9,627,913 | 3,996,213 | ||||||
Gross loss |
(741,590 | ) | (457,172 | ) | ||||
OPERATING EXPENSES |
||||||||
Consulting and professional fees |
136,807 | 183,377 | ||||||
Office and administrative expenses |
317,738 | 326,701 | ||||||
Total operating expenses |
454,545 | 510,078 | ||||||
OTHER INCOME (EXPENSE) |
||||||||
Interest income |
202 | 1,836 | ||||||
Interest expense |
(37,376 | ) | (31,640 | ) | ||||
Patronage dividends |
20,403 | 66,252 | ||||||
Total other income (expense) |
(16,771 | ) | 36,448 | |||||
NET LOSS |
$ | (1,212,906 | ) | $ | (930,802 | ) | ||
BASIC AND DILUTED LOSS PER UNIT |
$ | (45.86 | ) | $ | (35.19 | ) | ||
WEIGHTED AVERAGE UNITS OUTSTANDING, |
||||||||
BASIC AND DILUTED |
26,447 | 26,447 | ||||||
See accompanying notes.
4
Table of Contents
WESTERN IOWA ENERGY, LLC
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended | Three Months Ended | |||||||
March 31, 2011 | March 31, 2010 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net (loss) |
$ | (1,212,906 | ) | $ | (930,802 | ) | ||
Adjustments to reconcile net (loss) to net cash
provided by (used in) operating activities |
||||||||
Depreciation and amortization |
564,238 | 566,733 | ||||||
Non cash portion of patronage dividends |
(4,559 | ) | (16,880 | ) | ||||
Effects of changes in operating assets and liabilities |
||||||||
Margin deposits |
| (193,290 | ) | |||||
Trade accounts receivable |
(702,471 | ) | 3,079,009 | |||||
Other receivables |
193,384 | 318,149 | ||||||
Incentive receivables |
7,810 | 2,946,499 | ||||||
Inventory |
(4,090,424 | ) | (2,745,916 | ) | ||||
Derivative instruments |
| 165,316 | ||||||
Prepaid expenses and other assets |
(244,889 | ) | 337,713 | |||||
Accounts payable |
818,786 | (240,089 | ) | |||||
Accrued interest |
8,560 | (13,221 | ) | |||||
Accrued wages and benefits |
72,071 | (7,266 | ) | |||||
Accrued payroll taxes |
14,137 | 1,802 | ||||||
Accrued expenses related party |
| (17,735 | ) | |||||
Other current liabilities |
4,340 | (16,814 | ) | |||||
Net cash provided by (used in) operating activities |
(4,571,923 | ) | 3,233,208 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Purchase of property, plant and equipment, including
construction in progress |
(16,868 | ) | (105,865 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Net increase (decrease) in checks issued in excess of bank balance |
421,068 | (333,008 | ) | |||||
Proceeds from long-term debt |
5,085,000 | 1,150,000 | ||||||
Payments on long-term debt |
(978,055 | ) | (3,908,056 | ) | ||||
Net cash provided by (used in) financing activities |
4,528,013 | (3,091,064 | ) | |||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
(60,778 | ) | 36,279 | |||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
61,078 | 300 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 300 | $ | 36,579 | ||||
See accompanying notes.
5
Table of Contents
WESTERN IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
March 31, 2011
NOTES TO FINANCIAL STATEMENTS
March 31, 2011
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Western Iowa Energy, LLC located in Wall Lake, Iowa was organized on September 21, 2004 to own and
operate a 30 million gallon biodiesel plant for the production of fuel grade biodiesel. The
Companys fiscal year ends on December 31. Significant accounting policies followed by the Company
are presented below.
Use of Estimates in Preparing Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Basis of Accounting
The Company has prepared the financial statements as of March 31, 2011, included herein without
audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).
However, all adjustments have been made to the accompanying financial statements which are, in the
opinion of the Companys management, necessary for a fair presentation of the Companys operating
results all adjustments are of a normal recurring nature. Certain information and footnote
disclosures normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been condensed pursuant to such
rules and regulations, although the Company believes that the disclosures are adequate to make the
information presented herein not misleading. It is recommended that these financial statements be
read in conjunction with the financial statements and the notes thereto included in the Companys
latest annual report on Form 10-K.
Revenue Recognition
Revenue from the production of biodiesel and related products, net of marketing fees, is recorded
upon transfer of the risks and rewards of ownership which generally occurs upon shipment.
Interest income is recognized as earned. Patronage dividends are recognized when received.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be cash equivalents.
The Company maintains its accounts primarily at one financial institution. At times throughout the
year, the Companys cash and equivalents balances may exceed amounts insured by the Federal Deposit
Insurance Corporation. The Company has not experienced any losses in such accounts and believes it
is not exposed to any significant credit risk.
6
Table of Contents
WESTERN IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
March 31, 2011
NOTES TO FINANCIAL STATEMENTS
March 31, 2011
Accounts Receivable
Accounts receivable are presented at face value, net of the allowance for doubtful accounts. The
allowance for doubtful accounts is established through provisions charged against income and is
maintained at a level believed adequate by management to absorb estimated bad debts based on
historical experience and current economic conditions. Management has established an allowance for
doubtful accounts of $-0- at March 31, 2011 and December 31, 2010.
The Companys policy is to charge simple interest on trade receivables past due balances; accrual
of interest is discontinued when management believes collection is doubtful. Receivables are
considered past due based upon payment terms set forth at the date of the related sale. The
Company has no receivables accruing interest at March 31, 2011 and December 31, 2010.
Derivative Instruments and Hedging Activities
Topic 815 of the Accounting Standards Codification (ASC), Derivatives and Hedging, requires a
company to evaluate its contracts to determine whether the contracts are derivatives. Certain
contracts that literally meet the definition of a derivative may be exempted from ASC 815 as normal
purchases or normal sales. Normal purchases and normal sales are contracts that provide for the
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 purchase or normal sales are
documented as such, and exempted from the accounting and reporting requirements of ASC 815. The
Company does enter into agreements to purchase soybean oil for anticipated production needs. These
contracts are considered normal purchase contracts and exempted from ASC 815.
Inventories
Inventory is stated at the lower of cost, determined on a first in, first out basis, or market
value. As of March 31, 2011 inventories were adjusted to market value which was approximately
$375,000 lower than cost.
Property, Plant, and Equipment
Property and equipment are stated at cost. Significant additions are capitalized, while
expenditures for maintenance, repairs and minor renewals are charged to operations when incurred.
Depreciation and amortization are computed using the straight-line method over the estimated useful
lives of the assets determined as follows:
Years | ||
Land improvements |
20-40 | |
Office building |
5-40 | |
Office equipment |
5-20 | |
Plant and process equipment |
10-40 |
Depreciation expense for the three months ended March 31, 2011 and 2010 was $559,714 and $562,208,
respectively.
7
Table of Contents
WESTERN IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
March 31, 2011
NOTES TO FINANCIAL STATEMENTS
March 31, 2011
The Company reviews its property and equipment for impairment whenever events indicate that the
carrying amount of the asset may not be recoverable. An impairment loss is recorded when the sum
of the future cash flows is less than the carrying amount of the asset. The amount of the loss is
determined by comparing the fair market values of the asset to the carrying amount of the asset.
Loan Origination Fees
Loan origination fees are stated at cost and are amortized on the straight-line method over the
life of the loan agreements. Amortization commenced as the Company borrowed funds on the loans.
Amortization for the three months ended March 31, 2011 and 2010 was $4,524.
Other Investments
Other investments consist of investments in the capital stock and patron equities of the Companys
primary lenders. The investments are stated at cost and adjusted for non cash patronage equities
received.
Income Taxes
The Company is organized as a limited liability company under state law and is treated as a
partnership for income tax purposes. Under this type of organization, the Companys earnings pass
through to the partners and are taxed at the partner level. Accordingly, no income tax provision
has been calculated. Differences between financial statement basis of assets and tax basis of
assets is related to capitalization and amortization of organization and start-up costs for tax
purposes, whereas these costs are expensed for financial statement purposes. Differences also
exist in the treatment of expenses capitalized for inventory for tax purposes, prepaid expenses,
and differences between depreciable lives and methods used for book and tax purposes.
Loss per Unit
Losses per unit are calculated based on the period of time units have been issued and outstanding.
For purposes of calculating diluted earnings per capital unit, units subscribed for but not issued
are included in the computation of outstanding capital units based on the treasury stock method.
As of March 31, 2011 and 2010, there was not a difference between basic and diluted earnings per
unit as there were no units subscribed.
Cost of Sales
The primary components of cost of sales from the production of biodiesel products are raw materials
(soybean oil, animal fats, hydrochloric acid, methanol, and sodium methylate), energy (natural gas
and electricity), labor and depreciation on process equipment.
Fixed costs during the periods when the plant is idle are classified in cost of sales. Cost of
sales during these periods primarily consists of labor, depreciation on process equipment, and
other indirect costs.
8
Table of Contents
WESTERN IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
March 31, 2011
NOTES TO FINANCIAL STATEMENTS
March 31, 2011
Shipping and Handling Costs
Shipping and handling costs are expensed as incurred and are included in the cost of sales.
Environmental Liabilities
The Companys operations are subject to federal, state and local environmental laws and
regulations. These laws require the Company to investigate and remediate the effects of the
release or disposal of materials at its location. Accordingly, the Company has adopted policies,
practices and procedures in the areas of pollution control, occupational health, and the
production, handling, storage and use of hazardous materials to prevent material environmental or
other damage; and to limit the financial liability which could result from such events.
Environmental liabilities are recorded when the liability is probable and the costs can be
reasonably estimated.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of
financial instrument held by the Company:
Current assets and current liabilities The carrying value approximates fair value due to the
short maturity of these items.
Long-term debt The carrying amount of long-term obligations approximated fair value based on
estimated interest rates for comparable debt.
NOTE 2 INCENTIVE PAYMENTS AND RECEIVABLE
Revenue from federal incentive programs is recorded when the Company has sold blended biodiesel and
satisfied the reporting requirements under the applicable program. When it is uncertain that the
Company will receive full allocation and payment due under the federal incentive program, it
derives an estimate of the incentive revenue for the relevant period based on various factors
including the most recently used payment factor applied to the program. The estimate is subject to
change as management becomes aware of increases or decreases in the amount of funding available
under the incentive programs or other factors that affect funding or allocation of funds under such
programs.
The Company receives federal incentive revenues from the Volumetric Ethanol Tax Credit (VEETC)
and Commodity Credit Corporation (CCC) Bioenergy Programs. The VEETC expired on December 31, 2009
and was reinstated in December 2010 and made retroactive for 2010. The amount of incentives
receivable was $224,139 and $231,949 as of March 31, 2011 and December 31, 2010, respectively.
9
Table of Contents
WESTERN IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
March 31, 2011
NOTES TO FINANCIAL STATEMENTS
March 31, 2011
NOTE 3 INVENTORY
Inventory consists of the following:
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Raw material |
$ | 2,384,687 | $ | 1,976,460 | ||||
Work in process |
1,490,304 | 31,278 | ||||||
Finished goods |
2,827,449 | 604,278 | ||||||
Total |
$ | 6,702,440 | $ | 2,612,016 | ||||
NOTE 4 DEBT AND FINANCING
Long-Term Debt
Long-term obligations of the Company are summarized as follows:
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Note payable to Farm Credit Services of America and
CoBank under reducing revolving credit note see
details below. |
$ | 5,960,000 | $ | 1,825,000 | ||||
Note payable to the Iowa Department of Economic Development see details below. |
170,000 | 177,500 | ||||||
Note payable to Glidden Rural Electric Cooperative see details below |
431,666 | 452,222 | ||||||
Total |
6,561,666 | 2,454,722 | ||||||
Less current portion |
252,222 | 259,722 | ||||||
Long-term portion |
$ | 6,309,444 | $ | 2,195,000 | ||||
The estimated future maturities of long-term debt at March 31, 2011 are as follows:
2012 |
$ | 252,222 | ||
2013 |
842,222 | |||
2014 |
1,882,222 | |||
2015 |
1,882,222 | |||
2016 |
1,682,222 | |||
Thereafter |
20,556 | |||
Total |
$ | 6,561,666 | ||
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WESTERN IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
March 31, 2011
NOTES TO FINANCIAL STATEMENTS
March 31, 2011
The Company has available loan commitments from Farm Credit Services of America and CoBank. The
commitments consisted of a $10,000,000 term note, a $6,510,000 reducing revolving credit note and a
$490,000 letter of credit. The commitment under the reducing revolving credit note reflects a
$2,000,000 reduction which was effective until March 31, 2011. On March 28, 2011, the reducing
revolving credit note was amended to increase the commitment to $7,000,000 effective until
September 28, 2011. As of March 31, 2011 and December 31, 2010, the balance outstanding under the
term note was $-0-. As of March 31, 2011 and December 31, 2010, the balance outstanding under the
reducing revolving credit note was $5,960,000 and $1,825,000, respectively. Advances under the
reducing revolving credit note are available through the life of the commitment. The commitment
reduces by $900,000 semi-annually beginning July 1, 2012 or six months after the repayment of the
term loan, whichever is earlier, and continues through January 1, 2016, with a final reduction at
the expiration of the commitment on July 1, 2016, at which time any outstanding balance shall be
due and payable in full. The notes require interest payments based on unpaid principal. The
agreements also include a provision for additional payments for the fiscal years ending 2006
through 2012 based on the free cash flows of the Company. The agreements provide for several
different interest rate options including variable and fixed options (3.25% variable revolving
credit note, as of March 31, 2011 and December 31, 2010, respectively). The variable interest rate
options are based on LIBOR or the agents base rate and include adjustments for performance which
is based on the Companys debt to net worth ratio, measured quarterly. The Company has issued a
$490,000 irrevocable letter of credit through CoBank in favor of Glidden Rural Electric
Cooperative. The notes are secured by essentially all of the Companys assets. At March 31, 2011,
the Company had $550,000 of available borrowings under the reducing revolving credit note.
The loan agreements with Farm Credit and CoBank contain various covenants pertaining to minimum
working capital and minimum net worth requirements. As of December 31, 2010, the Company was not
in compliance with the debt service coverage ratio requirement and obtained waiver for said
violation. As of March 31, 2011, the Company was in compliance with said covenants.
The Company was awarded $400,000 from the Iowa Department of Economic Development (IDED) consisting
of a $300,000 zero interest deferred loan and a $100,000 forgivable loan, the balance of which was
$170,000 and $177,500 at March 31, 2011 and December 31, 2010, respectively. The zero interest
deferred loan requires monthly installments of $2,500 beginning January 2008, with remaining unpaid
principal due at maturity, December, 2011. The Company was required to satisfy the terms of the
agreement to receive a permanent waiver of the forgivable loan. In April 2009, the Company
received notice from the IDED that the Company had satisfied the terms of the agreement and had
forgiven the forgivable loan. The loan is secured by a security agreement including essentially
all of the Companys assets.
In July 2006, the Company entered into a rural development loan agreement under the Rural
Electrification Act of 1936 with Glidden Rural Electric Cooperative. The original loan amount was
$740,000 and requires monthly installments of $6,851, requiring no interest and commencing July 31,
2007. The loan is to be paid in full on or before the tenth anniversary date of the first advance
of funds. The Company has issued an irrevocable letter of credit through CoBank in favor of
Glidden Rural Electric Cooperative as security for the note.
NOTE 5 MEMBERS EQUITY
The Companys operating agreement provides that the net profits or losses of the Company will be
allocated to the members in proportion to the membership units held. Members will not have any
right to take part in the management or control of the Company. Each membership unit entitles the
member to one vote on any matter which the member is entitled to vote. Transfers of membership
units are prohibited except as provided in the operating agreement.
11
Table of Contents
WESTERN IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
March 31, 2011
NOTES TO FINANCIAL STATEMENTS
March 31, 2011
NOTE 6 CASH FLOW DISCLOSURES
Supplemental disclosure for interest paid:
Three Months | Three Months | |||||||
Ended | Ended | |||||||
March 31, | March 31, | |||||||
2011 | 2010 | |||||||
Cash paid for interest |
$ | 28,816 | $ | 44,861 | ||||
NOTE 7 RELATED PARTY TRANSACTIONS
The Companys general contractor (Renewable Energy Group, LLC) used to construct the plant is an
entity related to West Central Coop who was originally contracted to provide the management and
operational services for the Company. Renewable Energy Group, LLC was also issued member units in
July 2006 and December 2006 in exchange for a reduction in the construction payable. In July 2006,
West Central Coop and Renewable Energy Group, LLC joined forces and created Renewable Energy Group,
Inc. (REG, Inc.). On September 21, 2006, the Company consented to the assignment of the contract
to construct the facility and the management and operational services agreement to REG, Inc.
The Company incurred management and operational service fees, feed stock procurement fees and
marketing fees with REG, Inc. For the three months ended March 31, 2011 and 2010, the Company
incurred service fees of $-0- and $65,107, respectively. The Company also purchases feed stock
from West Central Coop and Bunge North America, Inc. an entity related by common ownership in REG,
Inc. For the three months ended March 31, 2011 and 2010, the Company did not purchase any feed
stocks from these related parties. The amount payable to related parties as of March 31, 2011 and
December 31, 2010 was $62,902 and $13,838, respectively.
On April 3, 2009, the Company received from REG, Inc., a notice of termination of its management
and operational services agreement. The notification from REG, Inc. states that it shall
constitute such twelve month advance termination notice required by the terms of the agreement.
The agreement expired in 2010.
NOTE 8 MAJOR CUSTOMER AND COMMITMENTS
On September 24, 2010, the Company entered into three agreements with Archer-Daniels-Midland (ADM)
for product marketing, feedstock procurement and other services. The marketing agreement provides
that ADM will purchase from the Company and the Company will sell to ADM all of the biodiesel and
related products produced by the Company. The feedstock agreement provides that ADM will procure
feedstock for the Companys production plant. The services agreement provides that ADM will
provide certain services to the Company such as; safety, regulatory and environmental compliance,
operations assistance and quality control and lab testing. The agreements are effective for one
year commencing on the first day of the month in which the Company commences production of
biodiesel. The agreements may also be terminated by either party upon thirty days written notice.
Revenues from this customer for the three months ended March 31, 2011 were $8,508,242. Trade
accounts receivable due from this customer as of March 31, 2011 were $922,803.
12
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WESTERN IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
March 31, 2011
NOTES TO FINANCIAL STATEMENTS
March 31, 2011
NOTE 9 LEASE COMMITMENTS
During July 2006, the Company entered into an operating lease agreement for rail equipment which
expires in 2011. The lease agreement has a monthly payment amount of $2,969. The total remaining
minimum lease payments under a non-cancelable lease are $8,907 and are due by July 2011. Lease
expense for the three months ended March 31, 2011 and 2010 was $8,907.
NOTE 10 RETIREMENT AND SAVINGS PLAN
The Company has a 401(k) retirement and savings plan, which is available to substantially all
employees. The participants may contribute up to 18% of their compensation. The Companys
matching contribution is discretionary for each plan year. The Company contributions for the three
months ended March 31, 2011 and 2010, was $18,533 and $6,096, respectively.
NOTE 11 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company adopted ASC Topic 815, Derivatives and Hedging. This guidance was intended to improve
financial reporting about derivative instruments and hedging activities by requiring enhanced
disclosures to enable investors to better understand their effects on an entitys financial
position, financial performance, and cash flows.
Objectives and Strategies for Holding Derivative Instruments
In the ordinary course of business, the Company enters into contractual arrangements (derivatives)
as a means of managing exposure to changes in biodiesel prices and feedstock costs under
established procedures and controls. The Company has established a variety of approved derivative
instruments to be utilized in each risk management program, as well as varying levels of exposure
coverage and time horizons based on an assessment of risk factors related to each hedging program.
As part of its trading activity, the Company uses futures, option and swap contracts offered
through regulated commodity exchanges to reduce risk and is exposed to risk of loss in the market
value of biodiesel inventories and input costs.
Commodity Risk Management
Commodity price risk management programs serve to reduce exposure to price fluctuations on
purchases of feedstocks and biodiesel prices. The Company enters into over-the-counter and
exchange-traded derivative commodity instruments to hedge the commodity price risk associated with
feedstocks and commodity exposures. There were no derivative commodity instruments open at March
31, 2011 or December 31, 2010.
Accounting for Derivative Instruments and Hedging Activities
All derivatives are designated as non-hedge derivatives. Although the contracts may be effective
economic hedges of specified risks, they do not meet the hedge accounting criteria of ASC 815. At
March 31, 2011 and December 31, 2010, the Company had no open derivative assets or liabilities
related to these instruments.
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WESTERN IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
March 31, 2011
NOTES TO FINANCIAL STATEMENTS
March 31, 2011
During the three months ended March 31, 2011 and 2010, net realized and unrealized losses on
derivative transactions were recognized in the statement of operations as follows:
Derivative (Gain) Loss | Derivative (Gain) Loss | |||||||||||
Three Months Ended | Three Months Ended | |||||||||||
March 31, 2011 | March 31, 2010 | |||||||||||
Statement of | Statement of | |||||||||||
Operations | Operations | |||||||||||
Location | (Gain) Loss | Location | (Gain) Loss | |||||||||
Commodity contracts -
Heat oil swaps |
Cost of sales | $ | | Cost of sales | $ | 20,027 | ||||||
NOTE 12 UNCERTAINTIES
The Company has produced biodiesel for sale to customers since September of 2006. During that
time, crude oil has ranged in price from the mid-$30 per barrel to a high of $147 per barrel on the
NYMEX exchange. The Company has also experienced a wide swing in the price of soybean oil:
between 25¢ per pound and 70¢ per pound. Because the Company is able to process multiple feed
stocks, they have been able to process less expensive animal fats and vegetable oils into biodiesel
that meets ASTM D 6751 standards. As a result, for the year ended December 31, 2010, the Companys
net loss was $2,195,413, and incurred a loss of $1,212,906 for the three months ended March 31,
2011.
During the Companys short history, it has dealt with the lack of a direct correlation between the
cost of its inputs and the selling price of the products that it produces. On the input side, it
has to work within the Agricultural market; and on the output side, it has to work within the
Energy market. Historically, there has been no consistent relationship between those two markets.
Because of the relationship of its business within differing markets, it is necessary that
management stay abreast of the varying market conditions to determine the economic relationship
that exists at any given time and under certain market conditions. Because of the subjectivity
involved with the determination and relationships of market conditions, the uncertainties are
exacerbated. The flexibility of the production facilities to process varying feed stocks adds to
the Companys ability to respond to the varying market conditions and to reduce some of the market
uncertainties. The Federal blenders tax credit expired on December 31, 2009 until December 2010,
when it was reinstated retroactively for 2010. The credit is set to expire on December 31, 2011.
The elimination or reduction in the credit may materially impair the Companys ability to
profitably produce and sell biodiesel. As a result of these factors, the Company warm idled its
facility in April 2010 and had reduced production during 2010.
The accompanying financial statements have been prepared assuming the Company will continue as a
going concern. Due to certain items discussed above there is substantial doubt as to our ability to
continue to generate positive future cash flow is uncertain.
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WESTERN IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
March 31, 2011
NOTES TO FINANCIAL STATEMENTS
March 31, 2011
NOTE 13 GAIN CONTINGENCIES
The Companys former primary customer and marketer (REG, Inc.) has agreed to an arbitration hearing
with a European customer. The Company and REG, Inc. allege breach of contract as the customer
failed to take delivery of the Companys product. The Companys portion of damages associated with
arbitration hearing is $1,054,488. At this time, no estimate can be made as to the time or the
amount, if any, of the ultimate recovery. As such no revenues have been recorded in the
accompanying statement of operations for the three months ended March 31, 2011 relating to
estimated damages recoverable. Revenues will be recorded at which time the actual damages are
determinable, which will likely occur upon receipt.
NOTE 14 SUBSEQUENT EVENTS
Management evaluated subsequent events through the date the financial statements were issued.
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of
Operations. |
We prepared the following discussion and analysis to help you better understand our financial
condition, changes in our financial condition, and results of operations for the period ended March
31, 2011, compared to the same period in fiscal year 2010. This discussion should be read in
conjunction with the financial statements and notes and the information contained in the Companys
Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
Cautionary Statements Regarding Forward Looking Statements
This report contains historical information, as well as forward-looking statements. These
forward-looking statements include any statements that involve known and unknown risks and relate
to future events and our expectations regarding future performance or conditions. Words such as
may, should, anticipate, believe, expect, will, plan, future, intend, could,
estimate, predict, hope, potential, continue, or the negative of these terms or other
similar expressions are intended to identify forward-looking statements, but are not the exclusive
means of identifying such statements. These forward-looking statements, and others we may make
from time to time, are subject to a number of risks and uncertainties. Many factors could cause
actual results to differ materially from those projected in forward-looking statements. While it
is impossible to identify all such factors, factors that could cause actual results to differ
materially from those estimated by us include, but are not limited to:
| Changes in federal, state, or local incentives for biodiesel production, including
without limitation the federal biodiesel blenders tax credit; |
| The availability and adequacy of our cash flow to meet our requirements; |
| Changes to the rules related to the Renewable Fuels Standard and the value of
renewable identification numbers (RINs); |
| Competition with other manufacturers in the biodiesel industry; |
| Results of our hedging strategies; |
| Changes in interest rates and the availability of credit to support capital
improvements, development, expansion, and operations; |
| Changes in the amounts available under our credit facilities with Farm Credit; |
| Our ability to keep up with the latest technology for the production of biodiesel; |
| Decrease in the demand for biodiesel; |
| Changes in plant production capacity or technical difficulties in operating the
plant; |
| Actual biodiesel and co-product production varying from expectations; |
| Availability and cost of products and raw materials, particularly soybean oil and
animal fats; |
| Changes in the price and market for biodiesel and its co-products; |
| Our ability to market and our reliance on ADM to market our products; |
| Fluctuations in petroleum prices; |
| Our ability to procure and our reliance on ADM to procure feedstock for our plant; |
| Competition from alternative fuels and alternative fuel additives; |
| Changes in our business strategy, capital improvement, or development plans; |
| Consequences of the domestic and global economic downturn and ongoing financial
crisis; |
| Our ability to generate free cash flow to invest in our business and service our
debt; |
| Changes in general economic conditions or the occurrence of certain events causing
an economic impact in the agriculture, oil, or transportation industries; |
| Changes in the environmental regulations or in our ability to comply with the
environmental regulations that apply to our plant operations; |
| Changes and advances in biodiesel production technology; |
| Our ability to export our biodiesel; |
| Overcapacity within the biodiesel industry resulting in increased competition and
costs for feedstock and/or decreased prices for our biodiesel and co-products; |
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| Our ability to successfully operate our plant following the period during which the
plant was warm-idled; |
| The imposition of tariffs or other duties on biodiesel imported into Europe; |
| Our ability to comply with the financial covenants in our loan agreements; |
| Changes to our operations related to the engagement of ADM as our biodiesel and
co-product marketer and feedstock procurer; |
| Our ability to hire qualified personnel to operate the plant; and |
| Other factors described elsewhere in this report. |
The cautionary statements referred to in this section also should be considered in connection
with any subsequent written or oral forward-looking statements that may be issued by us or persons
acting on our behalf. We undertake no duty to update these forward-looking statements, even though
our situation may change in the future. Furthermore, we cannot guarantee future results, events,
levels of activity, performance, or achievements. We caution you not to put undue reliance on any
forward-looking statements, which speak only as of the date of this report. You should read this
report and the documents that we reference in this report and have filed as exhibits completely and
with the understanding that our actual future results may be materially different from what we
currently expect. We qualify all of our forward-looking statements by these cautionary statements.
Overview
Western Iowa Energy, LLC (WIE) is an Iowa limited liability company formed on September 21,
2004, for the purpose of developing, constructing, and operating a 30 million gallon per year
biodiesel manufacturing facility in Sac County, Iowa. References to we, us, and our refer to
Western Iowa Energy, LLC. Since May 2006, we have been engaged in the production of biodiesel and
its co-products, including glycerin, fatty acids and soapstock. We derive our revenues from the
sale and distribution of our biodiesel and co-products throughout the continental United States and
overseas.
In January 2011, we commenced operations again at our biodiesel plant following the
reinstatement of the blenders tax credit for biodiesel mixtures in December 2010. We had
warm-idled our plant in April 2010 due to limited sales and reduced sales forecasts related to the
failure of Congress to extend the blenders credit, which expired on December 31, 2009. The
expiration of the blenders credit and our subsequent decision to warm-idle our plant led to
discussions with CoBank, as administrative agent of Farm Credit, regarding certain changes to our
credit facilities. In particular, on May 14, 2010, we agreed with Farm Credit to reduce the amount
available under our revolving credit loan and reduce the amount of minimum working capital required
pursuant to our loan covenants. The term of this agreement, as amended, extended through January
31, 2011. On January 28, 2011, we extended the term of this agreement through February 28, 2011,
and on February 28, 2011, we finalized an extension of the term of this agreement through March 31,
2011. On March 25, 2011, we agreed with Farm Credit to increase the amount available under our
revolving credit loan to $7,000,000 through September 30, 2011, although this amount is still lower
than the original $8,000,000 available under our revolving credit loan. This agreement also
extended the reduction in our minimum working capital covenant through September 30, 2011 and
reduced the minimum net worth we are required to maintain pursuant to our loan covenants through
September 30, 2011. We expect the reduction in the amount available under our revolving credit
loan to last through September 30, 2011 at a minimum, unless Farm Credit otherwise agrees to
increase the available amount under the loan prior to that date. For additional detail regarding
our credit facilities, see Liquidity and Capital Resources Indebtedness.
In early May 2011, the Iowa Senate and Iowa House of Representatives passed a comprehensive
renewable energy bill that, among other initiatives, incentivizes local biodiesel production and
encourages biodiesel availability at retail pumps. In particular, Senate File 531 provides for a
biodiesel producer incentive, for the first 25 million gallons produced per producer per year, of 3
cents per gallon in 2012, 2.5 cents per gallon in 2013 and 2 cents per gallon in 2014. This
producer incentive is a new initiative in Iowa. The legislation also extends the Iowa biodiesel
retailer tax credit. The current retailer tax credit is scheduled to expire on December 31, 2011
and requires a retailers diesel gallon sales to meet a threshold of at least 50% biodiesel to
qualify for the tax credit. Senate File 531 eliminates this 50% biodiesel sales requirement and
sets the tax credit rates for B5 blends at 4.5 cents per gallon from 2012 through 2017 and for B2
blends at 2 cents per gallon in 2012. Senate File 531 has been sent to the Iowa Governor for
signature, but as of May 10, 2011 had not yet been signed into law.
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Results of Operations for the Three Months Ended March 31, 2011 and 2010
The following table shows the results of our operations for the three months ended March 31,
2011 and 2010, and the percentage of revenues, cost of sales, operating expenses, and other items
to total revenues in our statement of operations:
Three Months Ended | Three Months Ended | |||||||||||||||
March 31, 2011 | March 31, 2010 | |||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Statement of Operations Data | Amount | % | Amount | % | ||||||||||||
Revenues |
$ | 8,886,323 | 100.00 | % | $ | 3,539,041 | 100.00 | % | ||||||||
Cost of Sales |
$ | 9,627,913 | 108.35 | % | $ | 3,996,213 | 112.92 | % | ||||||||
Gross Profit (Loss) |
$ | (741,590 | ) | (8.35 | %) | $ | (457,172 | ) | (12.92 | %) | ||||||
Operating Expenses |
$ | 454,545 | 5.12 | % | $ | 510,078 | 14.41 | % | ||||||||
Other Income (Expense) |
$ | (16,771 | ) | (0.19 | %) | $ | 36,448 | 1.03 | % | |||||||
Net Income (Loss) |
$ | (1,212,906 | ) | (13.65 | %) | $ | (930,802 | ) | (26.30 | %) | ||||||
Revenues
Our revenues from operations come primarily from our sales of biodiesel and, to a lesser
extent, our sales of crude glycerin and fatty acids. The following table shows the sources of our
revenues for the three months ended March 31, 2011 and 2010:
Three Months Ended | Three Months Ended | |||||||||||||||
March 31, 2011 | March 31, 2010 | |||||||||||||||
% of | % of | |||||||||||||||
Revenue Sources | Amount | Revenues | Amount | Revenues | ||||||||||||
Biodiesel Sales |
$ | 8,080,132 | 90.93 | % | $ | 3,040,322 | 85.91 | % | ||||||||
Glycerin Sales |
$ | 318,099 | 3.58 | % | $ | 135,338 | 3.82 | % | ||||||||
Fatty Acid Sales,
Soapstock Sales and
Substrate Sales |
$ | 474,545 | 5.34 | % | $ | 227,450 | 6.43 | % | ||||||||
Custom Processing
and Storage |
$ | | | % | $ | 135,931 | 3.84 | % | ||||||||
Other Revenue |
$ | 13,546 | 0.15 | % | $ | | | % | ||||||||
Total Revenues |
$ | 8,886,322 | 100.00 | % | $ | 3,539,041 | 100.00 | % | ||||||||
Revenues from operations for the three months ended March 31, 2011 increased by approximately
151.1% compared to revenues from operations for the three months ended March 31, 2010. Revenue
from sales of biodiesel increased by approximately 162.5% for the three months ended March 31, 2011
compared to the three months ended March 31, 2010. This increase in revenues is due to an increase
in our number of gallons of biodiesel sold and an increase in the average price per gallon we
received for our biodiesel. During the three months ended March 31, 2011, we sold approximately
94.8% more gallons of biodiesel as compared to the same period in 2010. Additionally, the average
price per gallon we received for our biodiesel during the three months ended March 31, 2011
increased approximately 36.5% compared to the same period from the prior year. The expansion of
the Renewable Fuels Standard (often referred to as RFS2) requires that 800 million gallons of
biodiesel and biomass-based diesel fuel be blended into the national diesel pool in 2011. We expect that RFS2 will
favorably impact the demand for biodiesel going forward.
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Revenue from sales of glycerin increased by approximately 135.0% for the three months ended
March 31, 2011 compared to the three months ended March 31, 2010. This increase in revenue is the
net result of a decrease in quantity sold, offset by an increase in glycerin prices. The average
sales price for our glycerin increased by approximately 158.3% during the three months ended March
31, 2011 compared to the same period the prior year. However, our quantity of glycerin sold
decreased by approximately 9.0% during the three months ended March 31, 2011 compared to the same
period the prior year. This decrease in quantity sold is primarily a result of increased glycerin
sales during the first quarter of 2010 following our increase in biodiesel production at the end of
2009. Although we sold much of our biodiesel produced at the end of 2009 prior to year-end in
order to capture as much blenders credit revenue as we could before the credit expired, some of
our co-product sales resulting from this production, including sales of glycerin, did not occur
until after January 1, 2010. Revenue from sales of fatty acids, soapstock and substrate increased
approximately 108.6% for the three months ended March 31, 2011 compared to the three months ended
March 31, 2010. The average sales price for our fatty acids increased by approximately 71.1%
during the three months ended March 31, 2011 compared to the same period the prior year.
Additionally, our quantity of fatty acids sold increased by approximately 2.6% during the three
months ended March 31, 2011 compared to the same period the prior year.
During the three months ended March 31, 2010, we derived revenues from custom processing and
storage. Our revenues from custom processing were attributable to experimental processing that we
conducted on behalf of another company. Our revenues from storage were attributable to storing
product sold by us until the time the purchaser took possession of the product. We do not expect
to derive substantial revenues from custom processing or storage in the future, and did not derive
any revenues from custom processing or storage during the three months ended March 31, 2011.
During the three-month period ended March 31, 2011, we commenced operations again at our
biodiesel plant following the reinstatement of the blenders tax credit in December 2010. During
the three-month period the prior year, we had more limited production following the expiration of
the tax credit on December, 31, 2009. During the three months ended March 31, 2011, we operated at
an average of approximately 43.6% of our nameplate capacity, compared to the same period the prior
year when we operated at an average of approximately 29.8% of our capacity.
Cost of Sales
While our absolute cost of sales for our products increased during the three-month period
ended March 31, 2011 compared to the three-month period from the prior year, our cost of sales as a
percentage of our revenues decreased from 112.92% of our revenues for the three months ended March
31, 2010, to 108.35% of our revenues for the three months ended March 31, 2011. The increase in
our absolute cost of sales is primarily due to price increases for our raw materials compared to
the previous year, and due to our higher production rates compared to the previous year.
The primary components of cost of goods sold from the production of biodiesel are feedstock
(primarily soybean oil and animal fats) and other raw materials (methanol and other chemicals),
energy (natural gas and electricity), labor, and depreciation on process equipment. During the
three months ended March 31, 2011, approximately 54.3% of our total feedstock usage consisted of
choice white grease, which is a decrease from the same period in 2010, when 76.7% of our total
feedstock usage was choice white grease. The average price we paid for feedstock for the three
months ended March 31, 2011 was approximately 68.5% higher than our feedstock prices for the same
period in 2010. Our average price paid for methanol, another input into the biodiesel production
process, increased by approximately 10.4% during the three months ended March 31, 2011 compared to
the same period in the prior year. Finally, our average price paid for natural gas decreased by
approximately 14.9% during the three months ended March 31, 2011 compared to the same period in the
prior year.
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Operating Expense
Both our absolute operating expenses and our operating expenses as a percentage of revenues
decreased
during the three-month period ended March 31, 2011 compared to the three-month period from the
prior year. The decrease in our absolute operating expenses was due to the fact that we had
increased consulting and professional fees during the three-month period ended March 31, 2010 in
connection with our proposed consolidation with REG. The decrease in our operating costs is also
attributable to decreased office and administrative expenses. Our decreased office and
administrative expenses are a result of decreased management fees and association dues.
In mid-April 2010 we warm-idled our plant due to limited sales and reduced sales forecasts
related to the failure of Congress to extend the blenders tax credit for biodiesel mixtures, which
expired on December 31, 2009. In connection with our plant warm-idling, we laid off 15 full-time
employees to reduce operating expenses, although we agreed to pay the health and dental insurance
policy premiums for these individuals through mid-August 2010. Effective August 13, 2010, we laid
off seven additional full-time employees, leaving us with six full-time employees. We also agreed
to temporarily pay a portion of the health and dental insurance premiums of these laid-off
employees. Since these most recent layoffs, and in connection with the reinstatement of the
blenders tax credit, we have hired additional employees as we have once again started producing
biodiesel.
Other Income (Expenses)
Our other income (expenses) decreased from a net other income of $36,448, or 1.03% of
revenues, for the three-month period ended March 31, 2010, to a net other expense of $16,771, or
(0.19%) of revenues, for the three-month period ended March 31, 2011. This change resulted
primarily from an increase in interest expense related to our credit facilities and a decrease in
patronage dividends from our lenders.
Changes in Financial Condition for the Three Months Ended March 31, 2011
The following table highlights the changes in our financial condition for the three months
ended March 31, 2011:
March 31, 2011 | December 31, 2010 | |||||||
Current Assets |
$ | 8,597,179 | $ | 3,821,367 | ||||
Current Liabilities |
$ | 2,910,808 | $ | 1,579,346 | ||||
Long-Term Debt |
$ | 6,309,444 | $ | 2,195,000 | ||||
Members Equity |
$ | 25,142,466 | $ | 26,355,372 |
Current Assets. The increase in current assets from $3,821,367 as of December 31,
2010 to $8,597,179 as of March 31, 2011 is primarily a result of an increase in trade account
receivables, an increase in inventory and an increase in prepaid expenses and other assets,
partially offset by decreases in cash and cash equivalents and other receivables. Our inventory
and trade accounts receivable increased from December 31, 2010 to March 31, 2011 as our biodiesel
and co-product production increased. Following the reinstatement of the biodiesel tax credit in
December 2010, we began to hire back employees and started operating our biodiesel plant again.
Starting production required additional raw material and led to increased levels of work in process
and finished goods, all of which comprises our inventory. Additionally, as we began selling
product to our product marketer, ADM, our trade accounts receivable increased.
Current Liabilities. Our current liabilities increased from $1,579,346 as of December
31, 2010, to $2,910,808 as of March 31, 2011. This increase was due primarily to increases in
checks issued in excess of our bank balance, accounts payable and accrued wages and benefits.
Long-Term Debt. The increase in our long-term debt, net of current maturities, at
March 31, 2011, as compared to December 31, 2010, was due to advances drawn on our revolving credit
note with Farm Credit Services. During the three-month period ended March 31, 2011, we received
net proceeds totaling $4,135,000 under our revolving credit note in order to fund working capital
needs at our biodiesel plant.
Members Equity. Members contributions at March 31, 2011 and December 31, 2010 are
$23,516,376. Retained earnings as of March 31, 2011 are $1,626,090 compared to $2,838,996 at
December 31, 2010 due to our net loss during the three months ended March 31, 2011.
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Liquidity and Capital Resources
Cash Flows
The following table shows cash flows for the three months ended March 31, 2011 and 2010:
2011 | 2010 | |||||||
Net cash provided by (used in) operating activities |
$ | (4,571,923 | ) | $ | 3,233,208 | |||
Net cash used in investing activities |
$ | (16,868 | ) | $ | (105,865 | ) | ||
Net cash provided by (used in) financing activities |
$ | 4,528,013 | $ | (3,091,064 | ) | |||
Net increase (decrease) in cash and cash equivalents |
$ | (60,778 | ) | $ | 36,279 | |||
Operating Cash Flows
For the three months ended March 31, 2011, cash provided by operating activities decreased by
$7,805,131 compared to the three months ended March 31, 2010. This decrease was primarily the
result of changes in inventory, changes in our receivables, including trade account receivables,
incentive receivables and other receivables, a greater net loss for the three months ended March
31, 2011 compared to the net loss during the same period the prior year, and changes in derivative
instruments and prepaid expenses and other assets, netted against changes in our margin deposits,
accounts payable and accrued wages and benefits. Many of the changes in operating cash flows for
the three months ended March 31, 2011 compared to the three months ended March 31, 2010 are related
to commencing operations again at our biodiesel plant following the reinstatement of the blenders
tax credit in December 2010.
Although our capital needs are currently being adequately met through our credit facilities,
any further reductions in the amount available for advancement under our revolving credit loan
beyond the current reduction may cause us to be unable to meet our capital needs. See Liquidity
and Capital Resources Indebtedness.
Investing Cash Flows
For the three months ended March 31, 2011, cash used in investing activities decreased by
$88,997 compared to the three months ended March 31, 2010. This decrease in cash used resulted
from a decrease in expenditures for property, plant, and equipment during the three months ended
March 31, 2011 compared to the same period the prior year, when we exercised a real estate option
to purchase an additional approximate 35 acres adjacent to our plant site.
Financing Cash Flows
For the three months ended March 31, 2011, cash provided by financing activities increased by
$7,619,077 compared to the three months ended March 31, 2010. This increase is a net result of a
net increase in checks issued in excess of our bank balance, increased borrowings on our revolving
credit facility and decreased payments on our long-term debt during the three months ended March
31, 2011 compared to the three months ended March 31, 2010.
Indebtedness
Short-Term Debt Sources
We have obtained a $490,000 declining balance standby irrevocable letter of credit from Farm
Credit in favor of Glidden Rural Electric Cooperative (Glidden REC) as security for our loan with
Glidden REC (discussed below under Long-Term Debt Sources). This letter of credit will expire on
June 30, 2011. We anticipate extending the letter of credit prior to its expiration at a lower
amount reflecting the lower principal amount we will owe Glidden REC at that time.
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Long-Term Debt Sources
On June 6, 2005, we closed on $18,000,000 of long-term debt financing with Farm Credit
pursuant to a Master Loan Agreement (MLA). CoBank, ACB is the administrative agent of Farm
Credit pursuant to an Administrative Agency Agreement dated June 6, 2005. Pursuant to supplements
to the MLA, the loan commitments from Farm Credit consisted of a $10,000,000 term loan and an
$8,000,000 reduced revolving credit loan. In December 2010 we paid off the remaining balance on
our term loan and therefore at March 31, 2011 had no balance outstanding on the term loan. Our
term loan required quarterly payments of principal in the amount of $450,000, with a final payment
due no later than December 20, 2011. We were also required to make annual payments of 50% of our
free cash flow, as defined in our term loan agreement. Although we paid off our term loan in
full in December 2010, our term loan agreement provides that in the event our term loan is paid in
full prior to the end of fiscal year 2012, we must continue to make 50% free cash flow payments
for each fiscal year through fiscal year 2012 in the form of early reductions to the amount of our
revolving credit loan commitment.
The expiration of the blenders tax credit on December 31, 2009 and our subsequent decision to
warm-idle our plant led to discussions with CoBank, as administrative agent of Farm Credit,
regarding certain changes to our credit facilities. In particular, on May 14, 2010, we agreed with
Farm Credit to reduce the amount available under our revolving credit loan from $8,000,000 to
$6,000,000 (inclusive of our $490,000 irrevocable letter of credit in favor of Glidden Rural
Electric Cooperative, discussed above under Short-Term Debt Sources). The term of this agreement
was subsequently extended through March 31, 2011. Pursuant to an agreement dated March 25, 2011,
we agreed with Farm Credit to increase the amount available under this loan to $7,000,000 through
September 30, 2011. Our March 25, 2011 agreement also reduced the minimum net worth we are
required to maintain pursuant to our loan covenants from $26,000,000 to $24,000,000 for the period
from February 1, 2011 through September 30, 2011. The May 14, 2010 agreement to reduce the amount
available under our revolving credit loan amended our loan covenant pertaining to minimum working
capital so that the reduction of the amount available for advancement under the revolving credit
loan did not cause us to fall out of compliance with the minimum working capital covenant in our
loan agreement. Our prior minimum working capital requirement was $6,000,000 and our amended
minimum working capital requirement is $4,000,000. Our March 25, 2011 agreement with Farm Credit
extended this reduction in required working capital through September 30, 2011. As of March 31,
2011, the balance outstanding under the revolving credit loan was $5,960,000.
Subject to our May 14, 2010 agreement with Farm Credit, as extended and amended, advances
under the revolving credit loan are available throughout the life of the commitment, although the
amount of the commitment reduces by $900,000 semi-annually beginning upon the earlier of: (i) July
1, 2012, or (ii) the first day of the month that is six months after the first day of the month
following the repayment of our term loan. Because we paid off the term loan in full in December
2010, our revolving credit loan commitment will be reduced by $900,000 every six months beginning
July 1, 2011. As discussed above, the revolving credit loan commitment may also be reduced by the
amount of any free cash flow payment we would otherwise be required to make on our term loan
through 2012. Any outstanding balance on our revolving credit loan is due and payable in full on
July 1, 2016. At March 31, 2011, we had $550,000 of available borrowings under the revolving
credit loan.
The revolving credit loan bears interest at one of three rates, to be determined by us in our
discretion: (1) at a rate equal to the rate of interest established by the agent as its agent base
rate; (2) at a fixed rate per annum to be quoted by the agent in its sole discretion; or (3) at a
fixed rate per annum equal to LIBOR. Each of the rates is subject to certain performance pricing
adjustments. While our term loan had an outstanding balance, it was subject to the same terms with
respect to interest rates. At March 31, 2011, the applicable interest rate with respect to our
credit facilities with Farm Credit was 3.25%. Our credit facilities with Farm Credit are secured
by substantially all of our assets.
The MLA, as amended, contains covenants pertaining to minimum levels of working capital and
net worth, as well a minimum debt service coverage ratio. Our debt service coverage ratio covenant
requires us to maintain a debt service coverage ratio, defined as (i) net income (after taxes),
plus depreciation and amortization; divided by (ii) all current portion of long term debt for the
prior period, of 1.50 to 1.00. Compliance with our debt service coverage ratio covenant is
determined on an annual basis, measured at the end of each fiscal year.
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The working capital covenant set forth in the MLA, as amended, (including the amendment
pursuant to our May 14, 2010 agreement with Farm Credit, discussed above), requires us to maintain
minimum working capital of $4,000,000. Compliance with our working capital covenant is determined
on a monthly basis. As of March 31, 2011, we were in compliance with our working capital covenant.
Additionally, the net worth covenant set forth in the MLA, as amended, required us to maintain
a minimum net worth of $26,000,000 through January 31, 2011, and requires us to maintain a minimum
net worth of $24,000,000 from February 1, 2011 through September 30, 2011. Compliance with our net
worth covenant is determined on a monthly basis. As of March 31, 2011, we were in compliance with
our net worth covenant. We were not in compliance with our net worth covenant as of February 28,
2011 because our net worth at that time was less than $26,000,000. However, under our March 25,
2011 agreement with Farm Credit, our minimum net worth covenant was reduced to $24,000,000
retroactive to February 1, 2011, which resulted in our compliance with the net worth covenant as of
February 28, 2011.
Although we were in compliance with our loan covenants as of March 31, 2011, we could fail to
comply with one or more of our loan covenants in the future. A failure to comply with our
covenants in the future may constitute an event of default under our loan agreements which, at the
election of Farm Credit, could result in the acceleration of the unpaid principal loan balance and
accrued interest owed to Farm Credit, or the loss of our assets securing the loan in the event Farm
Credit elected to foreclose its lien or security interest in such assets. While Farm Credit
granted us a waiver for failing to comply with our debt service coverage ratio at December 31,
2010, Farm Credit might not grant a waiver for future covenant violations. Additionally, while
Farm Credit agreed to amend our loan documents to retroactively modify our net worth requirement
from February 1, 2011 so that we would not be in violation of our net worth covenant at February
28, 2011, Farm Credit might not be willing to amend our loan documents in the future. If an event
of default occurs and Farm Credit elects to accelerate the amounts due to it or foreclose on our
assets, this may have a material adverse effect on our ability to operate the plant and may cause
our members to lose some or all of their investment.
The MLA, as amended, prohibits us from distributing any profits to our members unless the
proposed distribution is agreed to in writing by CoBank. As a result, we may be unable to make
future distributions to our members, including for income tax purposes.
On July 13, 2006, we entered into a Rural Development Loan Agreement with the Glidden REC for
a $740,000 no-interest loan to fund operating expenses for the plant. Pursuant to the terms of the
agreement and an associated Promissory Note, the loan is to be repaid in monthly installments of
$6,851 beginning on July 31, 2007, and continuing on the last day of each month thereafter until
the principal sum has been paid in full or before the final maturity date of the promissory note
which shall be on the tenth anniversary of the first advance of funds. The outstanding balance of
the loan as of March 31, 2011 was $431,666. The loan is secured by the declining balance standby
irrevocable letter of credit from Farm Credit discussed above under Short-Term Debt Sources.
We have obtained subordinated debt financing of approximately $400,000 from the Iowa
Department of Economic Development (IDED). The subordinated debt financing included a $300,000
zero-interest deferred loan and a $100,000 forgivable loan. On April 30, 2009, IDED notified us
that we had satisfied all conditions of the forgivable loan and that IDED had forgiven the balance
outstanding under the forgivable loan. The zero-interest deferred loan requires monthly
installments of $2,500 beginning January 2008 with the remaining unpaid principal due in December
2012. The balance outstanding on the zero-interest deferred loan at March 31, 2011 was $170,000.
Other
The blenders tax credit for biodiesel mixtures, which provides a tax credit of $1.00 per
gallon for biodiesel mixtures, expired on December 31, 2009. The absence of this credit during
most of 2010 caused many biodiesel plants to significantly reduce production or halt production
altogether. In December 2010, the blenders credit was reinstated and made retroactive for 2010.
However, this tax credit is set to expire again on December 31, 2011. This future expiration of
the federal blenders tax credit on December 31, 2011 led our auditor to raise doubts about our
ability to continue as a going concern. Our consolidated financial statements do not include any
adjustments that might be necessary if we are unable to continue as a going concern.
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Subsequent Events
None.
Critical Accounting Estimates
Management uses estimates and assumptions in preparing our financial statements in accordance
with generally accepted accounting principles. These estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the
reported revenues and expenses. The following is a discussion of what we believe to be the most
critical of these policies and methods.
Inventories. Inventories are stated at the lower of cost or market value. Costs are
determined using the first-in, first-out method.
Long-Lived Assets. Depreciation and amortization of our property, plant, and
equipment is provided on the straight-line method by charges to operations at rates based upon the
expected useful lives of individual or groups of assets. Economic circumstances or other factors
may cause managements estimates of expected useful lives to differ from actual useful lives.
Long-lived assets, including property, plant and equipment, and investments are evaluated for
impairment on the basis of undiscounted cash flows whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. An impaired asset is written
down to our estimated fair market value based on the best information available. Considerable
management judgment is necessary to estimate discounted future cash flows and may differ from
actual cash flows.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
We are exposed to the impact of market fluctuations associated with interest rates and
commodity prices as discussed below. We have no exposure to foreign currency risk as we conduct
all of our business in U.S. Dollars. We use derivative financial instruments as part of an overall
strategy to manage market risk. We consider market risk to be the potential loss arising from
adverse changes in market rates and prices. We do not enter into these contracts as hedges for
accounting purposes pursuant to the requirements of the FASB Accounting Standards Codification
(ASC) Topic 815, Derivatives and Hedging.
Our risk management committee oversees our risk management practices and provides open
communication among management and the board of directors regarding market risk. The risk
management committee takes an active role in the risk management process and has developed policies
and procedures that require specific administrative and business functions to assist in the
identification, assessment, and control of various risks.
Interest Rate Risk
We are exposed to market risk from changes in interest rates. Exposure to interest rate risk
results primarily from our credit facilities with Farm Credit. Specifically, we have $5,960,000
outstanding in variable rate debt as of March 31, 2011. The specifics of our credit facilities are
discussed in detail in Item 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS Liquidity and Capital Resources, Indebtedness.
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Below is a sensitivity analysis we prepared regarding our income exposure to changes in
interest rates. The sensitivity analysis below shows the anticipated effect on our income from a
10% adverse change in interest rates for a one-year period.
Outstanding Variable | Interest Rate at | Interest Rate Following | Annual Adverse Change | |||||||||||
Rate Debt at 3/31/11 | March 31, 2011 | 10% Adverse Change | to Income | |||||||||||
$ | 5,960,000 | 3.25 | % | 3.58 | % | $ | 19,370 |
Commodity Price Risk
We are also exposed to market risk from commodity prices. Exposure to commodity price risk
results from our dependence on animal fats, soybean oil, and natural gas in the biodiesel
production process. We are also exposed to biodiesel and co-products price risks as our revenues
consist primarily of biodiesel sales and co-products sales. In 2010, we sought to minimize the
risks from fluctuations in the price of biodiesel by using derivative instruments such as cash,
futures, and option contracts for home heating oil. There is currently no futures market for
biodiesel. Instead, we used home heating oil derivatives. Home heating oil is high sulfur diesel,
which is the closest commodity to biodiesel for which there is a futures market. More recently, we
have entered into flat price future sales contracts with our product marketer, ADM, to limit our
exposure to decreases in the price of biodiesel. These flat price sales contracts allow us to lock
in a margin at the time that we purchase the feedstock utilized to produce the biodiesel that we
have contracted for future sale. We are currently unable to manage our price risk for animal fats
as there are no futures contracts available for animal fats, and animal fats suppliers are, to
date, unwilling to enter into long-term contracts for animal fats.
In practice, as markets move, we actively manage our risk and adjust hedging strategies as
appropriate. The extent to which we enter into cash, futures, or option contracts varies
substantially from time to time based on a number of factors, including supply and demand factors
affecting the needs of customers or suppliers to purchase biodiesel or co-products or to sell us
raw materials on a fixed basis, our views as to future market trends, seasonal factors and the
costs of futures contracts.
Although we believe our hedge positions accomplish an economic hedge against our future sales,
they are not designated as such for hedge accounting purposes, which would match the gain or loss
on our hedge positions to the specific commodity being hedged. As the current market price of our
hedge positions changes, the gains and losses are immediately recognized in our cost of sales. The
immediate recognition of hedging gains and losses can cause net income to be volatile from quarter
to quarter due to the timing of the change in value of the derivative instruments relative to the
cost and use of the commodity being hedged. At March 31, 2011 and December 31, 2010, we did not
record a net asset or net liability for derivative instruments. During the three months ended
March 31, 2011, we recognized no net gain or loss in earnings on our derivative activities, as
compared to the three months ended March 31, 2010, when we recognized a net loss in earnings on
derivative activities of $20,027, which is included in our cost of sales in our statements of
operations.
Several variables could affect the extent to which biodiesel price fluctuations impact our
derivative instruments. However, it is likely that commodity cash prices will have the greatest
impact on the derivative instruments with delivery dates nearest the current cash price. As we
move forward, additional protection may be necessary. As the prices of hedged commodities move in
reaction to market trends and information, our statement of operations will be affected depending
on the impact such market movements have on the value of our derivative instruments. Depending on
market movements, these price protection positions may cause immediate adverse effects, but are
expected to produce long-term growth for us.
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A sensitivity analysis has been prepared to estimate our exposure to commodity price risk.
The table presents the net fair value of our derivative instruments as of March 31, 2011 and March
31, 2010, and the potential loss in fair value resulting from a hypothetical 10% adverse change in
such prices. The fair value of the positions is a summation of the fair values calculated by
valuing each net position at quoted market prices as of the applicable date. The results of this
analysis, which may differ from actual results, are as follows:
Effect of | ||||||||
Hypothetical | ||||||||
Adverse Change - | ||||||||
Fair Value | Market Risk | |||||||
March 31, 2011 |
$ | 0 | $ | 0 | ||||
March 31, 2010 |
$ | 2,490,936 | $ | 249,094 |
Item 4. | Controls and Procedures. |
Disclosure Controls and Procedures
Our management, including our Principal Executive Officer, William J. Horan, and our Principal
Financial and Accounting Officer, Bradley D. Wilson, 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 Securities Exchange Act of 1934, as amended) as of March 31, 2011. Based on 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 specified in
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 persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure.
Changes in Internal Controls
Our management, including our Principal Executive Officer, William J. Horan, and our Principal
Financial and Accounting Officer, Bradley D. Wilson, have reviewed and evaluated any changes in our
internal control over financial reporting that occurred during the fiscal quarter ended March 31,
2011 and there has been no change that has materially affected or is reasonably likely to
materially affect our internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. | Legal Proceedings. |
From time to time in the ordinary course of business, WIE may be named as a defendant in legal
proceedings related to various issues, including without limitation, workers compensation claims,
tort claims, or contractual disputes. Other than the arbitration matter described below, we are not
currently involved in any material legal proceedings, directly or indirectly, and we are not aware
of any claims pending or threatened against us or any of the directors that could result in the
commencement of legal proceedings.
In 2008, a customer allegedly defaulted on its contract with our biodiesel marketer for the
purchase of biodiesel due to revocation of the customers letter of credit after our marketer
shipped the biodiesel for exporting. As a result, our marketer sold the biodiesel to another
purchaser for a lower price. Our former marketer, on behalf of WIE and other biodiesel producers
who sold biodiesel to the allegedly defaulting customer, is now in continued arbitration to resolve
this dispute. The arbitration is being conducted in London, UK under the system of arbitration and
appeals of the Federation of Oils, Seeds, and Fats Associations (FOSFA). The parties to the
arbitration proceeding are an affiliate of our former marketer, REG Marketing and Logistics Group
LLC, and Avista Trade Oy, a Finnish entity. On September 28, 2010, the arbitrators issued an award
to our former marketer in an amount of approximately $3.25 million, plus interest dating from
November 1, 2008, plus certain fees, costs and legal expenses. However, Avista Trade Oy has
appealed this award to the FOFSA Board of Appeal. Because WIE
produced and marketed approximately one-third (1/3) of the total quantity of biodiesel for
which payment default is alleged in this arbitration proceeding, we estimate that WIE will be
entitled to approximately one-third (1/3) of any award, judgment, settlement, or other monies
collected by our former marketer arising from this dispute.
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Item 1A. | Risk Factors. |
The Risk Factors discussed in our Annual report on Form 10-K for the year ended December 31,
2010 should be read in conjunction with the considerations set forth in this report. If any of
those factors were to occur, they could materially adversely affect our business, financial
condition or future results, and could cause actual results to differ materially from those
expressed in forward-looking statements in this report. There have been no material changes with
respect to the risk factors discussed in our Annual Report on Form 10-K for the year ended December
31, 2010
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
None.
Item 3. | Defaults Upon Senior Securities. |
None.
Item 4. | (Removed and Reserved). |
Item 5. | Other Information. |
None.
Item 6. | Exhibits. The following exhibits are included herein: |
Exhibit No. | Exhibit | |||
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. § 1350. |
|||
32.2 | Certificate Pursuant to 18 U.S.C. § 1350. |
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SIGNATURES
Pursuant to the requirements of the Security Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
WESTERN IOWA ENERGY, LLC |
||||
Date: May 13, 2011 | /s/ William J. Horan | |||
William J. Horan | ||||
Chairman, President and Director (Principal Executive Officer) |
||||
Date: May 13, 2011 | /s/ Bradley D. Wilson | |||
Bradley D. Wilson | ||||
Chief Financial Officer (Principal Financial and Accounting Officer) |
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