Attached files
file | filename |
---|---|
EX-31 - EX-31 - Advanced BioEnergy, LLC | c64687exv31.htm |
EX-32 - EX-32 - Advanced BioEnergy, LLC | c64687exv32.htm |
EX-10.2 - EX-10.2 - Advanced BioEnergy, LLC | c64687exv10w2.htm |
EX-10.5 - EX-10.5 - Advanced BioEnergy, LLC | c64687exv10w5.htm |
EX-10.3 - EX-10.3 - Advanced BioEnergy, LLC | c64687exv10w3.htm |
EX-10.1 - EX-10.1 - Advanced BioEnergy, LLC | c64687exv10w1.htm |
EX-10.4 - EX-10.4 - Advanced BioEnergy, LLC | c64687exv10w4.htm |
EX-10.6 - EX-10.6 - Advanced BioEnergy, LLC | c64687exv10w6.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
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: 000-52421
ADVANCED BIOENERGY, LLC
(Exact name of Registrant as Specified in its Charter)
Delaware (State or Other Jurisdiction of Incorporation or Organization) |
20-2281511 (I.R.S. Employer Identification No.) |
8000 Norman Center Drive, Suite 610
Bloomington, Minnesota 55437
(763) 226-2701
(Address, including zip code, and telephone number,
including area code, of Registrants Principal Executive Offices)
Bloomington, Minnesota 55437
(763) 226-2701
(Address, including zip code, and telephone number,
including area code, of Registrants Principal Executive Offices)
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. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ (Do not check if a smaller reporting company) | 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
As of May 12, 2011, the number of outstanding units was 24,714,180.
ADVANCED BIOENERGY, LLC
FORM 10-Q
Index
FORM 10-Q
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EX-10.1 | ||||||||
EX-10.2 | ||||||||
EX-10.3 | ||||||||
EX-10.4 | ||||||||
EX-10.5 | ||||||||
EX-10.6 | ||||||||
EX-31 | ||||||||
EX-32 |
2
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ADVANCED BIOENERGY, LLC & SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
March 31, | September 30, | |||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 29,265 | $ | 22,772 | ||||
Accounts receivable: |
||||||||
Trade accounts receivable, net of allowance for doubtful
accounts of $255 at March 31, 2011 and
September 30, 2010, respectively |
16,581 | 13,519 | ||||||
Other receivables |
1,233 | 1,543 | ||||||
Due from broker |
| 252 | ||||||
Derivative financial instruments |
| 314 | ||||||
Inventories |
12,408 | 14,102 | ||||||
Prepaid expenses |
2,327 | 2,666 | ||||||
Current portion of restricted cash |
3,437 | 4,169 | ||||||
Total current assets |
65,251 | 59,337 | ||||||
Property and equipment, net |
172,432 | 181,701 | ||||||
Other assets: |
||||||||
Restricted cash |
2,127 | 3,145 | ||||||
Other assets |
1,956 | 2,014 | ||||||
Total assets |
$ | 241,766 | $ | 246,197 | ||||
LIABILITIES AND MEMBERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 7,832 | $ | 4,337 | ||||
Accrued expenses |
8,748 | 5,818 | ||||||
Current portion of long-term debt (stated principal amount of
$14,215 and $19,199 at March 31, 2011 and September 30, 2010,
respectively) |
15,052 | 20,045 | ||||||
Total current liabilities |
31,632 | 30,200 | ||||||
Other liabilities |
410 | 628 | ||||||
Deferred income |
4,544 | 4,881 | ||||||
Long-term debt (stated principal amount of $128,388 and $137,203 at
March 31, 2011 and September 30, 2010, respectively) |
||||||||
137,436 | 146,670 | |||||||
Total liabilities |
$ | 174,022 | $ | 182,379 | ||||
Members equity |
||||||||
Members capital, no par value, 24,714,180 units issued and
outstanding |
171,223 | 171,200 | ||||||
Accumulated deficit |
(103,479 | ) | (107,382 | ) | ||||
Total members equity |
67,744 | 63,818 | ||||||
Total liabilities and members equity |
$ | 241,766 | $ | 246,197 | ||||
See notes to consolidated financial statements.
3
Table of Contents
ADVANCED
BIOENERGY, LLC & SUBSIDIARIES
Consolidated Statements of Operations
(Dollars in thousands, except per unit data)
(Unaudited)
(Dollars in thousands, except per unit data)
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
March 31, | March 31, | March 31, | March 31, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net sales |
||||||||||||||||
Ethanol and
related products |
$ | 152,704 | $ | 98,574 | $ | 268,970 | $ | 194,580 | ||||||||
Other |
108 | 167 | 358 | 416 | ||||||||||||
Total net sales |
152,812 | 98,741 | 269,328 | 194,996 | ||||||||||||
Cost of goods sold |
148,000 | 88,199 | 258,414 | 172,329 | ||||||||||||
Gross profit |
4,812 | 10,542 | 10,914 | 22,667 | ||||||||||||
Selling, general and
administrative |
3,667 | 2,217 | 5,730 | 4,314 | ||||||||||||
Operating income |
1,145 | 8,325 | 5,184 | 18,353 | ||||||||||||
Other income |
510 | 275 | 610 | 266 | ||||||||||||
Interest income |
13 | 17 | 37 | 60 | ||||||||||||
Interest expense |
(932 | ) | (3,511 | ) | (1,928 | ) | (7,419 | ) | ||||||||
Net income |
$ | 736 | $ | 5,106 | $ | 3,903 | $ | 11,260 | ||||||||
Weighed average units
outstanding basic |
24,705,180 | 17,800,180 | 24,705,180 | 17,729,311 | ||||||||||||
Weighed average units
outstanding diluted |
24,705,180 | 17,800,180 | 24,705,180 | 17,729,311 | ||||||||||||
Income per unit basic |
$ | 0.03 | $ | 0.29 | $ | 0.16 | $ | 0.64 | ||||||||
Income per unit diluted |
$ | 0.03 | $ | 0.28 | $ | 0.16 | $ | 0.63 |
See notes to consolidated financial statements.
4
Table of Contents
ADVANCED
BIOENERGY, LLC & SUBSIDIARIES
Consolidated Statements of Changes in Members Equity
For the Six Months Ended March 31, 2011
(Dollars in thousands)
(Unaudited)
For the Six Months Ended March 31, 2011
(Dollars in thousands)
(Unaudited)
Member | Member | Accumulated | ||||||||||||||
Units | Capital | Deficit | Total | |||||||||||||
MEMBERS EQUITY September 30, 2010 |
24,714,180 | $ | 171,200 | $ | (107,382 | ) | $ | 63,818 | ||||||||
Unit compensation expense |
| 23 | | 23 | ||||||||||||
Net income |
| | 3,903 | 3,903 | ||||||||||||
MEMBERS EQUITY March 31, 2011 |
24,714,180 | $ | 171,223 | $ | (103,479 | ) | $ | 67,744 | ||||||||
See notes to consolidated financial statements
5
Table of Contents
ADVANCED
BIOENERGY, LLC & SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
(Dollars in thousands)
(Unaudited)
Six Months Ended | ||||||||
March 31, | March 31, | |||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 3,903 | $ | 11,260 | ||||
Adjustments to reconcile net income to operating activities cash flows: |
||||||||
Depreciation |
11,226 | 10,886 | ||||||
Amortization of deferred financing costs |
66 | 66 | ||||||
Amortization of deferred revenue |
(337 | ) | (337 | ) | ||||
Idle lease liability reduction |
(154 | ) | (191 | ) | ||||
Amortization of debt discount |
| 308 | ||||||
Amortization of additional carrying value |
(428 | ) | | |||||
Unit compensation expense |
23 | 23 | ||||||
Gain on disposal of assets |
(8 | ) | | |||||
Unrealized gain on derivative financial instruments |
(64 | ) | (35 | ) | ||||
Change in risk management activities |
314 | (425 | ) | |||||
Change in working capital components: |
||||||||
Accounts receivable |
(2,500 | ) | (2,062 | ) | ||||
Inventories |
1,694 | (5,274 | ) | |||||
Prepaid expenses |
339 | (1,029 | ) | |||||
Accounts payable |
3,495 | 1,288 | ||||||
Accrued expenses |
2,930 | 5,488 | ||||||
Net cash provided by operating activities |
20,499 | 19,966 | ||||||
Cash flows from investing activities: |
||||||||
Purchase of property and equipment |
(1,949 | ) | (672 | ) | ||||
Change in other assets |
(8 | ) | | |||||
Decrease in restricted cash |
1,750 | 5,450 | ||||||
Net cash provided by (used in) investing activities |
(207 | ) | 4,778 | |||||
Cash flows from financing activities: |
||||||||
Payments on debt |
(13,799 | ) | (14,305 | ) | ||||
Proceeds from issuance of membership units and subscribed units |
| 1,254 | ||||||
Repurchase of units |
| (3 | ) | |||||
Payment of deferred financing costs |
| (102 | ) | |||||
Net cash used in financing activities |
(13,799 | ) | (13,156 | ) | ||||
Net increase in cash and cash equivalents |
6,493 | 11,588 | ||||||
Beginning cash and cash equivalents |
22,772 | 26,367 | ||||||
Ending cash and cash equivalents |
$ | 29,265 | $ | 37,955 | ||||
Supplemental disclosure of non cash transactions |
||||||||
Accrued interest at HGF transferred to debt |
$ | | $ | 4,987 | ||||
Other receivable offset against equipment |
| 1,100 | ||||||
Warrant obligation recognized as a liability |
| 489 | ||||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid for interest |
$ | 2,393 | $ | 2,429 |
See notes to consolidated financial statements.
6
Table of Contents
ADVANCED BIOENERGY, LLC & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011 and 2010
(Unaudited)
March 31, 2011 and 2010
(Unaudited)
1. Organization and Significant Accounting Policies
The consolidated financial statements include the accounts of Advanced BioEnergy, LLC (the
Company) and its wholly owned subsidiaries, ABE Fairmont, LLC (ABE Fairmont) and ABE South
Dakota, LLC (ABE South Dakota). All intercompany balances and transactions have been eliminated
in consolidation. The interim financial statements should be read in conjunction with the audited
financial statements and notes thereto, contained in the Companys Annual Report on Form 10-K for
the year ended September 30, 2010. The financial information as of March 31, 2011 and the results
of operations for the six months ended March 31, 2011 are not necessarily indicative of the results
for the fiscal year ending September 30, 2011.
The Company currently operates three ethanol production facilities in the U.S. with a combined
production capacity of 195 million gallons per year. The Company commenced operations at the 110
million gallon facility in Fairmont, Nebraska in October 2007. The Company acquired existing
facilities in Aberdeen and Huron, South Dakota in November 2006 and commenced operations at the 44
million gallon Aberdeen expansion facility in January 2008.
Cash, Cash Equivalents and Restricted Cash
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 Companys restricted cash includes cash held for debt service under the terms of its
debt agreements.
Fair Value Measurements
In determining fair value of its derivative financial instruments and warrant liabilities, the
Company uses various methods including market, income and cost approaches. Based on these
approaches, the Company often uses certain assumptions that market participants would use in
pricing the asset or liability, including assumptions about risk and the risks inherent in the
inputs to the valuation technique. These inputs can be readily observable, market-corroborated, or
generally unobservable inputs. Financial assets and liabilities carried at fair value will be
classified and disclosed in one of the following three fair value hierarchy categories.
Level 1: Valuations for assets and liabilities traded in active markets from readily available
pricing sources for market transactions involving identical assets or liabilities.
Level 2: Valuations for assets and liabilities traded in less active dealer or broker markets.
Valuations are obtained from third-party pricing services for identical or similar assets or
liabilities.
Level 3: Valuations incorporate certain assumptions and projections in determining the fair value
assigned to such assets or liabilities.
Commodity futures and exchange-traded commodity options contracts are reported at fair value
using Level 1 inputs. For these contracts, the Company obtains fair value measurements from an
independent pricing service. The fair value measurements consider observable data that may include
dealer quotes and live trading levels from the CBOT and NYMEX markets.
The following table summarizes financial assets and financial liabilities measured at the
approximate fair value used to measure fair value (amounts in thousands):
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
At March 31, 2011 |
||||||||||||||||
Liabilities Warrant Derivative |
$ | 410 | $ | | $ | | $ | 410 | ||||||||
At September 30, 2010 |
||||||||||||||||
Assets
Derivative Financial Instruments |
$ | 314 | $ | 314 | $ | | $ | | ||||||||
Liabilities Warrant Derivative |
474 | | | 474 |
7
Table of Contents
The unit warrants issued contain a strike price adjustment feature. The Company
calculated the fair value of the warrants using the Black-Scholes valuation model. During the six
months ended March 31, 2011 and 2010, the Company recognized an unrealized gain of $64,000 and
$35,000, respectively, related to the change in the fair value of the warrant derivative liability.
The assumptions used in the Black-Scholes valuation model were as follows:
March 31, | September 30, | |||||||
2011 | 2010 | |||||||
Market value(1) |
$ | 1.50 | $ | 1.50 | ||||
Exercise price |
$ | 1.50 | $ | 1.50 | ||||
Expected volatility |
104.39 | % | 117.08 | % | ||||
Expected life (years) |
1.75 | 2.00 | ||||||
Risk-free interest rate |
0.750 | % | 0.375 | % | ||||
Forfeiture rate |
| | ||||||
Dividend rate |
| |
(1) | Market value based on recent unit transactions. |
The following table reflects the activity for the unit warrant, the only liability
measured at fair value using Level 3 inputs for the six months ended March 31, 2011 and 2010
(amounts in thousands):
2011 | 2010 | |||||||
Beginning balance of warrant derivative |
$ | 474 | $ | 489 | ||||
Unrealized gain related to the change in fair value |
(64 | ) | (35 | ) | ||||
Ending balance |
$ | 410 | $ | 454 | ||||
Receivables
Credit sales are made to a few customers with no collateral required. Trade receivables are
carried at original invoice amount 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 receivables and considering a customers financial
condition, credit history and current economic conditions. Receivables are written off if deemed
uncollectible. Recoveries of receivables previously written off are recorded when received.
Derivative Instruments/Due From Broker
On occasion, the Company has entered into derivative contracts to hedge the Companys exposure
to price risk related to forecasted corn purchases and forecasted ethanol sales. Accounting for
derivative contracts requires that an entity recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value. If certain conditions
are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in
the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge
of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign
currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted transaction.
Although the Company believes its derivative positions are economic hedges, it has not
designated any derivative position as a hedge for accounting purposes and it records derivative
positions on the balance sheet at their fair market value, with changes in fair value recognized in
current period earnings.
Inventories
Corn, chemicals, supplies, work in process, ethanol and distillers grains inventories are
stated at the lower of weighted cost or market.
Revenue Recognition
Ethanol revenue is recognized when product title and all risk of ownership is transferred to
the customer as specified in
the contractual agreements with the marketers. At all of the Companys plants, revenue is
recognized upon the release of the product for shipment. Revenue from the sale of co-products is
recorded when title and all risk of ownership transfers to
8
Table of Contents
customers, which generally occurs at the
time of shipment. Co-products and related products are generally shipped free on board (FOB)
shipping point. Interest income is recognized as earned. In accordance with the Companys
agreements for the marketing and sale of ethanol and related products, commissions due to the
marketers are deducted from the gross sale price at the time of payment.
Income Per Unit
Basic and diluted income per unit is computed using the weighted-average number of vested
units outstanding during the period. Unvested units are considered unit equivalents and are
considered in the diluted income per unit computation, but have not been included in the
computations of diluted income per unit for the current periods because their effect would be
anti-dilutive. Basic earnings and diluted per unit data were computed as follows (in thousands
except per unit data):
Three Months Ended | Six Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Numerator: |
||||||||||||||||
Net income for basic earnings per share |
$ | 736 | $ | 5,106 | $ | 3,903 | $ | 11,260 | ||||||||
Gain in fair
value of warrant derivative liability |
(30 | ) | (34 | ) | (64 | ) | (35 | ) | ||||||||
Net income for diluted earnings per share |
706 | 5,072 | 3,839 | 11,225 | ||||||||||||
Denominator: |
||||||||||||||||
Basic and diluted common shares outstanding |
24,705 | 17,800 | 24,705 | 17,729 | ||||||||||||
Earnings per share basic |
$ | 0.03 | $ | 0.29 | $ | 0.16 | $ | 0.64 | ||||||||
Earnings per share diluted |
$ | 0.03 | $ | 0.28 | $ | 0.16 | $ | 0.63 | ||||||||
Accounting Estimates
Management uses estimates and assumptions in preparing these financial statements in
accordance with generally accepted accounting principles. Those estimates and assumptions affect
the reported amounts of assets and liabilities, the disclosure of contingent assets and
liabilities, and the reported revenues and expenses. Actual results could differ from those
estimates.
Risks and Uncertainties
The ethanol industry is currently receiving an indirect benefit of the Volumetric Ethanol
Excise Tax Credit (VEETC) provided to gasoline blenders, which is set to expire on December 31,
2011, after a one-year extension was signed into law on December 17, 2010. This credit provides for
a 45-cent a gallon tax credit for gasoline blenders and a 54-cent a gallon tariff on ethanol
imports. Although the Renewable Fuels Standard still exists to maintain the demand for ethanol in
the United States, the Company is uncertain of the potential impact that the elimination or
reduction in the VEETC credit would have on the Company and the overall ethanol industry.
Contingencies
On February 23, 2011, the arbitrator in a proceeding brought by the Companys former chief
executive officer issued an interim award, finding that the Companys January 2009 termination of
the former officer did not meet the standard for termination for cause in his employment
agreement, and the Company would be required to pay the former chief executive officer compensatory
damages and defamation damages. Although the interim award is not final, it is likely the
arbitrator will issue a final award with the same findings in the interim award, plus any
attorneys fees that the arbitrator may or may not award to the former officer. The damages, costs
and interest awarded as a result of the interim award total approximately $2.1 million plus
attorneys fees which could range from zero to $1.5 million. See Item 1, Legal Proceedings, in
Part II of this Form 10-Q. The Company has taken a charge of approximately $2.1 million in the
second quarter with respect to this matter.
9
Table of Contents
2. Inventories
A summary of inventories is as follows (in thousands):
March 31, | September 30, | |||||||
2011 | 2010 | |||||||
Corn |
$ | 2,140 | $ | 3,127 | ||||
Chemicals |
1,088 | 1,107 | ||||||
Work in process |
3,203 | 2,104 | ||||||
Ethanol |
3,079 | 5,427 | ||||||
Distillers grain |
600 | 419 | ||||||
Supplies and parts |
2,298 | 1,918 | ||||||
Total |
$ | 12,408 | $ | 14,102 | ||||
3. Property and Equipment
A summary of property and equipment is as follows (in thousands):
March 31, | September 30, | |||||||
2011 | 2010 | |||||||
Land |
$ | 3,999 | $ | 3,962 | ||||
Buildings |
21,341 | 21,341 | ||||||
Process equipment |
216,643 | 215,962 | ||||||
Office equipment |
1,373 | 1,356 | ||||||
Construction in process |
1,393 | 234 | ||||||
244,749 | 242,855 | |||||||
Accumulated depreciation |
$ | (72,317 | ) | $ | (61,154 | ) | ||
Property and equipment, net |
$ | 172,432 | $ | 181,701 | ||||
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4. Debt and subsequent event
A summary of debt is as follows (in thousands, except percentages):
March 31, | ||||||||||||
2011 | March 31, | September 30, | ||||||||||
Interest Rate | 2011 | 2010 | ||||||||||
ABE Fairmont: |
||||||||||||
Senior credit facility variable |
3.65 | % | $ | 34,866 | $ | 45,050 | ||||||
Senior credit facility fixed |
7.53 | % | 20,000 | 20,000 | ||||||||
Seasonal line |
3.35 | % | | | ||||||||
Subordinate exempt facilities bonds fixed |
6.75 | % | 6,185 | 7,000 | ||||||||
61,051 | 72,050 | |||||||||||
ABE South Dakota: |
||||||||||||
Senior debt principal variable |
1.80 | % | 78,552 | 81,352 | ||||||||
Restructuring fee |
N/A | 3,000 | 3,000 | |||||||||
Additional carrying value of restructured debt |
N/A | 9,885 | 10,313 | |||||||||
91,437 | 94,665 | |||||||||||
Total outstanding |
$ | 152,488 | $ | 166,715 | ||||||||
Additional carrying value of restructured debt |
N/A | (9,885 | ) | (10,313 | ) | |||||||
Stated principal |
$ | 142,603 | $ | 156,402 | ||||||||
The estimated maturities of debt at March 31, is as follows (in thousands):
Amortization of | ||||||||||||
Additional Carrying | ||||||||||||
Stated | Value of | |||||||||||
Principal | Restructured Debt | Total | ||||||||||
2012 |
$ | 14,215 | $ | 837 | $ | 15,052 | ||||||
2013 |
14,215 | 1,693 | 15,908 | |||||||||
2014 |
12,881 | 2,439 | 15,320 | |||||||||
2015 |
13,815 | 2,505 | 16,320 | |||||||||
2016 |
80,367 | 2,411 | 82,778 | |||||||||
Thereafter |
7,110 | | 7,110 | |||||||||
Total debt |
$ | 142,603 | $ | 9,885 | $ | 152,488 | ||||||
Senior Credit Facility for the Fairmont Plant
ABE Fairmont has a senior credit facility with Farm Credit consisting of a term loan
(term loan A), and a revolving term loan, known as term loan B. At March 31, 2011, the Company
also had a $6.0 million revolving credit facility through Farm Credit for financing eligible grain
inventory and equity in Chicago Board of Trade (CBOT) futures positions. In April 2011, the
Company extended the revolving credit facility to April 1, 2012, and reduced the available amount
from $6.0 million to $4.0 million. ABE Fairmont also has a revolving credit facility with Farm
Credit for financing third-party letters of credit. ABE Fairmont has issued a letter of credit in
connection with a rail car lease, thereby reducing the financing available under the $2.0 million
revolving credit facility by $911,000 as of March 31, 2011. In April 2011, the Company and
Farm Credit formally reduced the revolving credit facility to $911,000 to equal the
outstanding letter of credit. This revolving credit facility expires in February 2012.
11
Table of Contents
At March 31, 2011, ABE Fairmont had $29.9 million outstanding on term loan A. Under the term
loan A agreement, Advanced BioEnergy Fairmont was required make quarterly principal installments of
$2.6 million through November 2013, followed by a final installment in an amount equal to the
remaining unpaid term loan A principal balance in February 2014. In April 2011, ABE Fairmont and
Farm Credit amended the term loan A agreement to allow Advanced BioEnergy Fairmont to defer the May
2011 payment in order to finance a capital project. The final $2.6 million principal installment
is now due in February 2014, with the final installment of the remaining unpaid term loan A
principal balance due in May 2014. In addition, under the term loan A agreement, for each fiscal
year ending through September 30, 2013, ABE Fairmont is required to pay an additional amount equal
to the lesser of $8.0 million or 75% of its free cash flow as defined in the agreement. The
outstanding loan balance at March 31, 2011 reflects a $5.0 million cash sweep payment made to Farm
Credit in December 2010.
At March 31, 2011, ABE Fairmont had $25.0 million outstanding on the revolving term loan B
(term loan B). On the earlier of December 1, 2014 or six months following complete repayment of
term loan A, ABE Fairmont is required to begin repayment of revolving term loan B in $5.0 million
semi-annual principal payments.
ABE Fairmont pays interest monthly at an annualized interest rate of 7.53% on $20.0 million
and a variable rate comprised of the 30-day LIBOR plus a fixed rate of 3.40% on the remaining
outstanding senior credit facility.
ABE Fairmonts senior credit facility is secured by a first mortgage on all of ABE Fairmonts
real estate and a lien on all of ABE Fairmonts personal property. The agreement contains financial
and restrictive covenants, including limitations on additional indebtedness, restricted payments,
and the incurrence of liens and transactions with affiliates and sales of assets. In addition, the
senior secured credit facility requires ABE Fairmont to comply with certain financial covenants,
including maintaining monthly minimum working capital, monthly minimum net worth, annual debt
service coverage ratios and capital expenditure limitations.
Fillmore County Subordinate Exempt Facilities Revenue Bonds for the Fairmont plant
ABE Fairmont has $6.2 million of subordinate exempt facilities revenue bonds outstanding under
a subordinated loan and trust agreement with the County of Fillmore, Nebraska and Wells Fargo, N.A.
The loan agreement is collateralized by the Fairmont plant assets. ABE Fairmonts repayment of the
loan and the security for the loan are subordinate to its senior credit facility. The loan requires
semi-annual interest payments. The Company made its first principal payment of $815,000 in
December 2010, and will continue to make this payment annually through December 2016, with the
remainder due in December 2017.
Senior Credit Agreement for the South Dakota Plants
ABE South Dakota entered into an Amended and Restated Senior Credit Agreement (the
Senior Credit Agreement) effective as of June 18, 2010, which was accounted for under troubled
debt restructuring rules. The Senior Credit Agreement was executed among ABE South Dakota, the
lenders from time to time party thereto, and WestLB AG, New York Branch, as Administrative Agent
and Collateral Agent. The Senior Credit Agreement converted the outstanding principal amount of the
loans and certain other amounts under interest rate protection agreements to a senior term loan in
an aggregate principal amount equal to $84.4 million. The interest accrued on outstanding term and
working capital loans under the existing credit agreement was reduced to zero. ABE South Dakota has
agreed to pay a $3.0 million restructuring fee to the lenders due at the earlier of March 31, 2016
or the date on which the loans are repaid in full. ABE South Dakota recorded the restructuring fee
as a long-term, non-interest bearing debt on its consolidated balance sheets.
The principal amount of the term loan facility is payable in equal quarterly payments of
$750,000, with the remaining principal amount fully due and payable on March 31, 2016.
ABE South Dakota has the option to select the interest rate on the senior term loan
between base rate and euro-dollar loans. Base rate loans bear interest at the administrative
agents base rate, plus an applicable margin of 0.50% increasing to 3.0% on June 16, 2013.
Euro-dollar loans bear interest at LIBOR plus the applicable margin of 1.5% increasing to 3.0% on
June 16, 2012, and 4.0% beginning on June 16, 2013 and thereafter. Each loan can be entered for
one, two, three or six month maturities.
Since the future maximum undiscounted cash payments on the Senior Credit Agreement
(including principal, interest and the restructuring fee) exceed the adjusted carrying value, no
gain for the forgiven interest was recorded, the carrying
value was not adjusted and the modification of terms will be accounted for on a prospective
basis, via a new effective interest calculation, amortized over the life of the note, offsetting
interest expense. Based on the treatment of the troubled debt restructuring which will result in
the additional carrying value being amortized as a reduction in interest expense over the term of
the loan, the Companys effective interest rate over the term of the restructuring note agreement
is approximately 0.33% over the Three-Month LIBOR (0.64% at March 31, 2011).
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ABE South Dakotas obligations under the Senior Credit Agreement are secured by a
first-priority security interest in all of the equity of and assets of ABE South Dakota.
ABE South Dakota is allowed to make equity distributions (other than certain tax
distributions) to ABE only upon ABE South Dakota meeting certain financial conditions and if there
is no more than $25 million of principal outstanding on the senior term loan. Loans outstanding
under the Senior Credit Agreement are subject to mandatory prepayment in certain circumstances,
including, but not limited to, mandatory prepayments based upon receipt of certain proceeds of
asset sales, casualty proceeds, termination payments, and cash flows.
The Senior Credit Agreement and the related loan documentation include, among other terms and
conditions, limitations (subject to specified exclusions) on ABE South Dakotas ability to make
asset dispositions; merge or consolidate with or into another person or entity; create, incur,
assume or be liable for indebtedness; create, incur or allow liens on any property or assets; make
investments; declare or make specified restricted payments or dividends; enter into new material
agreements; modify or terminate material agreements; enter into transactions with affiliates;
change its line of business; and establish bank accounts. Substantially all cash of ABE South
Dakota is required to be deposited into special, segregated project accounts subject to security
interests to secure obligations in connection with the Senior Credit Agreement. The Senior Credit
Agreement contains customary events of default and also includes an event of default for defaults
on other indebtedness by ABE South Dakota and certain changes of control.
5. Major Customers
The Company has entered into Exclusive Ethanol Marketing Agreements with Hawkeye Gold, LLC to
sell substantially all of its ethanol. Prior to January 2011, Hawkeye Gold was an affiliate of
Hawkeye Energy Holdings, LLC, a 34% owner of the Companys membership units. ABE Fairmont executed
an Exclusive Ethanol Marketing Agreement dated as of August 28, 2009 with Hawkeye Gold (the ABE
Fairmont Ethanol Agreement), which became effective on January 1, 2010. Prior to that time, ABE
Fairmonts ethanol was marketed by Gavilon. ABE South Dakota executed Exclusive Ethanol Marketing
Agreements dated as of April 7, 2010 with Hawkeye Gold (the ABE South Dakota Ethanol Agreements,
and together with the ABE Fairmont Ethanol Agreement, the Ethanol Agreements), which became
effective October 1, 2010. Prior to October 1, 2010, ABE South Dakotas ethanol was marketed by
Gavilon. The Ethanol Agreements require, among other things, that:
(1) | Hawkeye Gold must use commercially reasonable efforts to submit purchase orders for, and ABE Fairmont and ABE South Dakota must sell, substantially all of the denatured fuel grade ethanol produced by ABE Fairmont and ABE South Dakota, | ||
(2) | a purchase and sale of ethanol under the Ethanol Agreements must be in the form of either a direct fixed price purchase order, a direct index price purchase order, a terminal storage purchase order, a transportation swap or similar transaction that is mutually acceptable to the parties, | ||
(3) | ABE Fairmont or ABE South Dakota will pay any replacement or other costs incurred by Hawkeye Gold as a result of any failure to deliver by ABE Fairmont or ABE South Dakota, respectively, and | ||
(4) | with certain exceptions, ABE Fairmont and ABE South Dakota will sell substantially all of the ethanol they produce to Hawkeye Gold. The initial term of the ABE Fairmont Agreement is for two years, and provides for automatic renewal for successive 18 month terms unless either party provides written notice of nonrenewal at least 180 days prior to the end of any term. The initial terms of the ABE South Dakota Ethanol Agreements are for three years and provide for automatic renewal for successive one-year terms unless either party provides written notice of nonrenewal at least 180 days prior to the end of any term. |
ABE Fairmont is currently self-marketing the distillers grains it produces. ABE South Dakota
is party to a co-product marketing agreement with Dakotaland Feeds, LLC (Dakotaland Feeds), under
which Dakotaland Feeds markets the local sale of distillers grains produced at the ABE South Dakota
Huron plant to third parties for an agreed upon commission. The Company currently has an agreement
with Hawkeye Gold to market the distillers grains produced at the ABE South Dakota Aberdeen plants.
The initial term of this agreement is for three years and provides for automatic renewal for
successive one-
year terms unless either party provides written notice of nonrenewal at least 180 days prior
to the end of any term.
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Sales and receivables from the Companys major customers were as follows (in thousands):
March 31, | March 31, | |||||||
2011 | 2010 | |||||||
Hawkeye Gold Ethanol and Distiller Grains |
||||||||
Six months revenues (Since January 1, 2010 for prior year) |
$ | 237,667 | $ | 49,173 | ||||
Receivable balance at period end |
13,719 | 6,150 | ||||||
Gavilon Ethanol |
||||||||
Six months revenues |
$ | | $ | 118,059 | ||||
Receivable balance at period end |
| 4,378 | ||||||
Dakotaland ABE South Dakota Distillers Grains |
||||||||
Six months revenues |
$ | 6,614 | $ | 7,229 | ||||
Receivable balance at period end |
588 | 399 |
6. Risk Management
The Company is exposed to a variety of market risks, including the effects of changes in
commodity prices and interest rates. These financial exposures are monitored and managed by the
Company as an integral part of its overall risk management program. The Companys risk management
program seeks to reduce the potentially adverse effects that the volatility of these markets may
have on its current and future operating results. To reduce these effects, the Company generally
attempts to fix corn purchase prices and related sale prices of ethanol and distillers grains with
forward purchase and sales contracts to reduce volatility in future operating margins. In addition
to entering into contracts to purchase 12.1 million bushels of corn and sell 11.5 million gallons
of ethanol in which the futures price was not locked, the Company had entered into the following
fixed price forward contracts at March 31, 2011 (in thousands):
Quantity (000s) | Amount | Period Covered | ||||||||||||
Corn |
Purchase Contracts | 3,168 bushels | $ | 21,036 | July 2011 | |||||||||
Ethanol |
Sale Contracts | 17,852 gallons | 45,163 | May 2011 | ||||||||||
Distillers grains |
Sale Contracts | 56 tons | 10,278 | June 2011 |
Unrealized gains and losses on forward contracts, in which delivery has not occurred, are
deemed normal purchases and normal sales, and, therefore are not marked to market in the
financial statements.
When forward contracts are not available at competitive rates, the Company may engage in
hedging activities using exchange traded futures contracts, OTC futures options or OTC swap
agreements. Changes in market price of ethanol-related hedging activities are reflected in revenues
and changes in market price of corn related items are reflected in cost of goods sold. The
following table represents the approximate amount of realized and unrealized gains and changes in
fair value recognized in earnings on commodity contracts for the three and six months ended March
31, 2011 and 2010, and the fair value of futures contracts as of March 31, 2011 and September 30,
2010 (in thousands):
Income Statement | Realized | Unrealized | Total | |||||||||||
Classification | Gain | Loss | Gain (Loss) | |||||||||||
Three months ending March 31, 2011 |
Cost of Goods Sold | $ | | $ | | $ | | |||||||
Three months ending March 31, 2010 |
Cost of Goods Sold | 419 | (1,334 | ) | (915 | ) | ||||||||
Six months ending March 31, 2011 |
Cost of Goods Sold | $ | 90 | $ | | $ | 90 | |||||||
Six months ending March 31, 2010 |
Cost of Goods Sold | 766 | (1,012 | ) | (246 | ) |
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Balance Sheet | March 31, | September 30, | ||||||||||
Classification | 2011 | 2010 | ||||||||||
Derivative financial instrument futures contract |
Current Assets | $ | | $ | 314 |
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Information Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements regarding our business,
financial condition, results of operations, performance and prospects. All statements that are not
historical or current facts are forward-looking statements and are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements
involve known and unknown risks, uncertainties and other factors, many of which may be beyond our
control, that may cause our actual results, performance or achievements to be materially different
from any future results, performances or achievements expressed or implied by the forward-looking
statements. Certain of these risks and uncertainties are described in the Risk Factors section of
our Annual Report on Form 10-K for the year ended September 30, 2010 and in this Form 10-Q. These
risks and uncertainties include, but are not limited to, the following:
| our operational results are subject to fluctuations in the prices of grain, utilities and ethanol, which are affected by various factors including weather, production levels, supply, demand, changes in technology and government support and regulations; | ||
| margins can be volatile and can evaporate, which may affect our liability to meet current obligations and debt service requirements at our operating entities; | ||
| our hedging transactions and mitigation strategies could materially harm our results; | ||
| cash distributions depend upon our future financial and operational performance and will be affected by debt covenants, reserves and operating expenditures; | ||
| current governmental mandated tariffs, credits and standards may be reduced or eliminated and legislative acts taken by state governments such as California related to low carbon fuels that include the effects caused by indirect land use, may have an adverse effect on our business; | ||
| alternative fuel additives may be developed that are superior to or cheaper than ethanol; | ||
| transportation, storage and blending infrastructure may become impaired, preventing ethanol from reaching markets; | ||
| our operation facilities may experience technical difficulties and not produce the gallons of ethanol we expect and insurance proceeds may not be adequate to cover these production disruptions; | ||
| our units are subject to a number of transfer restrictions and no public market exists for our units, and we do not is expect a public market to develop; and | ||
| our ability to resolve all issues related to an arbitration involving us and our former chief executive officer, and pending litigation brought by that officer against one of our current directors. |
You can identify forward-looking statements by terms such as anticipates, believes,
could, estimates, expects, intends, may, plans, potential, predicts, projects,
should, will, would, and similar expressions intended to identify forward-looking statements.
Forward-looking statements reflect our current views with respect to future events, are based on
assumptions, and are subject to risks and uncertainties. Given these uncertainties, you should not
place undue reliance on these forward-looking statements. Also, forward-looking statements
represent our estimates and assumptions only as of the date of this report. Except as required by
law, we assume no obligation to update any forward-looking statements publicly, or to update the
reasons actual results could differ materially from those anticipated in any forward-looking
statements, even if new information becomes available in the future. Readers are urged to carefully
review and consider the various disclosures made by us in this report and in our other reports
filed from time to time with the Securities and Exchange Commission that advise interested parties
of the risks and factors that may affect our business.
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General
The following discussion and analysis provides information that management believes is
relevant to an assessment and understanding of our consolidated financial condition and results of
operations. This discussion should be read in conjunction with the consolidated financial
statements included herewith and notes to the consolidated financial statements thereto.
Overview
Advanced BioEnergy, LLC (Company, we, our, Advanced BioEnergy or ABE) was formed in
2005 as a Delaware limited liability company. Our business consists of producing ethanol and
co-products, including wet, modified and dried distillers grains. Ethanol is a renewable,
environmentally clean fuel source that is produced at numerous facilities in the United States,
mostly in the Midwest. In the U.S., ethanol is produced primarily from corn and then blended with
unleaded gasoline in varying percentages. Ethanol is most commonly sold as E10. Increasingly,
ethanol is also available as E85, which is a higher percentage ethanol blend for use in
flexible-fuel vehicles.
To execute our business plan, we entered into financial arrangements to build and operate
an ethanol production facility in Fairmont, Nebraska. Separately, we acquired ABE South Dakota in
November 2006, which owned existing ethanol production facilities in Aberdeen and Huron, South
Dakota. Construction of our Fairmont, Nebraska plant began in June 2006, and operations commenced
at the plant in October 2007. Construction of our new facility in Aberdeen, South Dakota began in
April 2007, and operations commenced in January 2008. Our production operations are carried out
primarily through our operating subsidiaries, ABE Fairmont, which owns and operates the Fairmont,
Nebraska plant and ABE South Dakota, which owns and operates plants in Aberdeen and Huron, South
Dakota.
Operating segments are defined as components of an enterprise for which separate
financial information is available that is evaluated regularly by the chief operating decision
maker in deciding how to allocate resources in assessing performance. Based on the related business
nature and expected financial results, the Companys plants are aggregated into one operating
segment.
DRY MILL PROCESS
Dry mill ethanol plants produce ethanol by predominantly processing corn. Other possible feeds
are grain sorghum, or other cellulosic materials. The corn is received by truck, then weighed and
unloaded in a receiving building. It is then conveyed to storage silos. Thereafter, it is
transferred to a scalper to remove rocks, cobs, and other debris before it is fed to a hammer mill
where it is ground into flour and conveyed into a slurry tank. Water, heat and enzymes are added to
the flour in the slurry tank to start the process of converting starch from the corn into sugar.
The slurry is pumped to a liquefaction tank where additional enzymes are added. These enzymes
continue the starch-to-sugar conversion. The grain slurry is pumped into fermenters, where yeast is
added, to begin the batch-fermentation process. Fermentation is the process of the yeast converting
the sugar into alcohol and carbon dioxide. After the fermentation is complete, a vacuum
distillation system removes the alcohol from the grain mash. The 95% (190-proof) alcohol from the
distillation process is then transported to a molecular sieve system, where it is dehydrated to
100% alcohol (200 proof). The 200-proof alcohol is then pumped to storage tanks and blended with a
denaturant, usually gasoline. The 200-proof alcohol and 2.0-2.5% denaturant constitute denatured
fuel ethanol.
Corn mash left over from distillation is pumped into a centrifuge for dewatering. The
liquid from the centrifuge, known as thin stillage, is then pumped from the centrifuges to an
evaporator, where it is concentrated to a syrup. The solids that exit the centrifuge, known as the
wet cake, are conveyed to the dryer system. Syrup is added to the wet cake as it enters the dryer,
where moisture is removed. The process produces distillers grains with solubles, which is used as a
high-protein/fat animal-feed supplement. Dry-mill ethanol processing creates three forms of
distillers grains: wet distillers grains with solubles, known as wet distillers grains; modified
wet distillers grains with solubles, known as modified distillers grains; and dry distillers grains
with solubles, known as dry distillers grains. Wet and modified distillers grains have been dried
to approximately 67% and 50% moisture levels, respectively, and are predominately sold to nearby
markets. Dried distillers grains have been dried to 11% moisture, have an almost indefinite shelf
life and may be sold and shipped to any market regardless of its proximity to an ethanol plant.
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FACILITIES
The table below provides a summary of our ethanol plants in operation as of March 31, 2011:
Estimated | ||||||||||||||||||||
Estimated | Annual | Estimated | ||||||||||||||||||
Annual | Distillers | Annual | ||||||||||||||||||
Ethanol | Grains | Corn | Primary | |||||||||||||||||
Location | Production | Production(1) | Processed | Energy Source | Builder | |||||||||||||||
(Million gallons) | (Tons) | (Million bushels) | ||||||||||||||||||
Fairmont, NE |
110 | 334,000 | 39.3 | Natural Gas | Fagen | |||||||||||||||
Aberdeen, SD(2) |
9 | 27,000 | 3.2 | Natural Gas | Broin | |||||||||||||||
Aberdeen, SD(2) |
44 | 134,000 | 15.7 | Natural Gas | ICM | |||||||||||||||
Huron, SD |
32 | 97,000 | 11.4 | Natural Gas | ICM | |||||||||||||||
Consolidated |
195 | 592,000 | 69.6 | |||||||||||||||||
(1) | Our plants produce and sell wet, modified wet and dried distillers grains. The stated quantities are on a fully dried basis operating at full production capacity. | |
(2) | Our plant at Aberdeen consists of two separate production facilities, which operate on a separate basis. Accordingly, we report and track production from these Aberdeen facilities separately. |
We believe that each of the operating facilities is in adequate condition to meet our current
and future production goals. We also believe that these plants are adequately insured for
replacement cost plus related disruption expenditures.
The senior credit facility of the ABE Fairmont plant is secured by a first mortgage on the
plant real estate and a security interest lien on the sites personal property. We also granted a
subordinate lien and security interest to the trustee of the subordinated exempt facilities revenue
bonds used to finance the ABE Fairmont plant. We pledged a first-priority security interest in and
first lien on substantially all of the assets of the ABE South Dakota plants to the collateral
agent for the senior creditor of these plants.
ABE Fairmont entered into a new marketing agreement with Hawkeye Gold, which became effective
on January 1, 2010. Prior to January 2011, Hawkeye Gold was an affiliate of Hawkeye Energy
Holdings, LLC, a 34% owner of the Companys membership units. The marketing agreement with Hawkeye
Gold requires, among other things, that Hawkeye Gold must use commercially reasonable efforts to
submit purchase orders for, and ABE Fairmont must sell, substantially all of the denatured
fuel-grade ethanol produced by ABE Fairmont. The initial term of the agreement is for two years and
provides for automatic renewal for successive 18-month terms unless either party provides written
notice of nonrenewal at least 180 days prior to the end of any term.
ABE South Dakota executed new marketing agreements with Hawkeye Gold which became effective
October 1, 2010. The agreements provide that Hawkeye Gold will use commercially reasonable efforts
to submit purchase orders for, and ABE South Dakota will sell to Hawkeye Gold, substantially all of
the denatured fuel-grade ethanol produced at the South Dakota plants. The initial term of the
agreement is for three years and provides for automatic renewal for successive one-year terms
unless either party provides written notice of nonrenewal at least 180 days prior to the end of any
term. Prior to October 1, 2010, ABE South Dakotas ethanol was marketed by Gavilon, LLC
(Gavilon).
Sales of distillers grains have represented 15.8% and 14.4% of our revenues for the quarters
ended March 31, 2011 and 2010, respectively. When the plants are operating at capacity they produce
approximately 592,000 tons of dried distillers grains equivalents per year, approximately 17 pounds
per bushel of corn. Distillers grains are a high-protein, high-energy animal feed supplement
primarily marketed to the dairy and beef industry, as well as the poultry and swine markets.
Plan of Operations Through March 31, 2012
Over the next year we will continue our focus on operational improvements at each of our
operating facilities. These operational improvements include exploring methods to improve ethanol
yield per bushel and maximizing production output at each of our plants. We will also have a
continued emphasis on safety and environmental regulation, reducing our operating costs, and
optimizing our margin opportunities through prudent risk-management policies. We are also improving
the rail
facilities at the Huron plant location, and adding corn oil extraction technology to our
Fairmont facility.
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RESULTS OF OPERATIONS
Quarter Ended March 31, 2011 Compared to Quarter Ended March 31, 2010
The following table reflects quantities of our products sold at average net prices as well as
bushels of corn ground and therms of gas burned at average costs for the three months ended March
31, 2011 and 2010:
Three Months Ended | Three Months Ended | |||||||||||||||
March 31, 2011 | March 31, 2010 | |||||||||||||||
Sold/Consumed | Average | Sold/Consumed | Average | |||||||||||||
(In thousands) | Net Price/Cost | (In thousands) | Net Price/Cost | |||||||||||||
Ethanol (gallons) |
54,612 | $ | 2.35 | 48,889 | $ | 1.73 | ||||||||||
Dried distillers grains (tons) |
116 | 159.47 | 108 | 102.43 | ||||||||||||
Wet/modified distillers grains (tons) |
86 | 65.26 | 95 | 33.66 | ||||||||||||
Corn (bushels) |
19,469 | $ | 5.96 | 17,594 | $ | 3.42 | ||||||||||
Gas (mmbtus) |
1,391 | 4.34 | 1,356 | 5.67 |
Net Sales
Net sales for quarter ended March 31, 2011 were $152.8 million compared to $98.7 million for
the quarter ended March 31, 2010, an increase of $54.1 million or 54.8%. The increase in revenues
was due to an increase in average prices of ethanol and distillers grains of 35.8% and 70.0%,
respectively. Ethanol prices rose due to increased demand, general overall motor fuel price
increases and commodity inflation. During the fiscal quarters ending March 31, 2011 and 2010, 84.2%
and 85.4%, respectively, of our net sales were derived from the sale of ethanol and our remaining
net sales were derived from the sale of distillers grains.
Cost of Goods Sold
Costs of goods sold for the quarter ending March 31, 2011 were $148.0 million, compared to
$88.2 million for the quarter ending March 31, 2010, an increase of $59.8 million or 67.8%. Costs
of goods sold included no hedging gains or losses in the quarter ended March 31, 2011 and a hedging
loss of $0.9 million in the quarter ended March 31, 2010. Corn costs represented 78.4% and 68.3% of
cost of sales for the fiscal quarters ending March 31, 2011 and 2010. Corn costs increased 74.3% to
$5.96 per bushel in the quarter ending March 31, 2011 from $3.42 per bushel for the quarter ending
March 31, 2010. The increase in corn cost per bushel was due primarily to the corn crop not being
as favorable as the prior year, world-wide commodity inflation, and generally less corn available.
Natural gas costs represented 4.1% and 8.7% of cost of sales for the fiscal quarters ending March
31, 2011 and 2010. Our average gas prices decreased to $4.34 per mmbtu in the quarter ending March
31, 2011 from $5.67 per mmbtu in the quarter ending March 31, 2010.
Gross Profit
Our gross profit for the quarter ending March 31, 2011 was $4.8 million, compared to gross
profit of $10.5 million for the quarter ending March 31, 2010. The decrease in gross profit was
primarily due to a reduction in the crush margin. We define the crush margin as the price of
ethanol per gallon less the costs of corn and natural gas on a per gallon basis. Compared to the
quarter ending March 31, 2010, crush margins for the quarter ending March 31, 2011 decreased, as
corn prices increased more than ethanol prices on a per gallon basis.
Selling, General, and Administrative Expenses
As a percentage of sales, selling, general and administrative expenses have increased to 2.4%
for the quarter ended March 31, 2011 compared to 2.2% for the quarter ended March 31, 2010.
Selling, general, and administrative expenses are comprised of recurring administrative personnel
compensation, legal, technology, consulting, insurance and accounting fees as well as certain
non-recurring charges. For the quarter ending March 31, 2011, selling, general and administrative
expenses were $3.67 million, of which $0.11 million was non-recurring legal expense and
approximately $2.1 million was a charge related to the arbitration proceedings as discussed below.
Selling, general and administrative expenses were $2.22 million for the quarter ending March 31,
2010, of which $0.68 million was non-recurring expense related to the South Dakota debt
restructuring. Excluding non-recurring items, selling, general, and administrative expenses were
$1.46 million, or 1.0% of sales, for the quarter ending March 31, 2011, and $1.54 million, or 1.6%
of sales, for the quarter ending March 31, 2010.
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On February 23, 2011, the arbitrator in a proceeding brought by our former chief executive
officer issued an interim award, finding that the Companys January 2009 termination of the former
officer did not meet the standard for termination
for cause in his employment agreement, and the Company would be required to pay the former
chief executive officer compensatory damages and defamation damages. Although the interim award is
not final, it is likely the arbitrator will issue a final award with the same findings in the
interim award, plus any attorneys fees that the arbitrator may or may not award to the former
officer. See Item 1, Legal Proceedings, in Part II of this Form 10-Q. The Company has taken a
charge of approximately $2.1 million in the second quarter with respect to this matter.
Other Income
Other income for the quarter ended March 31, 2011 was $0.5 million, compared to $0.3 million
for the quarter ended March 31, 2010. The increase was due to a non-recurring refund of certain
restructuring fees of $0.1 million and Nebraska Advantage Act refunds of $0.1 million.
Interest Expense
Interest expense for the quarter ending March 31, 2011 was $0.9 million, compared to $3.5
million for the quarter ended March 31, 2010, a decrease of $2.6 million. The decrease in interest
expense is a result of the overall reduction in principal and a reduction in interest rates on ABE
South Dakotas debt. As of March 31, 2010, the total principal outstanding was $214.1 million,
decreasing to $142.6 million of stated principal at March 31, 2011. The reduction in principal was
a result of the debt restructuring that occurred in June 2010, repayment of a note issued to PJC
Capital, LLC, and scheduled principal payments. The interest rates on the senior credit facility
for ABE South Dakota decreased from a default rate of 8.50% at March 31, 2010 to a variable rate of
1.80% at March 31, 2011. The interest expense at March 31, 2011 also reflects a reduction in
interest expense resulting from the amortization of deferred gain that resulted from the debt
restructuring.
RESULTS OF OPERATIONS
Six Months Ended March 31, 2011 Compared to Six Months Ended March 31, 2010
The following table reflects quantities of our products sold at average net prices as well as
bushels of corn ground and therms of gas burned at average costs for the six months ended March 31,
2011 and 2010:
Six Months Ended | Six Months Ended | |||||||||||||||
March 31, 2011 | March 31, 2010 | |||||||||||||||
Sold/Consumed | Average | Sold/Consumed | Average | |||||||||||||
(In thousands) | Net Price/Cost | (In thousands) | Net Price/Cost | |||||||||||||
Ethanol (gallons) |
103,745 | $ | 2.18 | 98,912 | $ | 1.68 | ||||||||||
Dried distillers grains (tons) |
236 | 140.53 | 223 | 97.42 | ||||||||||||
Wet/modified distillers grains (tons) |
165 | 57.56 | 183 | 34.63 | ||||||||||||
Corn (bushels) |
37,047 | $ | 5.32 | 35,492 | $ | 3.46 | ||||||||||
Gas (mmbtus) |
2,797 | 4.23 | 2,732 | 5.07 |
Net Sales
Net sales for the six months ended March 31, 2011 were $269.3 million compared to $195.0
million for the quarter ended March 31, 2010, an increase of $74.3 million or 38.1%. The increase
in revenues was due to an increase in average prices of ethanol and distillers grains of 29.8% and
54.0%, respectively. Ethanol prices rose due to increased demand, general overall motor fuel price
increases and commodity inflation. For the six months ended March 31, 2011 and 2010, 84.0% and
85.4%, respectively, of our net sales were derived from the sale of ethanol and our remaining net
sales were derived from the sale of distillers grains.
Cost of Goods Sold
Costs of goods sold for the six months ended March 31, 2011 were $258.4 million, compared to
$172.3 million for the six months ended March 31, 2010, an increase of $86.1 million or 50.0%.
Costs of goods sold included a corn related hedging gain of $0.1 million for the six months ended
March 31, 2011 and a hedging loss of $0.2 million for the six months ended March 31, 2010. Corn
costs represented 76.3% and 71.2% of cost of sales for the six months ended March 31, 2011 and
2010, respectively. Corn costs increased 53.8% to $5.32 per bushel for the six months ended March
31, 2011 from $3.46 per bushel for the six months ended March 31, 2010. The increase in corn cost
per bushel was due primarily to the corn crop not being as favorable as the prior year, commodity
inflation world-wide, and generally less corn available. Natural gas costs represented 4.6% and
8.0% of cost of sales for the six months ended March 31, 2011 and 2010. Our average gas prices
decreased to $4.23 per mmbtu for the six months ended March 31, 2011 from $5.07 per mmbtu for the
six months ended March 31, 2010.
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Gross Profit
Our gross profit for the six months ended March 31, 2011 was $10.9 million, compared to gross
profit of $22.7 million for the six months ended March 31, 2010. The decrease in gross profit was
primarily due to a reduction in the crush margin. We define the crush margin as the price of
ethanol per gallon less the costs of corn and natural gas on a per gallon basis. Compared to the
six months ended March 31, 2010, crush margins for the six months ended March 31, 2011 decreased,
as corn prices increased more than ethanol prices on a per gallon basis.
Selling, General, and Administrative Expenses
As a percentage of sales, selling, general and administrative expenses have declined to 2.1%
for the six months ended March 31, 2011 compared to 2.2% for the six months ended March 31, 2010.
Selling, general, and administrative expenses are comprised of recurring administrative personnel
compensation, legal, technology, consulting, insurance and accounting fees as well as certain
non-recurring charges. For the six months ended March 31, 2011, selling, general and administrative
expenses were $5.73 million, of which $0.41 million was non-recurring legal expense and
approximately $2.1 million was a charge related to the arbitration proceedings as discussed below.
Selling, general and administrative expenses were $4.31 million for the six months ended March 31,
2010, of which $1.13 million was non-recurring expense related to the South Dakota debt
restructuring and $0.02 million was non-recurring legal expense related to the arbitration
proceedings. Excluding non-recurring items, selling, general, and administrative expenses were
$3.22 million, or 1.2% of sales, for the six months ended March 31, 2011, and $3.16 million, or
1.6% of sales, for the six months ended March 31, 2010.
As discussed above, under the Quarter Ended March 31, 2011 Compared to Quarter Ended March
31, 2010, the Company has taken a charge of approximately $2.1 million in the second quarter
related to arbitration brought by a former officer.
Other Income
Other income for the six months ended March 31, 2011 was $0.6 million, compared to $0.3
million for the six months ended March 31, 2010. The increase was due to a non-recurring refund of
certain restructuring fees of $0.1 million, and Nebraska Advantage Act refunds of $0.2 million.
Interest Expense
Interest expense for the six months ended March 31, 2011 was $1.9 million, compared to $7.4
million for the six months ended March 31, 2010, a decrease of $5.5 million. The decrease in
interest expense is a result of the overall reduction in principal and a reduction in interest
rates on ABE South Dakotas debt. As of March 31, 2010, the total principal outstanding was $214.1
million, decreasing to $142.6 million of stated principal at March 31, 2011. The reduction in
principal was a result of the debt restructuring that occurred in June 2010, repayment of a note
issued to PJC Capital, LLC, and scheduled principal payments. The interest rates on the senior
credit facility for ABE South Dakota decreased from a default rate of 8.50% at March 31,2010 to a
variable rate of 1.80% at March 31, 2011. The interest expense at March 31, 2011 also reflects a
reduction in interest expense resulting from the amortization of deferred gain that resulted from
the debt restructuring.
TRENDS AND UNCERTAINTIES AFFECTING THE ETHANOL INDUSTRY AND OUR FUTURE OPERATIONS
Overview
Ethanol is currently blended with gasoline to meet regulatory standards, as a clean air
additive, an octane enhancer, a fuel extender and a gasoline alternative. According to the
Renewable Fuels Association, as of April 2011, the estimated ethanol production capacity in the
United States is 13.8 billion gallons per year with an additional 0.6 billion gallons under
construction or expansion. The demand for ethanol is affected by what is commonly referred to as
the blending wall, which is a regulatory cap on the amount of ethanol that can be blended into
gasoline. The blend wall affects the demand for ethanol, and as industry production capacity
reaches the blend wall, the supply of ethanol in the market may surpass the demand. Assuming
current gasoline usage in the U.S. at 140 billion gallons per year and a blend rate of 10% ethanol
and 90% gasoline, the current blend wall can be assumed at approximately 14 billion gallons of
ethanol per year.
In an attempt to increase the blend wall, Growth Energy, an ethanol industry trade
organization, requested a waiver from the U.S. Environmental Protection Agency (EPA) to allow
blending of ethanol at a 15 percent blend rate. In October of 2010, the EPA made a decision to
allow the use of E15 blends in 2007 and newer vehicles. On January 21, 2011, the EPA announced E15
blends to be safe for use in all cars and pickups built in 2001 and later. However, we do not yet
know what the impact of this decision will be on ethanol demand, as there are still labeling
issues, additional testing, and some regulatory issues that must be addressed prior to widespread
market use of the E15 blend.
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Our operations are highly dependent on commodity prices, especially prices for corn, ethanol,
distillers grains and
natural gas. As a result of price volatility for these commodities, our operating results may
fluctuate substantially. The price and availability of corn are subject to significant fluctuations
depending upon a number of factors that affect commodity prices in general, including crop
conditions, weather, federal policy and foreign trade. Because the market price of ethanol is not
always directly related to corn prices, at times ethanol prices may lag movements in corn prices
and compress the overall margin structure at the plants. As a result, operating margins may become
negative and we may be forced to shut down the plants.
We focus on locking in margins based on the cash flows model that continually monitors market
prices of corn, natural gas and other input costs against prices for ethanol and distillers grains
at each of our production facilities. We create offsetting positions by using a combination of
derivative instruments, fixed-price purchases and sales, or a combination of strategies in order to
manage risk associated with commodity price fluctuations. Our primary focus is not to manage
general price movements, for example minimize the cost of corn consumed, but rather to lock in
favorable margins whenever possible. In the quarter ended March 31, 2011, the average Chicago Opis
Spot Ethanol Assessment was $2.425 per gallon and the average NYMEX RBOB was $2.682 per gallon, or
approximately $0.26 per gallon above ethanol prices.
Federal policy has a significant impact on ethanol market demand. Ethanol blenders benefit
from incentives that encourage usage and a tariff on imported ethanol that supports the domestic
industry. Additionally, the renewable fuels standard (RFS) mandates increased level of usage of
both corn-based and cellulosic ethanol. Any adverse ruling on, or legislation affecting, RFS
mandates in the future could have an adverse impact on short-term ethanol prices and our financial
performance in the future.
The ethanol industry and our business depend upon continuation of the federal and state
ethanol supports such as the RFS, the Volumetric Ethanol Excise Tax Credit (VEETC) and import
tariffs. We believe the ethanol industry expanded due to these federal mandates, policies, and
incentives. These government mandates and incentives have supported a market for ethanol that might
disappear without these programs. Alternatively, the government mandates and incentives may be
continued at lower levels than those at which they currently exist. The elimination or reduction of
the federal ethanol supports would make it more costly for us to sell our ethanol and would likely
reduce our net income. In addition, state regulatory activity may also negatively affect the
consumption of corn-based ethanol in certain domestic markets such as California, due to low carbon
fuel standards that take into consideration the effects caused by indirect land use.
The Renewable Fuels Standard
The RFS is a national program that imposes requirements with respect to the amount of
renewable fuel produced and used. The RFS was revised by the EPA in July 2010 (RFS2) and applies
to refineries, blenders, distributors and importers. In 2011, the RFS2 requires that refiners and
importers blend renewable fuels totaling at least 8.01% of total fuel volume, or approximately
13.95 billion gallons, of which 12.60 million gallons can be derived from corn-based ethanol. The
RFS2 requirement will increase incrementally over the next several years to a renewable fuel
requirement of 36.0 billion gallons, or approximately 11% of the anticipated gasoline and diesel
consumption, by 2022. The following chart illustrates the potential United States ethanol demand
based on the schedule of minimum usage established by the program through the year 2022 (in
billions of gallons).
Cellulosic | RFS Requirement | |||||||||||||||||||
Total Renewable | Ethanol | Biodiesel | That Can Be Met | |||||||||||||||||
Fuel | Minimum | Minimum | Advanced | With Corn-Based | ||||||||||||||||
Year | Requirement | Requirement | Requirement | Biofuel | Ethanol | |||||||||||||||
2011 |
13.95 | 0.25 | 0.80 | 1.35 | 12.60 | |||||||||||||||
2012 |
15.20 | 0.50 | 1.00 | 2.00 | 13.20 | |||||||||||||||
2013 |
16.55 | 1.00 | | 2.75 | 13.80 | |||||||||||||||
2014 |
18.15 | 1.75 | | 3.75 | 14.40 | |||||||||||||||
2015 |
20.50 | 3.00 | | 5.50 | 15.00 | |||||||||||||||
2016 |
22.25 | 4.25 | | 7.25 | 15.00 | |||||||||||||||
2017 |
24.00 | 5.50 | | 9.00 | 15.00 | |||||||||||||||
2018 |
26.00 | 7.00 | | 11.00 | 15.00 | |||||||||||||||
2019 |
28.00 | 8.50 | | 13.00 | 15.00 | |||||||||||||||
2020 |
30.00 | 10.50 | | 15.00 | 15.00 | |||||||||||||||
2021 |
33.00 | 13.50 | | 18.00 | 15.00 | |||||||||||||||
2022 |
36.00 | 16.00 | | 21.00 | 15.00 |
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The RFS2 went into effect on July 1, 2010 and requires certain gas emission reductions
for the entire lifecycle, including production of fuels. The greenhouse gas reduction requirement
generally does not apply to facilities that commenced construction prior to December 2007. If this
changes and our plants must meet the standard for emissions reduction, it may affect the way we
procure feed stock and modify the way we market and transport our products.
Blending Incentives
The VEETC, often commonly referred to as the blenders credit, was created by the American
Jobs Creation Act of 2004. This credit allows gasoline distributors who blend ethanol with gasoline
to receive a federal excise tax credit of $0.45 per gallon of pure ethanol used, or $0.045 per
gallon for E10 and $0.3825 per gallon for E85. To ensure the blenders credit spurs growth in
domestic production, federal policy has insulated the domestic ethanol industry from foreign
competition by levying a $0.54 per gallon tariff on all imported ethanol. Both the VEETC and the
tariff were set to expire on December 31, 2010, but were extended for one year as part of the Tax
Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 signed into law by
President Obama on December 17, 2010.
California Low Carbon Fuel Standard
In April 2009, the California air regulators approved the Low-Carbon Fuel Standard aimed at
achieving a 10% reduction in motor vehicle emissions of greenhouse gases by 2020. Other states may
adopt similar legislation, which may lead to a national standard. The regulation requires that
providers, refiners, importers and blenders ensure that the fuels they provide in the California
market meet a declining standard of carbon intensity. This rule calls for a reduction of greenhouse
gas emissions associated with the production, transportation and consumption of a fuel. The
emissions score also includes indirect land-use change created from converting a forest to
cultivated land for row crops. The final regulation contains a provision to review the measurement
of the indirect land-use effects and further analysis of the land use values and modeling inputs.
This standard and others to follow may affect the way ethanol producers procure feedstocks,
produce dry distillers grains and market and transport ethanol and distillers grains. Ethanol
produced through low carbon methods, including imported ethanol made from sugarcane, may be
redirected to certain markets and U.S. producers may be required to market their ethanol in other
regions.
Imported Ethanol Tariffs
There is a $0.54 per gallon tariff on imported ethanol, which expires on December 31,
2011, after a one year extension was signed into law on December 17, 2010. Ethanol imports from 24
countries in Central America and the Caribbean region are exempted from the tariff under the
Caribbean Basin Initiative or CBI, which provides that specified nations may export an aggregate of
7% of the prior years U.S. ethanol production into the U.S., with additional exemptions from
ethanol produced from feedstock in the Caribbean region over the 7% limit. Ethanol imported from
Caribbean basin countries may be a less expensive alternative to domestically produced ethanol.
Expiration of this tariff could lead to the importation of ethanol from other countries, which may
be a less expensive alternative to ethanol produced domestically. This could affect our ability to
sell our ethanol at the price we need to operate profitably.
Chinese Anti-Dumping Investigation
On December 28, 2010, the Chinese government announced a one-year investigation into the
potential violation of anti-dumping laws regarding imported dried distillers grains originating in
the United States. The allegation is that the recent surge in imports of U.S. dried distillers
grains is undercutting sales of domestically produced dried distillers grains and that U.S. dried
distillers grains are being sold at a price lower than the fair market value. If the Chinese
Government finds evidence of dumping upon conclusion of the investigation on December 28, 2011, a
final determination will include the imposition of punitive tariffs on U.S. imports of DDGS to
China. Punitive tariffs, if applied, will be significantly higher, as much as 50 percent, for
non-cooperating parties. Although the Company does not sell distillers grains directly into China,
some of our distillers grains are sold into China through third parties. The Company has chosen to
cooperate with the Chinese governments investigation, but at this time we are uncertain as to the
impact this may have on our business.
COMPETITION
Ethanol
The ethanol we produce is similar to ethanol produced by other plants. The RFA reports that as
of April 2011, current U.S. ethanol production capacity is approximately 13.8 billion gallons per
year. On a national level there are numerous other
production facilities with which we are in direct competition, many of whom have greater
resources than we do. As of April 2011, Nebraska had 25 ethanol plants producing an aggregate of
1.8 billion gallons of ethanol per year, and South Dakota had 15 ethanol plants producing an
aggregate of 1.0 billion gallons of ethanol per year, including our plants.
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The largest ethanol producers include: Abengoa Bioenergy Corp., Archer Daniels Midland
Company, Cargill, Inc., Green Plains Renewable Energy, Inc., POET, LLC and Valero Renewable Fuels.
Producers of this size may have an advantage over us from economies of scale and negotiating
position with purchasers. We market our ethanol primarily on a regional and national basis. We
believe that we are able to reach the best available markets through the use of experienced ethanol
marketers and by the rail delivery methods we use. Our plants compete with other ethanol producers
on the basis of price, and, to a lesser extent, delivery service. We believe that we can compete
favorably with other ethanol producers due to our proximity to ample grain, natural gas,
electricity and water supplies at favorable prices.
Distillers Grains
We compete with other ethanol producers in the sales of distillers grains, as well as a number
of large and smaller suppliers of competing animal feed. We believe the principal competitive
factors are price, proximity to purchasers and product quality. Currently 77.8% of our distillers
grain revenues are derived from the sale of dried distillers grains, which has an indefinite shelf
life and can be transported by truck or rail, 22.2% as modified and wet, which have a shorter shelf
life and are typically sold in local markets.
LIQUIDITY AND CAPITAL RESOURCES
Financing and Existing Debt Obligations
We conduct our business activities and plant operations through Advanced BioEnergy, ABE
Fairmont and ABE South Dakota. The liquidity and capital resources for each entity are based on the
entitys existing financing arrangements and capital structure. ABE Fairmont has traditional
project financing in place, including senior secured financing, working capital facilities and
subordinate exempt-facilities revenue bonds. In June 2010, ABE South Dakota entered into the Senior
Credit Agreement (as defined below), which eliminated its subordinated debt. There are provisions
contained in the various financing agreements at each operating entity preventing cross-default or
collateralization between operating entities. Advanced BioEnergy is highly restricted in its
ability to use the cash and other financial resources of each subsidiary for the benefit of
Advanced BioEnergy, with the exception of allowable distributions as defined in the separate
financing agreements.
Advanced BioEnergy, LLC
ABE had cash and cash equivalents of $5.5 million on hand at March 31, 2011. ABE does not have
any debt outstanding as of March 31, 2011. ABE does not expect to make any distributions to its
unit holders in the next 12 months. ABEs primary source of operating cash comes from charging a
monthly management fee to ABE Fairmont and ABE South Dakota for services provided in connection
with operating the ethanol plants. The primary management services provided include risk
management, accounting and finance, human resources and other general management related
responsibilities. From time to time ABE may also receive certain allowable distributions from ABE
Fairmont and ABE South Dakota based on the terms and conditions in their respective senior credit
agreements. In January 2011, ABE received a distribution from ABE Fairmont of $4.7 million based on
the fiscal 2010 financial results of ABE Fairmont. This distribution was subject to ABE Fairmont
remaining in compliance with all loan covenants and terms and conditions of its senior secured
credit agreement. ABE is not expecting any distribution from ABE South Dakota in 2011.
We believe ABE has sufficient financial resources available to fund current operations and
capital expenditure requirements for at least the next 12 months.
ABE Fairmont
ABE Fairmont had cash and cash equivalents of $15.9 million and restricted cash of $1.5
million on hand at March 31, 2011. The restricted cash is held in escrow for future debt service
payments. As of March 31, 2011, ABE Fairmont had total debt outstanding of $61.1 million consisting
of $54.9 million in senior secured credit and $6.2 million of subordinate exempt-facilities revenue
bonds. ABE Fairmont is required to make monthly interest payments on its senior secured credit and
semi-annual interest payments on its outstanding subordinate exempt revenue bonds. ABE Fairmont is
required to make quarterly principal payments of $2.6 million on its senior secured credit. Total
principal payments of $0.8 million on the subordinate exempt facilities revenue bonds have been
made through March 31, 2011. In April 2011, ABE Fairmont amended the senior secured credit
agreement to defer the May 2011 principal payment of $2.6 million in order to finance a capital
project. This
amendment has the effect of extending the final principal payment on term loan A in 2014 by
one quarter.
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ABE Fairmont is allowed to make cash distributions to ABE if ABE Fairmont meets all conditions
required in its senior secured credit agreement at the end of a fiscal year. This annual
distribution is limited to 40% of net income calculated in accordance with generally accepted
accounting principles and other terms contained in its senior secured credit agreement. The
distribution is subject to the completion of ABE Fairmonts annual financial statement audit and
ABE Fairmont remaining in compliance with all loan covenants and terms and conditions of the senior
secured credit agreement. The annual distribution based on ABE Fairmont fiscal 2010 financial
results is $4.7 million. The distribution was made at the end of January 2011.
ABE Fairmonts senior secured credit agreement also requires an annual cash sweep subject to a
free cash flow calculation, as defined in its senior secured credit agreement. The cash sweep
requires that, for each fiscal year ending in 2010 through 2013, ABE Fairmont must make a payment
equal to the lesser of $8.0 million or 75% of its free cash flow after distributions, not to exceed
$16.0 million in the aggregate for all of the free cash flow payments. Based on fiscal 2010
financial results, ABE Fairmont made a cash sweep payment of $5.0 million in December 2010. Cash
sweep payments are subject to compliance with all loan covenants and terms and conditions of the
senior secured credit agreement.
We believe ABE Fairmont has sufficient financial resources available to fund current
operations and capital expenditure requirements for at least the next 12 months. In addition to the
cash on hand, ABE Fairmont has a $4.0 million revolving credit facility for financing eligible
grain inventory and equity in Chicago Board of Trade futures positions. In April 2011, the Company
extended the revolving credit facility to April 1, 2012, and reduced the available amount from $6.0
million to $4.0 million. ABE Fairmont had $6.0 million available on the revolving credit facility
as of March 31, 2011. ABE Fairmont also has a revolving credit facility for financing third-party
letters of credit, which expires in February 2012. ABE Fairmont issued a letter of credit in
connection with a rail car lease, reducing the financing available from the $2.0 million revolving
credit facility by $911,000 as of March 31, 2011. In April 2011, ABE Fairmont reduced the amount
of this revolving credit facility to $911,000, equal to the outstanding letter of credit.
ABE Fairmonts senior secured credit facility agreement contains financial and restrictive
covenants, including limitations on additional indebtedness, restricted payments, and the
incurrence of liens and transactions with affiliates and sales of assets. In addition, the senior
secured credit facility requires ABE Fairmont to comply with certain financial covenants, including
maintaining monthly minimum working capital, monthly minimum net worth, annual debt service
coverage ratios and capital expenditure limitations. ABE Fairmont was in compliance with all
covenants at March 31, 2011.
ABE South Dakota
ABE South Dakota had cash and cash equivalents of $7.9 million and $4.0 million of restricted
cash on hand at March 31, 2011. The restricted cash consists of $3.0 million for a debt service
payment reserve, and $1.0 million for the construction of certain rail infrastructure at its Huron,
South Dakota ethanol facility. As of March 31, 2011, ABE South Dakota had interest bearing term
debt outstanding of $78.6 million.
In June 2010, ABE South Dakota entered into an Amended and Restated Senior Credit
Agreement dated as of June 16, 2010 (the Senior Credit Agreement) among ABE South Dakota, the
lenders from time to time party thereto, and WestLB AG, New York Branch, as administrative agent
and collateral agent. The Senior Credit Agreement converted the outstanding principal amount of the
loans and certain other amounts under interest rate protection agreements under the existing senior
credit agreement to a senior term loan in an aggregate principal amount equal to $84.3 million.
Interest accrued on outstanding term and working capital loans under the existing credit agreement
was reduced to zero on June 18, 2010. The principal amount of the term loan facility is payable in
equal quarterly payments of $750,000, with the remaining principal amount fully due and payable on
March 31, 2016. ABE South Dakota has agreed to pay a $3.0 million restructuring fee to the lender
due at the earlier of March 31, 2016 and the date on which the loans are repaid in full. The
Company recorded the restructuring fee as long-term, non-interest bearing debt.
ABE South Dakotas obligations under the Senior Credit Agreement are secured by a
first-priority security interest in all of the equity in and assets of ABE South Dakota.
ABE South Dakota is allowed to make equity distributions (other than certain tax
distributions) to ABE only upon ABE South Dakota meeting certain financial conditions and if there
is no more than $25 million of principal outstanding on the senior term loan. Loans outstanding
under the Senior Credit Agreement are subject to mandatory prepayment in certain circumstances,
including, but not limited to, mandatory receipt of certain proceeds of asset sales, casualty
proceeds, termination payments, and cash flows.
The Senior Credit Agreement and the related loan documentation include, among other terms and
conditions, limitations
(subject to specified exclusions) on ABE South Dakotas ability to make asset dispositions;
merge or consolidate with or into another person or entity; create, incur, assume or be liable for
indebtedness; create, incur or allow liens on any property or assets; make investments; declare or
make specified restricted payments or dividends; enter into new material agreements;
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modify or terminate material agreements; enter into transactions with affiliates; change
its line of business; and establish bank accounts. Substantially all cash of ABE South Dakota is
required to be deposited into special, segregated project accounts subject to security interests to
secure obligations in connection with the Senior Credit Agreement. The Senior Credit Agreement
contains customary events of default and also includes an event of default for defaults on other
indebtedness by ABE South Dakota and certain changes of control. ABE South Dakota was in compliance
with all covenants at March 31, 2011.
We believe ABE South Dakota has sufficient financial resources available to fund current
operations, make debt service payments and fund capital expenditure requirements, including the
$1.0 million remaining for the rail infrastructure project at Huron, over the next 12 months.
CREDIT ARRANGEMENTS
Long-term debt consists of the following (in thousands, except percentages):
March 31, | ||||||||||||
2011 | March 31, | September 30, | ||||||||||
Interest Rate | 2011 | 2010 | ||||||||||
ABE Fairmont: |
||||||||||||
Senior credit facility variable |
3.65 | % | $ | 34,866 | $ | 45,050 | ||||||
Senior credit facility fixed |
7.53 | % | 20,000 | 20,000 | ||||||||
Seasonal line |
3.35 | % | | | ||||||||
Subordinate exempt facilities bonds fixed |
6.75 | % | 6,185 | 7,000 | ||||||||
61,051 | 72,050 | |||||||||||
ABE South Dakota: |
||||||||||||
Senior debt principal variable |
1.80 | % | 78,552 | 81,352 | ||||||||
Restructuring fee |
N/A | 3,000 | 3,000 | |||||||||
Additional carrying value of restructured debt |
N/A | 9,885 | 10,313 | |||||||||
91,437 | 94,665 | |||||||||||
Total outstanding |
$ | 152,488 | $ | 166,715 | ||||||||
Additional carrying value of restructured debt |
N/A | (9,885 | ) | (10,313 | ) | |||||||
Stated principal |
$ | 142,603 | $ | 156,402 | ||||||||
The estimated maturities of debt at March 31, is as follows (in thousands):
Amortization of | ||||||||||||
Additional Carrying | ||||||||||||
Stated | Value of | |||||||||||
Principal | Restructured Debt | Total | ||||||||||
2012 |
$ | 14,215 | $ | 837 | $ | 15,052 | ||||||
2013 |
14,215 | 1,693 | 15,908 | |||||||||
2014 |
12,881 | 2,439 | 15,320 | |||||||||
2015 |
13,815 | 2,505 | 16,320 | |||||||||
2016 |
80,367 | 2,411 | 82,778 | |||||||||
Thereafter |
7,110 | | 7,110 | |||||||||
Total debt |
$ | 142,603 | $ | 9,885 | $ | 152,488 | ||||||
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SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Note 1 to our consolidated financial statements contains a summary of our significant
accounting policies, many of which require the use of estimates and assumptions. Accounting
estimates are an integral part of the preparation of financial statements and are based upon
managements current judgment. We used our knowledge and experience about past events and certain
future assumptions to make estimates and judgments involving matters that are inherently uncertain
and that affect the carrying value of our assets and liabilities. We believe that of our
significant accounting policies, the following are noteworthy because changes in these estimates or
assumptions could materially affect our financial position and results of operations:
Fair Value of Financial Instruments
Financial instruments include cash, cash equivalents and restricted cash, interest rate swaps,
derivative financial instruments, accounts receivable, accounts payable, accrued expenses and
long-term debt. The fair value of the long-term debt is estimated based on anticipated interest
rates which management believes would currently be available to the Company for similar issues of
debt, taking into account the current credit risk of the Company and other market factors. The
Company believes the carrying value of the debt instruments at ABE Fairmont and ABE South Dakota
approximate fair value. The fair value of all other financial instruments is estimated to
approximate carrying value due to the short-term nature of these instruments.
Inventories
Corn, chemicals, supplies, work in process, ethanol and distillers grains inventories are
stated at the lower of weighted cost or market.
Property and Equipment
Property and equipment is carried at cost less accumulated depreciation computed using the
straight-line method over the estimated useful lives:
Office equipment
|
5-7 Years | |
Process equipment
|
10 Years | |
Buildings
|
40 Years |
Maintenance and repairs are charged to expense as incurred; major improvements and betterments
are capitalized. Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount on the asset may not be recoverable. An impairment
loss is recognized when estimated undiscounted future cash flows from operations are less than the
carrying value of the asset group. An impairment loss is measured by the amount by which the
carrying value of the asset exceeds the estimated fair value on that date.
Revenue Recognition
Ethanol revenue is recognized when product title and all risk of ownership is transferred to
the customer as specified in the contractual agreements with the marketers. At all of the Companys
plants, revenue is recognized upon the release of the product for shipment. Revenue from the sale
of co-products is recorded when title and all risk of ownership transfers to customers, which
generally occurs at the time of shipment. Co-products and related products are generally shipped
free on board (FOB) shipping point. Interest income is recognized as earned. In accordance with
the Companys agreements for the marketing and sale of ethanol and related products, commissions
due to the marketers are deducted from the gross sale price at the time of payment.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements.
GOVERNMENT PROGRAMS, TAX CREDITS AND TAX INCREMENT FINANCING
We have applied for income and sales tax incentives available under a Nebraska Advantage Act
Project Agreement. As of March 31, 2011, we have received approximately $3.2 million in refunds
under the Nebraska Advantage Act. We anticipate earning investment credits for certain sales taxes
paid on construction costs, up to 10% of the cost of the Fairmont plant construction, and up to 10%
of new asset additions. These investment credits can be used to offset Nebraska sales, use, and
income tax. Under the Nebraska Advantage Act, we also anticipate earning employment credits for 5%
of the annual costs of the newly created employment positions, which can be used to offset future
payroll taxes. We will continue to earn
additional investment and employment credits under the Nebraska Advantage Act through the tax
year ended September 30, 2014. These
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credits can be carried over until used, but will expire on
September 30, 2020. Although we may apply under several programs simultaneously and may be awarded
grants or other benefits from more than one program, some combinations of programs are mutually
exclusive. Under some state and federal programs, awards are not made to applicants in cases where
construction on the project has started prior to the award date. There is no guarantee that
applications will result in awards of grants or credits or deductions.
In December 2006, we received net proceeds of $6.7 million from tax incremental financing from
the Village of Fairmont, Nebraska. We anticipate paying off the outstanding obligation with future
property tax payments assessed on the Fairmont plant.
The State of South Dakota pays an incentive to operators of ethanol plants to encourage the
growth of the ethanol industry. The Huron plant is eligible to receive an aggregate of $9.7
million, payable up to $1 million per year. The amounts are dependent on annual allocations by the
State of South Dakota and the number of eligible plants. ABE South Dakota has historically received
a payment between $700,000 and $800,000 for the Huron plant per year. The State of South Dakota
has reduced the annual allocation for the remainder of the fiscal year so the annual payment is
expected to be approximately $600,000 for this fiscal year.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
COMMODITY PRICE RISK
We consider commodity price risk to be the impact of adverse changes in commodity prices on
our results of operations. We are subject to significant market risk with respect to the price of
ethanol and corn. For the quarter ended March 31, 2011, sales of ethanol represented 84.2% of our
total revenues and corn costs represented 78.4% of total cost of goods sold. In general, ethanol
prices are affected by the supply and demand for ethanol, the cost of ethanol production, the
availability of other fuel oxygenates, the regulatory climate and the cost of alternative fuels
such as gasoline. The price of corn is affected by weather conditions and other factors affecting
crop yields, farmer planting decisions and general economic, market and regulatory factors. At
March 31, 2011, the price per gallon of ethanol and the cost per bushel of corn on the Chicago
Board of Trade, or CBOT, were $2.66 and $6.93, respectively.
We are also subject to market risk on the selling prices of our distillers grains, which
represent 16.0% of our total revenues. These prices fluctuate seasonally when the price of corn or
other cattle feed alternatives fluctuate in price. The dried distiller grains spot price for
Nebraska and South Dakota local customers were $192 and $185 per ton, respectively, at March 31,
2011.
We are also subject to market risk with respect to our supply of natural gas that is consumed
in the ethanol production process. Natural gas costs represented 4.1% of total cost of goods sold
for the quarter ended March 31, 2011. The price of natural gas is affected by weather conditions
and general economic, market and regulatory factors. At March 31, 2011, the price of natural gas on
the NYMEX was $4.39 per mmbtu.
To reduce price risk caused by market fluctuations in the cost and selling prices of related
commodities, we have entered into forward purchase/sale contracts and derivative transactions. At
March 31, 2011 we guaranteed prices for our ethanol representing 36.6% of our ethanol gallons sold
through May 2011 by entering into flat-priced contracts. At March 31, 2011 we had entered into
forward sale contracts representing 38.1% of our expected distillers grains production and we had
entered into forward purchase contracts representing 18.2% of our current corn requirements through
June 2011. At March 31, 2011, our April gas usage prices were fixed with our natural gas providers.
The following represents a sensitivity analysis that estimates our annual exposure to market
risk with respect to our current corn and natural gas requirements and ethanol sales. Market risk
is estimated as the potential impact on operating income resulting from a hypothetical 10% change
in the current ethanol, distiller grains, corn, and natural gas prices. The results of this
analysis, which may differ from actual results, are as follows:
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Change in | ||||||||||||||||||||
Estimated at | Hypothetical | Annual | ||||||||||||||||||
Risk | Change in | Spot | Operating | |||||||||||||||||
Volume (1) | Units | Price | Price(2) | Income | ||||||||||||||||
(In millions) | (In millions) | |||||||||||||||||||
Ethanol |
123.6 | gallons | 10.0 | % | $ | 2.66 | $ | 32.9 | ||||||||||||
Distillers grains |
0.37 | tons | 10.0 | % | 189.00 | 6.9 | ||||||||||||||
Corn |
56.9 | bushels | 10.0 | % | 6.93 | 39.5 | ||||||||||||||
Natural gas |
4.1 | mmbtus | 10.0 | % | 4.39 | 1.8 |
(1) | The volume of ethanol at risk is based on the assumption that we will enter into contracts for 36.6% of our expected annual gallons capacity of 195 million gallons. The volume of distillers grains at risk is based on the assumption that we will enter into contracts for 38.1% of our expected annual distillers grains production of 592,000 tons. The volume of corn is based on the assumption that we will enter into forward contracts for 18.2% of our estimated current 69.6 million bushel annual requirement. The volume of natural gas at risk is based on the assumption that we will continue to lock in 22.4% gas usage. | |
(2) | Current spot prices include the CBOT price per gallon of ethanol and the price per bushel of corn, the NYMEX price per mmbtu of natural gas and our listed local advertised dried distillers grains price per ton as of March 31, 2011. |
INTEREST RATE/FOREIGN EXCHANGE RISK
Our future earnings may be affected by changes in interest rates due to the impact those
changes have on our interest expense on borrowings under our credit facilities. As of March 31,
2011, we had $113.4 million of outstanding borrowings with variable interest rates. With each 1%
change in interest rates our annual interest would change by $1.13 million.
We have no direct international sales. Historically all of our purchases have been denominated
in U.S. dollars. Therefore we do not consider future earnings subject to foreign exchange risk.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we conducted an evaluation, under the
supervision and with the participation of our chief executive officer, who is also our chief
financial officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934). Based on this evaluation, our chief executive
officer, who is also our chief financial officer, concluded that our disclosure controls and
procedures are effective to ensure that information required to be disclosed by us in reports that
we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission rules and forms
and to ensure that information required to be disclosed by the Company in the reports the Company
files or submits under the Exchange Act is accumulated and communicated to the Companys
management, including its principal executive and principal financial officer, to allow timely
decisions regarding required disclosures.
Changes in Internal Controls
There were no changes in our internal controls over financial reporting during our most
recently completed fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Stephenson v. Advanced BioEnergy, LLC. (Arbitration Matter)
As previously disclosed, in June 2009, Revis L. Stephenson III, the Companys former director,
Chairman of the Board and Chief Executive Officer, filed a demand for arbitration with the American
Arbitration Association (Stephenson Arbitration), alleging that the Company breached its
employment agreement, violated a covenant of good faith and fair dealing, and defamed him when it
terminated his employment agreement in January 2009.
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On February 23, 2011, the arbitrator in the proceeding issued an Interim Award. The
arbitrator found that the Companys January 2009 termination of Stephenson did not meet the
standard for termination for cause in Stephensons employment agreement.
Under the Interim Award, the Company would be required to pay Stephenson amounts that
otherwise would be due under his employment agreement for termination without cause, which are
equal to two times his base salary, an annual target bonus, and other benefits. The total
principal amount of the compensation was $777,832, (Compensation Award) minus several offsets
specified in the Interim Award, plus interest from the date of termination.
In addition, the arbitrator found that the Companys statement in its Current Report on Form
8-K dated January 20, 2009, filed with the Commission on January 26, 2009, that Stephenson was
terminated for cause was defamatory and awarded damages in the amount of $1,000,000 (Defamation
Award), plus interest from the date of termination. The arbitrator found the Company was not
liable for breach of any duty of good faith and fair dealing.
In the Interim Award, the arbitrator asked the parties to meet and confer to see if they could
reach an agreement on reasonable attorneys fees and costs to be awarded to Stephenson, plus
computations of damages and appropriate interest. The arbitrator stated that if the parties were
unable to reach agreements on these matters, then each party would be required to submit briefs
with its position to the arbitrator.
Stephenson and the Company were able to reach an agreement and entered into a stipulation
(Stipulation) with respect to costs and disbursements to be awarded Stephenson, the amount of the
offsets against the Compensation Award, and the calculation of interest on both the Compensation
Award and the Defamation Award. Nothing in the Stipulation waives or limits any right the Company
has to challenge or seek modification of either the Compensation Award or the Defamation Award.
The total amount the Company would be required to pay Stephenson under the Interim Award and the
Stipulation including interest through the date of the Interim Award is $2,098,082. Interest has
accrued since February 23, 2011, at the rate of $485.89 per day.
The parties were not able to reach an agreement regarding any legal fees to be awarded
Stephenson and so this issue has been briefed and submitted to the arbitrator. Stephenson argues
that approximately $1.5 million in attorneys fees should be added to the amounts set forth above
and paid to him by the Company. The Company argues that no attorneys fees should be awarded.
Although the Interim Award is not final, it is likely the arbitrator will issue a final award
with the same findings in the Interim Award, plus any attorneys fees that the arbitrator may award
to Stephenson. The parties have agreed to submit to mediation in an attempt to resolve the open
issues related to the matter. The Company currently expects the mediation to occur in late May
2011. If mediation is unsuccessful, the Company expects the arbitrator would issue a final award
in June 2011. The Company would then have the opportunity to ask a court to vacate the arbitration
award, although such motions are not often granted by the courts.
There can be no assurance that the Company will be able to successfully resolve the matters in
dispute before the arbitrator or that the arbitrator will not award attorneys fees to Stephenson.
Further, there can be no assurance that if the Company challenges or seeks modification of any
final award, that it would be successful.
Stephenson v Clean Energy Capital, LLC and Scott Brittenham (Federal Court)
In August 2009, Revis L. Stephenson III, the Companys former director, Chairman of the Board
and Chief Executive Officer, also filed a lawsuit, now in the United States District Court of the
District of Minnesota, against Clean Energy Capital, LLC (CEC) and Scott Brittenham, one of the
Companys directors. This lawsuit seeks damages against CEC and Brittenham and includes claims for
defamation, breach of fiduciary duty (based on the theory of the
fiduciary duty one director owes to another director), and tortious interference with contract based on statements
allegedly made by Brittenham and other representatives of CEC and its predecessor entities. The
lawsuit is in the pre-trial stage.
CEC and its affiliates own approximately 17.9 percent of the Company, and Brittenham is a
designee of CEC on the Board of the Company. The Company has entered into indemnification
agreements with all of its directors, including Brittenham. Brittenham has advised the Company
that it is required to indemnify him in the Stephenson lawsuit under Delaware law and the
indemnification agreement between the Company and him. The Company has not made any final
determination with respect to the scope or extent of its obligation to indemnify Brittenham in the
Stephenson lawsuit. Although the Company carries insurance, including directors and officers
insurance, and believes that it will have some coverage for any amount it may be required to
indemnify Brittenham, there can be no assurance that insurance will cover all or any part of any
amount it may be required to pay to Brittenham under its indemnification obligation.
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Item 1A. Risk Factors
There are no material changes from risk factors as previously discussed in our September 30,
2010 Annual Report on Form 10-K except as disclosed below.
We are involved in arbitration with our former chief executive officer and an interim award
against us has been issued. We may be required to indemnify a current director for claims made
against him in a matter brought by that former officer.
On February 23, 2011, the arbitrator in the arbitration proceeding brought by our former chief
executive officer issued an interim award against us. In addition, the former chief executive has
filed a lawsuit, now pending in the United States District Court of the District of Minnesota,
against Clean Energy Capital, LLC and Scott Brittenham, a director of the Company, seeking damages.
Brittenham has requested that we indemnify him with respect to any costs or expenses in that
proceeding. Each of these matters is described in Item 1, Legal Proceedings, in Part II of this
Form 10-Q. As discussed in Managements Discussion and Analysis, we have taken a second quarter
charge of approximately $2.1 million in connection with the arbitration. There can be no assurance
that our ultimate liability in the arbitration will not exceed the amount we have accrued. In
addition, we may be required to indemnify Brittenham in the lawsuit in an amount that exceeds any
insurance we have.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. [Removed and Reserved]
Not applicable.
Item 5. Other Information
Employment Agreement with Richard Peterson
On May 11, 2011, the Company entered into a Second Amended and Restated Employment Agreement
(2011 Employment Agreement) with Richard Peterson, Chief Executive Officer and Chief Financial
Officer. The 2011 Employment Agreement replaces the Amended and Restated Employment Agreement
dated December 11, 2007, as subsequently amended (the Prior Agreement) between the Company and
Peterson.
Under the 2011 Employment Agreement, Peterson will receive (i) an annual base salary of
$285,000 effective as of October 1, 2010, the first day of the Companys current fiscal year; (ii)
the right to participate in all employee benefit plans and programs of the Company; (iii) use of an
automobile while employed by the Company; (iv) three weeks annually of paid vacation time off in
accordance with the Companys normal policies; (v) reimbursement for all reasonable and necessary
out-of-pocket business, travel and entertainment expenses; and (vi) an annual cash performance
bonus of up to 37.5% of his base salary based on achievement of certain criteria established by the
Companys compensation committee.
All other provisions of the 2011 Employment Agreement, including payments to be made to
Peterson for termination, including (i) termination without cause by the Company after a change in
control or prior to June 18, 2012, or (ii) termination by Peterson for Good Reason after a change
in control or prior to June 18, 2012, are substantially identical to the provisions in effect under
the Prior Agreement as described in the Companys Proxy Statement for the 2011 Regular Meeting of
Members held on March 18, 2011 (2011 Proxy Statement), with payments adjusted for the increase in
Petersons compensation under the 2011 Employment Agreement.
Nonqualified Option and Unit Appreciation Rights for Peterson
The Compensation Committee of the Companys Board has also granted to Peterson an option to
purchase up to 150,000 Units of the Companys Member Units at various prices, along with a right, under certain
circumstances, to exchange the option for a cash payment equal to the appreciation on the value of
the Units over the exercise price.
Peterson has the right to purchase up to:
50,000 Units at $1.50 per Unit (Tranche 1);
50,000 Units at $3.00 per Unit (Tranche 2); and
50,000 Units at $4.50 per Unit (Tranche 3).
50,000 Units at $3.00 per Unit (Tranche 2); and
50,000 Units at $4.50 per Unit (Tranche 3).
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Each Tranche will vest at a rate of 10,000 Units (30,000 Units total) each year if Peterson
remains employed on May 11 of each year between 2012 through 2016. If Peterson dies or becomes
disabled during his employment with the Company, those Units that would have vested on the next May
11, would immediately vest.
If the Company experiences a change in control, all options immediately become fully vested if
the Company is not the surviving entity, or become fully vested if (i) the Company is the surviving
entity and (ii) within two years after the change in control, Peterson is terminated by the Company
without Cause (as defined below) or he resigns for Good Reason (defined in the Agreement as a
material reduction in his duties or his compensation, or a relocation of the Companys offices
greater than 50 miles). Under the option agreement, change in control has the same definition as
described in the 2011 Proxy Statement and as provided in the 2011 Employment Agreement.
Prior to a change in control of the Company and prior to the Units becoming tradable on a
national securities exchange, Peterson (or his heirs in the event of death) may only exercise the
option as to any vested Units during the 12-month period following his termination of employment as
a result of death or disability, or during the 3-month period following termination of employment
for any other reason other than Cause.
Peterson may exercise the options, to the extent vested, by giving notice to the Company and
paying the aggregate exercise price for the options exercised. Peterson may turn back Units
necessary to pay his tax withholding obligations resulting from the exercise. All options
immediately forfeit if Peterson is terminated for Cause, which includes his unlawful conduct,
failure to perform his duties after notice from the Board or breach of his fiduciary duties as an
officer of the Company.
In the event of a change in control of the Company, Peterson may, for 30 days beginning on the
date of the change in control, exercise the unit appreciation right granted to him in connection
with the option and receive cash equal to the appreciation on the number of Units then vested under
the option in excess of the exercise price, less required tax withholding, except that the Company
may substitute property received by the Unit holders for cash, and may delay payment of a portion
of the appreciation until such time as the Unit holders are paid any deferred purchase price for
their Units.
In the event the Units of the Company become tradable on a national securities exchange,
Peterson may thereafter, at any time during his employment and for the period following his
employment described above, exercise the unit appreciation right and receive a cash payment equal
to the appreciation on the number of Units then vested over the exercise price, less required tax
withholding. Any Units exercised under the unit appreciation right or the option reduce the number
of Units remaining available under the option.
To the extent not exercised, the option and unit appreciation rights expire on May 10, 2021,
(the tenth anniversary of the date of grant) or on the earliest of (i) the 90th day following
termination of employment other than for Cause, (ii) the first anniversary of termination of
employment as a result of death or disability, or (iii) 30 days following a change in control if
the Company is not the surviving entity.
Item 6. Exhibits
The exhibits filed herewith are set forth on the Exhibit Index filed as a part of this report
beginning immediately following the signatures.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ADVANCED BIOENERGY, LLC |
||||
Date: May 16, 2011 | By: | /s/ Richard R. Peterson | ||
Richard R. Peterson | ||||
Chief Executive Officer and President, Chief Financial Officer (Duly authorized signatory and Principal Financial Officer) |
||||
EXHIBIT INDEX
Exhibit | ||||
No. | Description | Method of Filing | ||
10.1
|
Master Loan Agreement between Farm Credit Services of America, FLCA and ABE Fairmont, LLC dated as of April 7, 2011. | Filed electronically | ||
10.2
|
Multiple Advance Term Loan Supplement between Farm Credit Services of America, FLCA and ABE Fairmont, LLC dated as of April 7, 2011. | Filed electronically | ||
10.3
|
Monitored Revolving Credit Supplement between Farm Credit Services of America, FLCA and ABE Fairmont, LLC dated as of April 7, 2011. | Filed electronically | ||
10.4
|
Revolving Credit Supplement between Farm Credit Services of America, FLCA and ABE Fairmont, LLC dated as of April 7, 2011. | Filed electronically | ||
10.5
|
Second Amended and Restated Employment Agreement dated as of May 11, 2011 between the Company and Richard Peterson. | Filed electronically | ||
10.6
|
Company Agreement with Richard Peterson Unit Appreciation Right with Tandem Nonqualified Unit Option dated May 15, 2011. | Filed electronically | ||
31
|
Rule 13a-14(a)/15d-14(a) Certification by Principal Executive Officer, Financial and Accounting Officer. | Filed Electronically | ||
32
|
Section 1350 Certifications. | Filed Electronically |
32