Attached files
| file | filename |
|---|---|
| EXCEL - IDEA: XBRL DOCUMENT - LAKE AREA CORN PROCESSORS LLC | Financial_Report.xls |
| EX-10.1 - LAKE AREA CORN PROCESSORS LLC | a101-thirdamendmentoffirst.htm |
| EX-32.2 - CERTIFICATION - LAKE AREA CORN PROCESSORS LLC | exhibit322-certification3x.htm |
| EX-31.2 - CERTIFICATION - LAKE AREA CORN PROCESSORS LLC | exhibit312-certification3x.htm |
| EX-10.3 - LAKE AREA CORN PROCESSORS LLC | a103-secondamendedandresta.htm |
| EX-10.2 - LAKE AREA CORN PROCESSORS LLC | a102-secondamendedandresta.htm |
| EX-32.1 - CERTIFICATION - LAKE AREA CORN PROCESSORS LLC | exhibit321-certification3x.htm |
| EX-31.1 - CERTIFICATION - LAKE AREA CORN PROCESSORS LLC | exhibit311-certification3x.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the quarterly period ended March 31, 2012 | |
o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
Commission file number 000-50254 | |
LAKE AREA CORN PROCESSORS, LLC | |||
(Exact name of registrant as specified in its charter) | |||
South Dakota | 46-0460790 | ||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||
46269 SD Highway 34 P.O. Box 100 Wentworth, South Dakota | 57075 | ||
(Address of principal executive offices) | (Zip Code) | ||
(605) 483-2676 | |||
(Registrant's telephone number, including area code) | |||
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. x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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).
x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | |
Non-accelerated filer x | Smaller Reporting Company o | |
(Do not check if a smaller reporting company) | ||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes x No
As of May 14, 2012, there are 29,620,000 membership units of the registrant outstanding.
INDEX
Page No. | |
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LAKE AREA CORN PROCESSORS, LLC
Consolidated Balance Sheets (Unaudited)
March 31, 2012 | December 31, 2011* | ||||||
ASSETS | |||||||
CURRENT ASSETS | |||||||
Cash and cash equivalents | $ | 1,264,982 | $ | 11,225,659 | |||
Accounts receivable | 4,134,414 | 4,259,385 | |||||
Other receivables | 122,463 | 172,296 | |||||
Inventory | 13,735,779 | 10,680,451 | |||||
Due from broker | 887,277 | 907,349 | |||||
Derivative financial instruments | 534,350 | 29,263 | |||||
Prepaid expenses | 133,693 | 126,031 | |||||
Total current assets | 20,812,958 | 27,400,434 | |||||
PROPERTY AND EQUIPMENT | |||||||
Land | 676,097 | 676,097 | |||||
Land improvements | 2,665,358 | 2,665,358 | |||||
Buildings | 8,088,853 | 8,088,853 | |||||
Equipment | 39,172,503 | 39,097,266 | |||||
Construction in progress | 31,253 | — | |||||
50,634,064 | 50,527,574 | ||||||
Less accumulated depreciation | (24,702,222 | ) | (24,053,888 | ) | |||
Net property and equipment | 25,931,842 | 26,473,686 | |||||
OTHER ASSETS | |||||||
Goodwill | 10,395,766 | 10,395,766 | |||||
Investments | 2,991,632 | 2,972,091 | |||||
Other | 133,920 | 150,875 | |||||
Total other assets | 13,521,318 | 13,518,732 | |||||
TOTAL ASSETS | $ | 60,266,118 | $ | 67,392,852 | |||
*Derived from audited financial statements. | |||||||
See Notes to Unaudited Consolidated Financial Statements.
3
March 31, 2012 | December 31, 2011* | ||||||
LIABILITIES AND MEMBERS’ EQUITY | |||||||
CURRENT LIABILITIES | |||||||
Accounts payable | $ | 3,004,802 | $ | 10,778,861 | |||
Accrued liabilities | 492,764 | 763,526 | |||||
Derivative financial instruments | 1,756,156 | 1,226,705 | |||||
Current portion of guarantee payable | 52,145 | 52,145 | |||||
Current portion of notes payable | 278,338 | 387,489 | |||||
Total current liabilities | 5,584,205 | 13,208,726 | |||||
LONG-TERM LIABILITIES | |||||||
Notes payable, net of current maturities | 375,303 | 446,166 | |||||
Guarantee payable, net of current portion | 43,266 | 43,266 | |||||
Total long-term liabilities | 418,569 | 489,432 | |||||
COMMITMENTS AND CONTINGENCIES | |||||||
MEMBERS’ EQUITY (29,620,000 units issued and outstanding) | 54,263,344 | 53,694,694 | |||||
TOTAL LIABILITIES AND MEMBERS' EQUITY | $ | 60,266,118 | $ | 67,392,852 | |||
*Derived from audited financial statements. | |||||||
See Notes to Unaudited Consolidated Financial Statements.
4
LAKE AREA CORN PROCESSORS, LLC
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended March 31, 2012 | Three Months Ended March 31, 2011 | ||||||
REVENUES | $ | 32,005,292 | $ | 35,241,656 | |||
COST OF REVENUES | 30,684,024 | 30,041,527 | |||||
GROSS PROFIT | 1,321,268 | 5,200,129 | |||||
OPERATING EXPENSES | 768,173 | 777,923 | |||||
INCOME FROM OPERATIONS | 553,095 | 4,422,206 | |||||
OTHER INCOME (EXPENSE) | |||||||
Interest and other income | 7,472 | 13,557 | |||||
Equity in net income of investments | 19,541 | 63,133 | |||||
Interest and other expense | (11,458 | ) | (64,402 | ) | |||
Total other income (expense) | 15,555 | 12,288 | |||||
NET INCOME | $ | 568,650 | $ | 4,434,494 | |||
BASIC AND DILUTED EARNINGS PER UNIT | $ | 0.02 | $ | 0.15 | |||
WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING FOR THE CALCULATION OF BASIC & DILUTED EARNINGS PER UNIT | 29,620,000 | 29,620,000 | |||||
See Notes to Unaudited Consolidated Financial Statements.
5
LAKE AREA CORN PROCESSORS, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31, 2012 | Three Months Ended March 31, 2011 | ||||||
OPERATING ACTIVITIES | |||||||
Net income | $ | 568,650 | $ | 4,434,494 | |||
Changes to net income affecting cash and cash equivalents | |||||||
Depreciation and amortization | 665,288 | 699,223 | |||||
Equity in net income loss of investments | (19,541 | ) | (63,133 | ) | |||
Gain on sale of property and equipment | — | (9,300 | ) | ||||
(Increase) decrease in | |||||||
Receivables | 174,804 | (754,434 | ) | ||||
Inventory | (3,055,328 | ) | (445,963 | ) | |||
Prepaid expenses | (7,662 | ) | (8,214 | ) | |||
Derivative financial instruments and due from broker | 44,436 | (620,710 | ) | ||||
Increase (decrease) in | |||||||
Accounts payable | (7,774,059 | ) | (2,358,593 | ) | |||
Accrued liabilities | (270,762 | ) | (289,431 | ) | |||
NET CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES | (9,674,174 | ) | 583,939 | ||||
INVESTING ACTIVITIES | |||||||
Purchase of property and equipment | (106,489 | ) | — | ||||
Sale of property and equipment | — | 9,300 | |||||
NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES | (106,489 | ) | 9,300 | ||||
FINANCING ACTIVITIES | |||||||
Increase in outstanding checks in excess of bank balance | — | 268,582 | |||||
Short-term notes payable issued | — | 358,000 | |||||
Principal payments on long-term notes payable | (180,014 | ) | (1,420,940 | ) | |||
NET CASH (USED FOR) FINANCING ACTIVITIES | (180,014 | ) | (794,358 | ) | |||
NET DECREASE IN CASH | (9,960,677 | ) | (201,119 | ) | |||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 11,225,659 | 637,804 | |||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 1,264,982 | $ | 436,685 | |||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | |||||||
Cash paid during the period for interest | $ | 10,204 | $ | 171,522 | |||
See Notes to Unaudited Consolidated Financial Statements
6
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2012 and 2011
NOTE 1 . NATURE OF OPERATIONS
Principal Business Activity
Lake Area Corn Processors, LLC and subsidiary (the Company) is a South Dakota limited liability company located in Wentworth, South Dakota. The Company was organized by investors to provide a portion of the corn supply for a 40 million-gallon (annual capacity) ethanol plant, owned by Dakota Ethanol, LLC (Dakota Ethanol). The Company sells ethanol and related products to customers located in North America.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited financial statements contained herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America although the Company believes that the disclosures are adequate to make the information not misleading.
In the opinion of management, all adjustments considered necessary for a fair presentation have been included in the accompanying financial statements. The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results to be expected for a full year.
These financial statements should be read in conjunction with the financial statements and notes included in the Company's audited financial statements for the year ended December 31, 2011, contained in the annual report on Form 10-K for 2011.
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of its wholly owned subsidiary, Dakota Ethanol. All significant inter-company transactions and balances have been eliminated in consolidation.
Revenue Recognition
Revenue from the production of ethanol and related products is recorded when title transfers to customers. Generally, ethanol and related products are shipped FOB shipping point, based on written contract terms between Dakota Ethanol and its customers. Collectability of revenue is reasonably assured based on historical evidence of collectability between Dakota Ethanol and its customers. Interest income is recognized as earned.
Shipping costs incurred by the Company in the sale of ethanol, dried distiller's grains and corn oil are not specifically identifiable and as a result, revenue from the sale of those products is recorded based on the net selling price reported to the Company from the marketer.
Cost of Revenues
The primary components of cost of revenues from the production of ethanol and related co-product are corn expense, energy expense (natural gas and electricity), raw materials expense (chemicals and denaturant), and direct labor costs.
Shipping costs on modified and wet distiller's grains are included in cost of revenues.
Inventory Valuation
Ethanol inventory, raw materials, work-in-process, and parts inventory are valued using methods which approximate the lower of cost (first-in, first-out) or market. Distillers grains and related products are stated at net realizable value. In the valuation of inventories and purchase and sale commitments, market is based on current replacement values except that it does not exceed net realizable values and is not less than net realizable values reduced by allowances for approximate normal profit margin.
7
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2012 and 2011
Investment in commodities contracts, derivative instruments and hedging activities
The Company is exposed to certain risks related to our ongoing business operations. The primary risks that we manage by using forward or derivative instruments are price risk on anticipated purchases of corn, natural gas and the sale of ethanol.
The Company is subject to market risk with respect to the price and availability of corn, the principal raw material we use to produce ethanol and ethanol by-products. In general, rising corn prices result in lower profit margins and, therefore, represent unfavorable market conditions. This is especially true when market conditions do not allow us to pass along increased corn costs to our customers. The availability and price of corn is subject to wide fluctuations due to unpredictable factors such as weather conditions, farmer planting decisions, governmental policies with respect to agriculture and international trade and global demand and supply.
Certain contracts that literally meet the definition of a derivative may be exempted from derivative accounting as normal purchases or normal sales. Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. Contracts that meet the requirements of normal purchases or sales are documented as normal and exempted from the accounting and reporting requirements of derivative accounting.
For transactions initiated prior to January 1, 2011, the Company applied the normal purchase and sales exemption under derivative accounting for forward purchases of corn. Corn purchase transactions initiated after December 31, 2010 are not exempted from the accounting and reporting requirements. As of March 31, 2012, the Company is committed to purchasing 4.6 million bushels of corn on a forward contract basis with an average price of $6.21 per bushel. Dakota Ethanol has a derivative financial instrument liability of approximately $1,756,000 related to the forward contracted purchases of corn. The corn purchase contracts represent 26% of the annual plant corn usage.
The Company enters into firm-price purchase commitments with some of our natural gas suppliers under which we agree to buy natural gas at a price set in advance of the actual delivery of that natural gas to us. Under these arrangements, we assume the risk of a price decrease in the market price of natural gas between the time this price is fixed and the time the natural gas is delivered. At March 31, 2012, we are committed to purchasing 480,000 MMBtu's of natural gas with an average price of $2.80 per MMBtu. We account for these transactions as normal purchases, and accordingly, do not mark these transactions to market. The natural gas purchases represent approximately 32% of the annual plant requirements.
The Company enters into short-term forward, option and futures contracts for corn and natural gas as a means of managing exposure to changes in commodity and energy prices. The Company enters into short-term forward, option and futures contracts for sales of ethanol to manage exposure to changes in energy prices. All of our derivatives are designated as non-hedge derivatives, and accordingly are recorded at fair value with changes in fair value recognized in net income. Although the contracts are considered economic hedges of specified risks, they are not designated as and accounted for as hedging instruments.
As part of our trading activity, The Company uses futures and option contracts offered through regulated commodity exchanges to reduce risk and we are exposed to risk of loss in the market value of inventories. To reduce that risk, we generally take positions using forward and futures contracts and options.
Derivatives not designated as hedging instruments at March 31, 2012 and December 31, 2011 were as follows:
Balance Sheet Classification | March 31, 2012 | December 31, 2011* | ||||||||
Forward contracts | Current Assets | $ | 11,349 | $ | 38,213 | |||||
Futures contracts | Current Assets | $ | 599,175 | $ | 1,012,825 | |||||
Forward contracts | (Current Liabilities) | $ | (1,767,505 | ) | $ | (1,264,918 | ) | |||
Futures contracts | (Current Liabilities) | $ | (64,825 | ) | $ | (983,562 | ) | |||
*Derived from audited financial statements.
8
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2012 and 2011
Realized and unrealized gains and losses related to derivative contracts related to corn and natural gas purchases are included as a component of cost of revenues and derivative contracts related to ethanol sales are included as a component of revenues in the accompanying financial statements.
Statement of Income | Three Months Ended March 31, | |||||||||
Classification | 2012 | 2011 | ||||||||
Net realized and unrealized gains (losses) related to purchase contracts: | ||||||||||
Futures contracts | Cost of Revenues | $ | 735,015 | $ | (2,415,807 | ) | ||||
Forward contracts | Cost of Revenues | $ | (807,610 | ) | $ | 321,517 | ||||
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.
Environmental Liabilities
Dakota Ethanol's operations are subject to environmental laws and regulations adopted by various governmental authorities in the jurisdiction in which it operates. These laws require Dakota Ethanol to investigate and remediate the effects of the release or disposal of materials at its locations. Accordingly, Dakota Ethanol has adopted policies, practices and procedures in the areas of pollution control, occupational health and the production, handling, storage and use of hazardous materials to prevent material environmental or other damage, and to limit the financial liability which could result from such events. Environmental liabilities are recorded when Dakota Ethanol's liability is probable and the costs can be reasonably estimated.
Recently Issued Accounting Pronouncements
ASU 2011-04, Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU supersedes most of the guidance in Topic 820, although many of the changes are clarifications of existing guidance or wording changes to align with IFRS 13. In addition, certain amendments in ASU 2011-04 change a particular principle or requirement for measuring fair value or disclosing information about fair value measurements. The amendments in ASU 2011-04 are effective for public entities for interim and annual periods beginning after December 15, 2011. The Company has adopted the above guidance and it has not affected the Company's consolidated financial position or results of operations.
ASU 2011-08, Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment. This ASU gives an entity the option in its annual goodwill impairment test to first assess revised qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company does not expect that the adoption of the above guidance will have a material impact on the Company's consolidated financial position or results of operations.
Reclassifications
Certain amounts on the 2011 financial statements have been reclassified to conform to the current year classification. Such reclassifications had no effect on previously reported net income.
9
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2012 and 2011
NOTE 3. INVENTORY
Inventory consisted of the following as of March 31, 2012 and December 31, 2011:
March 31, 2012 | December 31, 2011* | |||||||
Raw Materials | $ | 10,199,892 | $ | 7,617,243 | ||||
Finished Goods | 1,612,292 | 1,283,093 | ||||||
Work in process | 1,018,979 | 901,551 | ||||||
Parts inventory | 904,616 | 878,564 | ||||||
$ | 13,735,779 | $ | 10,680,451 | |||||
*Derived from audited financial statements.
NOTE 4. SHORT-TERM NOTE PAYABLE
Dakota Ethanol has a revolving promissory note from First National Bank of Omaha (FNBO) in the amount of $10,000,000. The note expires on May 1, 2012 and the amount available is subject to certain restrictive covenants establishing minimum reporting requirements, ratios, working capital, net worth and borrowing base requirements. Interest on the outstanding principal balances will accrue at 350 basis points above the 1 month LIBOR rate and is subject to a floor of 4.0 percent. The rate was 4.0 percent at March 31, 2012. There is a commitment fee of 0.4 percent on the unused portion of the $10,000,000 availability. In addition, the bank draws the checking account balance to a minimum balance on a daily basis. The excess cash pays down the balance or any shortfall is drawn upon the note as needed. The note is collateralized by the ethanol plant, its accounts receivable and inventory. On March 31, 2012 and December 31, 2011, Dakota Ethanol had $0 outstanding and $10,000,000 available to be drawn on the revolving promissory note.
On May 7, 2012, Dakota Ethanol renewed the revolving promissory note from First National Bank of Omaha (FNBO) in the amount of $10,000,000. The note expires on May 1, 2013 and the amount available is subject to certain restrictive covenants establishing minimum reporting requirements, ratios, working capital, net worth and borrowing base requirements. Interest on the outstanding principal balances will accrue at 315 basis points above the 1 month LIBOR rate and is not subject to a floor. There is a commitment fee of 0.25 percent on the unused portion of the $10,000,000 availability.
NOTE 5. LONG-TERM NOTES PAYABLE
Dakota Ethanol has a note payable to FNBO (Term Note 5).
As part of the note payable agreement, Dakota Ethanol is subject to certain restrictive covenants establishing minimum reporting requirements, ratios, working capital and net worth requirements. The note is collateralized by the ethanol plant and equipment, its accounts receivable and inventory. We are in compliance with our financial covenants as of March 31, 2012.
Term Note 5 is a reducing revolving note with an availability of $5,000,000. Interest on the outstanding principal balance will accrue at 350 basis points above the 1 month LIBOR rate and is subject to a floor of 4.0 percent. The rate was 4.0 percent at March 31, 2012. Dakota Ethanol may elect to borrow any principal amount repaid on Term Note 5 up to $5,000,000 subject to the terms of the agreement. Should Dakota Ethanol elect not to utilize this feature, the lender will assess an unused commitment fee of 0.4 percent on the unused portion of the note. Term Note 5 has a reducing feature through which the available amount of the note is reduced by $500,000 on the anniversary of the note. The note matures on May 1, 2014. On March 31, 2012 and December 31, 2011, Dakota Ethanol had $0 outstanding and $5,000,000 available to be drawn on Term Note 5.
On May 7, 2012, Dakota Ethanol restructured Term Note 5. Term Note 5 is a reducing revolving note with an availability of $5,000,000. Interest on the outstanding principal balances will accrue at 315 basis points above the 1 month LIBOR rate and is not subject to a floor. Dakota Ethanol may elect to borrow any principal amount repaid on Term Note 5 up to $5,000,000 subject to the terms of the agreement. Should Dakota Ethanol elect not to utilize this feature, the lender will assess an unused commitment fee of 0.25 percent on the unused portion of the note. Term Note 5 has a reducing feature through which the available amount of the note is reduced by $500,000 on the anniversary of the note starting May 1, 2013. The note matures on May 1, 2017.
10
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2012 and 2011
Dakota Ethanol issued a note payable related to the purchase of land adjacent to the plant site. The note was originally issued for $450,000. The note was paid in full on February 8, 2012. The note was payable in annual installments of $112,500 plus interest. Interest on the outstanding principal balances accrued at a fixed rate of 7.0 percent. The note was collateralized by the land.
Dakota Ethanol entered into two loan agreements for alternative financing for our corn oil extraction equipment as we had agreed with FNBO; one loan with Rural Electric Economic Development, Inc (REED) and the other loan with First District Development Company (FDDC).
The note to REED, originally for $1 million, has a fixed interest rate of 4.7%. The note requires monthly installments of $18,734 and matures on May 25, 2014. The note is secured by the oil extraction equipment.
The note to FDDC, originally for $200,000, has a fixed interest rate of 5.5%. The note requires monthly installments of $3,820 and matures on May 22, 2014. The note is secured by the oil extraction equipment.
The balances of the notes payable are as follows:
March 31, 2012 | December 31, 2011* | |||||||
Note payable to First National Bank, Omaha | ||||||||
Term Note 5 | $ | — | $ | — | ||||
Note payable - Land | — | 112,500 | ||||||
Note payable - REED | 462,842 | 513,210 | ||||||
Note payable - FDDC | 93,435 | 103,519 | ||||||
Note payable - Other | 97,364 | 104,426 | ||||||
653,641 | 833,655 | |||||||
Less current portion | (278,338 | ) | (387,489 | ) | ||||
$ | 375,303 | $ | 446,166 | |||||
*Derived from audited financial statements
Minimum principal payments for the next four years are estimated as follows:
Years Ending March 31, | Amount | |||
2013 | $ | 278,338 | ||
2014 | 292,147 | |||
2015 | 77,650 | |||
2016 | 5,506 | |||
NOTE 6. FAIR VALUE MEASUREMENTS
The Company complies with the fair value measurements and disclosures standard which defines fair value, establishes a framework for measuring fair value, and expands disclosure for those assets and liabilities carried on the balance sheet on a fair value basis.
The Company's balance sheet contains derivative financial instruments that are recorded at fair value on a recurring basis. Fair value measurements and disclosures require that assets and liabilities carried at fair value be classified and disclosed according to the process for determining fair value. There are three levels of determining fair value.
Level 1 uses quoted market prices in active markets for identical assets or liabilities.
Level 2 uses observable market based inputs or unobservable inputs that are corroborated by market data.
11
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2012 and 2011
Level 3 uses unobservable inputs that are not corroborated by market data.
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
Derivative financial instruments. Commodity futures and options contracts are reported at fair value utilizing Level 1 inputs. For these contracts, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the CME and NYMEX markets. Over-the-counter commodity options contracts are reported at fair value utilizing Level 2 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 over-the-counter markets. Forward purchase contracts are reported at fair value utilizing Level 2 inputs. For these contracts, the Company obtains fair value measurements from local grain terminal bid values. The fair value measurements consider observable data that may include live trading bids from local elevators and processing plants which are based off the CME markets.
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011 segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
March 31, 2012 | ||||||||||||||||
Assets: | ||||||||||||||||
Derivative financial instruments, futures contracts | $ | 599,175 | $ | 599,175 | $ | — | $ | — | ||||||||
forward contracts | $ | 11,349 | $ | — | $ | 11,349 | $ | — | ||||||||
Liabilities: | ||||||||||||||||
Derivative financial instruments, futures contracts | $ | (64,825 | ) | $ | (64,825 | ) | $ | — | $ | — | ||||||
forward contracts | $ | (1,767,505 | ) | $ | — | $ | (1,767,505 | ) | $ | — | ||||||
December 31, 2011* | ||||||||||||||||
Assets: | ||||||||||||||||
Derivative financial instruments, futures contracts | $ | 1,012,825 | $ | 1,012,825 | $ | — | $ | — | ||||||||
forward contracts | $ | 38,213 | $ | — | $ | 38,213 | $ | — | ||||||||
Liabilities: | ||||||||||||||||
Derivative financial instruments, futures contracts | $ | (983,562 | ) | $ | (983,562 | ) | $ | — | $ | — | ||||||
forward contracts | $ | (1,264,918 | ) | $ | — | $ | (1,264,918 | ) | $ | — | ||||||
*Derived from audited financial statements.
Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when
12
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2012 and 2011
there is evidence of impairment). Financial assets and financial liabilities measured at fair value on a non-recurring basis were not significant at March 31, 2012.
Disclosure requirements for fair value of financial instruments require disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non recurring basis are discussed above. The methodologies for other financial assets and financial liabilities are discussed below.
The Company believes the carrying amount of cash and cash equivalents (level 1), accounts receivable (level 2), other receivables (level 2), due from broker (level 1), accounts payable (level 2) and short-term debt (level 3) approximates fair value due to the short maturity of these instruments.
The carrying amount of long-term obligations (level 3) at March 31, 2012 of $749,052 had an estimated fair value of approximately $750,125 based on estimated interest rates for comparable debt. The carrying amount of long-term obligations at December 31, 2011 of $929,066 had an estimated fair value of approximately $930,139 based on estimated interest rates for comparable debt.
NOTE 7. RELATED PARTY TRANSACTIONS
Dakota Ethanol has a 7% interest in RPMG, and Dakota Ethanol has entered into an ethanol marketing agreement for the exclusive rights to market, sell and distribute the entire ethanol inventory produced by Dakota Ethanol. The marketing fees are included in net revenues.
Dakota Ethanol has entered into a dried distiller's grains marketing agreement with RPMG for the exclusive rights to market, sell and distribute the entire dried distiller's grains inventory produced by Dakota Ethanol. The marketing fees are included in net revenues.
Dakota Ethanol has entered into a corn oil marketing agreement with RPMG for the exclusive rights to market, sell and distribute the entire corn oil inventory produced by Dakota Ethanol. The marketing fees are included in net revenues.
Sales and marketing fees related to the agreements are as follows:
Three Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
Sales ethanol | $ | 24,212,362 | $ | 29,602,306 | ||||
Sales distiller's grains and corn oil | 1,345,013 | 1,707,718 | ||||||
Marketing fees ethanol | 46,713 | 60,756 | ||||||
Marketing fees distillers grains and corn oil | 9,027 | 19,227 | ||||||
March 31, 2012 | December 31, 2011 | |||||||
Amounts due included in accounts receivable | $ | 2,909,638 | $ | 4,149,286 | ||||
NOTE 8. SUBSEQUENT EVENTS
During May 2012, the Company declared and paid a distribution to its members of $1,481,000, or $0.05 per capital unit.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We prepared the following discussion and analysis to help you better understand our financial condition, changes in our financial condition, and results of operations for the three month period ended March 31, 2012, compared to the same period of the prior year. This discussion should be read in conjunction with the consolidated financial statements and the Management's Discussion and Analysis section for the fiscal year ended December 31, 2011, included in the Company's Annual Report on Form 10-K for 2011.
Disclosure Regarding Forward-Looking Statements
This report contains historical information, as well as forward-looking statements that involve known and unknown risks and relate to future events, our future financial performance, or our expected future operations and actions. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "future," "intend," "could," "hope," "predict," "target," "potential," "continue" or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions based on current information and involve numerous assumptions, risks and uncertainties. Our actual results or actions may differ materially from these forward-looking statements for many reasons, including the reasons described in this report and our annual report on Form 10-K for the fiscal year ended December 31, 2011.
The cautionary statements referred to in this section also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We undertake no duty to update these forward-looking statements, even though our situation may change in the future. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits completely and with the understanding that our actual future results may be materially different from what we currently expect. We qualify all of our forward-looking statements by these cautionary statements.
Overview
Lake Area Corn Processors, LLC is a South Dakota limited liability company that owns and manages its wholly-owned subsidiary, Dakota Ethanol, L.L.C. Dakota Ethanol, L.L.C. owns and operates an ethanol plant located near Wentworth, South Dakota that has a nameplate production capacity of 40 million gallons of ethanol per year. Lake Area Corn Processors, LLC is referred to in this report as "LACP," the "company," "we," or "us." Dakota Ethanol, L.L.C. is referred to in this report as "Dakota Ethanol" "we" "us" or the "ethanol plant."
The ethanol industry was previously impacted by the Volumetric Ethanol Tax Credit (VEETC) which is frequently referred to as the blenders' credit. This blenders' credit provided a tax credit of 45 cents per gallon of ethanol that was blended with gasoline. This incentive expired on December 31, 2011 and was not renewed. Management has not seen any significant effects of the expiration of VEETC and believes that the expiration will not have a significant effect on ethanol demand going forward provided gasoline prices remain high and the renewable fuels use requirement of the Federal Renewable Fuels Standard (RFS) is maintained. The RFS requires that a certain amount of renewable fuels, including ethanol, must be used in the United States each year. However, if the RFS is repealed, ethanol demand may be significantly impacted. Recently, there have been proposals in Congress to reduce or eliminate the RFS. Management does not believe that these proposals will be adopted in the near future. However, if the RFS is reduced or eliminated, the market price and demand for ethanol will likely decrease which could negatively impact our financial performance.
On May 7, 2012, we executed amended loan agreements with our primary lender, First National Bank of Omaha ("FNBO"). We executed a Third Amendment of First Amended and Restated Construction Loan Agreement, a Second Amended and Restated Promissory Note (Long Term Reducing Revolver) and a Second Amended and Restated Revolving Promissory Note (Operating Line of Credit). These amended loan agreements extended the maturity dates of our revolving lines of credit, removed the minimum interest rate provisions of our loans and reduced the fee we pay on the unused portions of our loans. These amended loan agreements were effective as of May 1, 2012.
Results of Operations
Comparison of the Fiscal Quarters Ended March 31, 2012 and 2011
The following table shows the results of our operations and the percentage of revenues, cost of revenues, operating
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expenses and other items to total revenues in our consolidated statements of operations for the fiscal quarters ended March 31, 2012 and 2011:
2012 | 2011 | |||||||||||||
Income Statement Data | Amount | % | Amount | % | ||||||||||
Revenue | $ | 32,005,292 | 100.0 | $ | 35,241,656 | 100.0 | ||||||||
Cost of Revenues | 30,684,024 | 95.9 | 30,041,527 | 85.2 | ||||||||||
Gross Profit | 1,321,268 | 4.1 | 5,200,129 | 14.8 | ||||||||||
Operating Expense | 768,173 | 2.4 | 777,923 | 2.2 | ||||||||||
Income from Operations | 553,095 | 1.7 | 4,422,206 | 12.5 | ||||||||||
Other Income | 15,555 | — | 12,288 | — | ||||||||||
Net Income | $ | 568,650 | 1.8 | $ | 4,434,494 | 12.6 | ||||||||
Revenues
Revenue from ethanol sales decreased by approximately 18% during our first quarter of 2012 compared to the same period of 2011. Revenue from distillers grains increased by approximately 42% during our first quarter of 2012 compared to the same period of 2011. Revenue from corn oil remained relatively steady during our first quarter of 2012 compared to the same period of 2011.
Ethanol
Our ethanol revenue was approximately $5.4 million less during our first quarter of 2012 compared to our first quarter of 2011, a decrease of approximately 18%. This decrease in ethanol revenue was due in part to a decrease in ethanol sales of approximately 949,000 gallons, a decrease of approximately 7%, during our first quarter of 2012 compared to our first quarter of 2011. Management attributes this decrease in the volume of ethanol sold during the first quarter of 2012 compared with the same period of 2011 to a carryover of excess ethanol inventory at the end of 2010 that was shipped in 2011. Management anticipates that ethanol sales will remain at their current levels going forward.
The decrease in ethanol revenue was also due, in part, to a decrease in the average price we received for our ethanol of approximately $0.27 per gallon, a decrease of approximately 12%, during our first quarter of 2012 compared to our first quarter of 2011. Management attributes this decrease in ethanol prices to a decrease in demand during the first quarter of 2012 compared with the same period of 2011. Management anticipates that ethanol prices will remain at their current levels due to recent reductions in the United States ethanol stocks which may increase demand for ethanol along with higher corn prices. However, if the RFS is eliminated or reduced, it could negatively impact demand for ethanol which could result in lower ethanol prices.
Management believes that ethanol demand in the United States is affected by what is referred to as the "blend wall." Most gasoline used in the United States is blended at a rate of 10% ethanol and 90% gasoline. The blend wall refers to the maximum amount of ethanol that can be used in the United States, based on the total gasoline demand, when ethanol is blended at a rate of 10%. It is estimated that 130 billion gallons of gasoline are consumed in the United States each year. Therefore, the blend wall is approximately 13 billion gallons of ethanol. Because of the blend wall, domestic ethanol demand is not expected to increase significantly without the use of more mid-level blends of ethanol. Management believes that the recent push to increase ethanol demand in the United States through E15 may not result in a significant increase in ethanol demand due to infrastructure restrictions which limit the availability of E15. Further, management believes that gasoline retailers may refuse to carry E15 due to the fact that not all standard vehicles can use E15 and due to potential liability for gasoline retailers if customers use E15 in vehicles that are not approved for E15 along with other state and federal regulatory hurdles. Without increases in domestic ethanol demand, we may experience periods when ethanol supply exceeds ethanol demand which may negatively impact the price we receive for our ethanol.
Distillers Grains
Our total distillers grains sales increased significantly for our first quarter of 2012 compared to the same period of 2011. We sold less distillers grains in the dried form and more distillers grains in the modified/wet form during our first quarter of 2012
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compared to the same period of 2011. For our first quarter of 2012, approximately 7% of our total revenue from distillers grains was attributable to revenue from distillers grains in the dried form, and approximately 93% of our total revenue from distillers grains was attributable to revenue from distillers grains in the modified/wet form. For our first quarter of 2011, approximately 24% of our total revenue from distillers grains was attributable to revenue from distillers grains in the dried form and approximately 76% of our total revenue from distillers grains was attributable to revenue from distillers grains in the modified/wet form. This change in the composition of our distillers grains sales was due to market conditions in the distillers grains market, including increased local demand for modified/wet distillers grains, as well as increased efficiencies in our methods of production, which made it more profitable for us to produce distillers grains in the modified/wet form than in the dried form. The average price we received for our dried distillers grains was approximately 94% greater during our first quarter of 2012 compared to the same period of 2011, an increase of approximately $95 per ton. The average price we received for our modified/wet distillers grains was approximately 29% greater for our first quarter of 2012 compared to the same period of 2011, an increase of approximately $43 per ton. Management attributes this increase in the selling price of our distillers grains to increased corn prices and increased distillers grains demand. Since distillers grains are typically used as a feed substitute for corn, as the price of corn increases, the price of and demand for distillers grains also increase.
Management expects to continue to make decisions as to whether our distillers grains will be marketed as dried distillers grains as opposed to modified/wet distillers grains based on market conditions. These market conditions include supply and demand factors as well as the price difference between dried distillers grains and modified/wet distillers grains along with the higher natural gas costs associated with drying our distillers grains.
Corn Oil
Our corn oil revenue was approximately the same during our first quarter of 2012 compared to our first quarter of 2011. Our total pounds of corn oil sold increased by approximately 16% during our first quarter of 2012 compared to the same period of 2011, primarily due to improved operation and efficiency of the corn oil extraction equipment. Management anticipates that our corn oil sales will remain at their current levels into the foreseeable future. Offsetting the increase in corn oil sales, the average price we received for our corn oil decreased by approximately 12% for our first quarter of 2012 compared to the same period of 2011. Management attributes this decrease in corn oil prices with weaker corn and soybean oil markets in 2012. Management anticipates corn oil prices will continue at their current price levels in the near future.
Cost of Revenues
The primary raw materials we use to produce ethanol and distillers grains are corn and natural gas. Our cost of revenues remained relatively steady for our first quarter of 2012 compared to the same period of 2011. Our average cost per bushel of corn increased by approximately 9% for our first quarter of 2012 compared to our first quarter of 2011, an increase of approximately $0.49 per bushel of corn. Management attributes this increase in corn costs with higher market corn prices and decreased corn carryover from the 2010/2011 crop year. We used approximately the same number of bushels of corn during our first quarter of 2012 as during the same period of 2011.
Our cost of revenues related to natural gas decreased by approximately $494,000, a decrease of approximately 27%, for our first quarter of 2012 compared to our first quarter of 2011. This decrease was due partly to a decrease in market natural gas prices during our first quarter of 2012 compared to the same period of 2011. Our average cost per MMBtu of natural gas during our first quarter of 2012 was lower than the cost per MMBtu during our first quarter of 2011 by $1.15, or approximately 23%. Management anticipates that natural gas prices may increase slightly in future years as overall demand returns to a more typical level. We anticipate higher natural gas prices during the winter months due to increased natural gas demand for heating needs which typically results in premium natural gas pricing during the winter months.
We also used less natural gas during our first quarter of 2012 compared to the same period of 2011 due to the unusually mild winter season and the fact that we were producing less distillers grains in the dried form than during 2011. We used approximately 5% less natural gas, a decrease of approximately 18,000 MMBtu of natural gas, during our first quarter of 2012 compared to the same period of 2011. Management anticipates that our natural gas consumption will remain at current levels into the foreseeable future.
Operating Expense
Our operating expenses were higher for our first quarter of 2012 compared to the same period of 2011 due primarily to higher professional fees and expenses related to public relations.
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Other Income and Expense
Our interest expense was lower for our first quarter of 2012 compared to the same period of 2011 because we had less debt outstanding. We had less interest income during our first quarter of 2012 compared to the same period of 2011 due to having less cash on hand during the 2012 period.
Changes in Financial Condition for the Three Months Ended March 31, 2012.
Current Assets
Our current assets were lower at March 31, 2012 compared to December 31, 2011 primarily due to decreased cash on hand, offset by an increase in inventories. The decrease in our cash on hand is tied to cash requirements to pay for corn deliveries at year end that were deferred until 2012 and decreased net income during the 2012 period due to tighter operating margins in the ethanol industry. This decrease was partially offset by an increase in inventory between December 31, 2011 and March 31, 2012. The increase in inventory was the result of more corn on hand that was carried at a higher value and higher valued ethanol inventory at March 31, 2012.
Property and Equipment
Our net property and equipment was approximately the same at March 31, 2012 compared to December 31, 2011. We did not make any material capital expenditures or any significant capital write-downs during the three months ended March 31, 2012 that impacted the value of our property and equipment.
Current Liabilities
Our accounts payable was lower at March 31, 2012 compared to December 31, 2011 because our corn suppliers typically seek to defer payments for corn that is delivered at the end of the year for tax purposes. These deferred payments were made early in our first quarter of 2012. Our accrued liability was lower at March 31, 2012 compared to December 31, 2011 because we reduced our liability for damages to the hopper car fleet we returned to the leasing company at the end of 2011. Our derivative financial instruments liability was higher at March 31, 2012 compared to December 31, 2011 because of increased unrealized losses we had outstanding on our derivative instruments at March 31, 2012. The current portion of our notes payable was lower at March 31, 2012 compared to December 31, 2011 because of ongoing payments we have made on our notes payable.
Long-Term Liabilities
Our long-term liabilities were lower at March 31, 2012 compared to December 31, 2011 because of our continuing payments on our various long-term promissory notes.
Liquidity and Capital Resources
Our main sources of liquidity are cash from our continuing operations and amounts we have available to draw on our revolving lines of credit. Management does not anticipate that we will need to raise additional debt or equity financing in the next twelve months and management believes that our current sources of liquidity will be sufficient to continue our operations during that time period. We do not anticipate making any significant capital expenditures in the next 12 months other than ordinary repair and replacement of equipment in our ethanol plant.
Currently, we have two revolving loans which allow us to borrow funds for working capital. These two revolving loans are described in greater detail below in the section entitled "Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Indebtedness." As of March 31, 2012, we had $0 outstanding and $15,000,000 available to be drawn on these revolving loans. Based on current management forecasts, management anticipates that this is sufficient to maintain our liquidity and continue our operations for the next 12 months and beyond.
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The following table shows cash flows for the three months ended March 31, 2012 and 2011:
Three Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
Net cash provided by (used for) operating activities | $ | (9,674,174 | ) | $ | 583,939 | |||
Net cash provided by (used for) investing activities | (106,489 | ) | 9,300 | |||||
Net cash (used for) financing activities | (180,014 | ) | (794,358 | ) | ||||
Cash Flow From Operations. Our operating activities used a significant amount of cash during the three months ended March 31, 2012 compared to the same period of 2011, primarily due to decreased net income during the 2012 period along with higher corn prices which increased our inventory. We also had approximately a $7.8 million decrease in accounts payable related to deferred corn payments that we made after the end of our 2011 fiscal year which used cash during the 2012 period compared to approximately a $2.4 million decrease in accounts payable in the prior year.
Cash Flow From Investing Activities. Our investing activities used cash during the three months ended March 31, 2012 due to a purchase of equipment related to the installation of a platform scale at the plant.
Cash Flow From Financing Activities. We used less cash for our financing activities during the three months ended March 31, 2012 compared to the same period of 2011 due to decreased payments on our long-term debt.
Indebtedness
First National Bank of Omaha (FNBO) is our primary lender. We have two loans outstanding with FNBO, a short-term revolving loan and a long-term revolving loan. In May 2012, we executed amendments to our FNBO revolving loans which extended the terms of these loans, reduced the interest rates payable under the loans and reduced the fee that we are charged on the unused portions of the loans. The material terms of these loans, as amended, are described below.
We also have two loans that we used to offset the cost of our corn oil extraction equipment which totaled $1,200,000 and we have a long-term loan related to a piece of property that we purchased adjacent to our ethanol plant. The specifics of each credit facility are discussed below.
Short-Term Debt Sources
We have a short-term revolving promissory note with FNBO that expired on May 1, 2012 and was subsequently extended until May 1, 2013. The principal amount of this short-term revolving promissory note is $10 million. However, the maximum amount we can draw on this short-term loan is limited by a borrowing base calculation, described in our loan agreements, based on a percentage of our inventory and accounts receivable less certain accounts payable and letters of credit that we may have outstanding from time to time. We agreed to pay a variable interest rate on the revolving promissory note at an annual rate 350 basis points above the one month London Interbank Offered Rate (LIBOR), adjusted monthly. Pursuant to our May 2012 loan amendments, this rate was reduced to 315 basis points above the one month LIBOR effective as of May 1, 2012. The revolving promissory note was subject to a minimum interest rate of 4.0% per year, however, this minimum interest rate was removed in our May 2012 loan amendments. The interest rate for this loan at March 31, 2012 was the minimum interest rate of 4.0%. We were required to pay a fee of 0.4% on the unused portion of the revolving promissory note. This unused commitment fee was reduced in the May 2012 loan amendments to 0.25%. The revolving promissory note is collateralized by the ethanol plant, its accounts receivable and inventory. As of March 31, 2012, we had $0 outstanding on our revolving promissory note and $10,000,000 available to be drawn.
Long-Term Debt Sources
We restructured our long-term revolving loan that we refer to as Term Note 5 in June 2011. Term Note 5 was restructured into a $5,000,000 loan with an interest rate that accrues at 350 basis points above the one month LIBOR, adjusted monthly. The interest rate was reduced by our May 2012 loan amendments to 315 basis points above the one month LIBOR. Term Note 5 is subject to a minimum interest rate of 4.0% per year. This minimum interest rate was removed in our May 2012 loan amendments. The credit limit on Term Note 5 reduces each year by $500,000 until the maturity date on May 1, 2014. However, this maturity date was extended by our May 2012 loan amendments to May 1, 2017 and the annual reductions will not start until May 1, 2013. Therefore, the funds available for us to draw on Term Note 5 will decrease each year, starting on May 1, 2013. If in any year we have a principal balance outstanding on Term Note 5 in excess of the new credit limit, we must make a payment to FNBO such
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that the amount outstanding on Term Note 5 does not exceed the new credit limit. We were required to pay a fee of 0.4% on the unused portion of Term Note 5. This fee was reduced to 0.25% in our May 2012 loan amendments. On March 31, 2012, we had $0 outstanding and $5,000,000 available to be drawn on this loan. As of March 31, 2012, interest accrued on Term Note 5 at the minimum interest rate of 4.0% per year.
We also have a long-term debt obligation related to our purchase of an additional 135 acres of land pursuant to a land purchase contract. The total cost of this additional land was $550,000. We paid the final installment on this note in February 2012. Therefore, as of March 31, 2012, we had $0 remaining to be paid pursuant to this land purchase contract.
We have a long-term debt obligation on a portion of a tax increment revenue bond series issued by Lake County, South Dakota of which we were the recipient of the proceeds. The portion for which we are obligated is currently estimated at $172,000. Taxes levied on our property are used for paying the debt service on the bonds. We are obligated to pay any shortfall in debt service on the bonds should the property taxes collected not be sufficient to pay the entire debt service. The interest rate on the bonds is 7.75% annually. The bonds require semi-annual payments of interest on December 1 and June 1, in addition to a payment of principal on December 1 of each year. While our obligation under the guarantee is expected to continue until maturity in 2018, such obligation may cease at some point in time if the property on which the plant is located appreciates in value to the extent that Lake County is able to collect a sufficient amount in taxes to cover the principal and interest payments on the taxable bonds. The principal balance outstanding was approximately $883,095 as of March 31, 2012.
Subordinated Debt
We raised a total of $1,200,000 in subordinated loans to help offset the cost of our corn oil extraction equipment from two different parties. We secured $1,000,000 in financing for the corn oil extraction equipment from the Rural Electric Economic Development, Inc. (REED) and $200,000 from the First District Development Company (FDDC). We closed on these loans on May 22, 2009. We agreed to pay 4.70% interest on the $1,000,000 loan from REED and 5.5% interest on the $200,000 FDDC loan. Both loans are amortized over a period of five years and both loans require monthly payments. The principal balance of the REED loan was approximately $463,000 as of March 31, 2012. The principal balance of the FDDC loan was approximately $93,000 as of March 31, 2012.
Covenants
Our credit facilities with FNBO are subject to various loan covenants. If we fail to comply with these loan covenants, FNBO can declare us to be in default of our loans. The material loan covenants applicable to our credit facilities are our fixed charge coverage ratio, our minimum net worth and minimum working capital requirements. We are required to maintain a fixed charge coverage ratio of no less than 1.10 to 1.0. This fixed charge coverage ratio compares our EBITDA adjusted earnings, as defined in our credit agreements, with our scheduled principal and interest payments on our outstanding debt obligations, including our subordinated debt. We are also required to maintain at least $4.8 million in working capital and maintain a minimum net worth of $20 million.
As of March 31, 2012, we were in compliance with all of our loan covenants. Management's current financial projections indicate that we will be in compliance with our financial covenants for the next 12 months and we expect to remain in compliance thereafter. Management does not believe that it is reasonably likely that we will fall out of compliance with our material loan covenants in the next 12 months. If we fail to comply with the terms of our credit agreements with FNBO, and FNBO refuses to waive the non-compliance, FNBO may require us to immediately repay all amounts outstanding on our loans.
Application of Critical Accounting Policies
Management uses estimates and assumptions in preparing our consolidated financial statements in accordance with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Of the significant accounting policies described in the notes to our consolidated financial statements, we believe that the following are the most critical:
Derivative Instruments
We enter into short-term forward grain, option and futures contracts as a means of securing corn and natural gas for the ethanol plant and managing exposure to changes in commodity and energy prices. We enter into short-term forward, option and futures contracts for sales of ethanol to manage exposure to changes in energy prices. All of our derivatives are designated as non-hedge derivatives, and accordingly are recorded at fair value with changes in fair value recognized in net income. Although the contracts are considered economic hedges of specified risks, they are not designated as and accounted for as hedging instruments.
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As part of our trading activity, we use futures and option contracts offered through regulated commodity exchanges to reduce our risk and we are exposed to risk of loss in the market value of inventories. To reduce that risk, we generally take positions using cash and futures contracts and options.
Unrealized gains and losses related to derivative contracts for corn and natural gas purchases are included as a component of cost of revenues and derivative contracts related to ethanol sales are included as a component of revenues in the accompanying financial statements. The fair values of derivative contracts are presented on the accompanying balance sheet as derivative financial instruments.
Lower of cost or market accounting for inventory and forward purchase contracts
With the significant change in the prices of our main inputs and outputs, the lower of cost or market analysis of inventories and purchase commitments can have a significant impact on our financial performance.
The impact of market activity related to pricing of corn and ethanol will require us to continuously evaluate the pricing of our inventory and purchase commitments under a lower of cost or market analysis.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to the impact of market fluctuations associated with commodity prices as discussed below. We have no exposure to foreign currency risk as all of our business is conducted in U.S. Dollars. We have loans that are subject to variable interest rates, however, they are currently accruing interest at minimum interest rates which based on current market conditions is expected to continue for the foreseeable future. We use derivative financial instruments as part of an overall strategy to manage market risk. We use cash, futures and option contracts to hedge changes to the commodity prices of corn and natural gas. We do not enter into these derivative financial instruments for trading or speculative purposes, nor do we designate these contracts as hedges for accounting purposes.
Commodity Price Risk
We are exposed to market risk from changes in commodity prices. Exposure to commodity price risk results from our dependence on corn and natural gas in the ethanol production process. We seek to minimize the risks from fluctuations in the prices of corn and natural gas through the use of hedging instruments. In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate. Although we believe our hedge positions accomplish an economic hedge against our future purchases, they are not designated as such for hedge accounting purposes, which would match the gain or loss on our hedge positions to the specific commodity purchase being hedged. We are marking to market our hedge positions, which means as the current market price of our hedge positions changes, the gains and losses are immediately recognized in our cost of revenues.
The immediate recognition of hedging gains and losses can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged. We recorded a increase to our cost of revenues of approximately $73,000 related to derivative instruments for the quarter ended March 31, 2012. We recorded an increase to our cost of revenues of approximately $2.1 million related to derivative instruments for the quarter ended March 31, 2011. There are several variables that could affect the extent to which our derivative instruments are impacted by price fluctuations in the cost of corn or natural gas. However, it is likely that commodity cash prices will have the greatest impact on the derivatives instruments with delivery dates nearest the current cash price.
As of March 31, 2012, we were committed to purchasing approximately 4.6 million bushels of corn valued at approximately $28.5 million using forward contracts. These corn purchases represent approximately 26% of our expected corn usage for the next 12 months As corn prices move in reaction to market trends and information, our income statement will be affected depending on the impact such market movements have on the value of our derivative instruments. Depending on market movements, crop prospects and weather, these price protection positions may cause immediate adverse effects to our financial results, but are designed to produce long-term positive growth for us.
As of March 31, 2012, we were committed to purchasing approximately 480,000 MMBtus of natural gas during our 2012 fiscal year, valued at approximately $1.3 million. The natural gas purchases represent approximately 32% of the annual plant
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requirements.
A sensitivity analysis has been prepared to estimate our exposure to corn and natural gas price risk. Market risk related to these factors is estimated as the potential change in income resulting from a hypothetical 10% adverse change in the average cost of our corn and natural gas prices and average ethanol price as of March 31, 2012, net of the forward and future contracts used to hedge our market risk for corn and natural gas usage requirements. The volumes are based on our expected use and sale of these commodities for a one year period from March 31, 2012. The results of this analysis, which may differ from actual results, are as follows:
Estimated Volume Requirements for the next 12 months (net of forward and futures contracts) | Unit of Measure | Hypothetical Adverse Change in Price | Approximate Adverse Change to Income | ||||||||
Ethanol | 49,000,000 | Gallons | 10 | % | $ | 10,339,000 | |||||
Corn | 16,282,985 | Bushels | 10 | % | $ | 10,062,885 | |||||
Natural Gas | 920,000 | MMBTU | 10 | % | $ | 228,160 | |||||
For comparison purposes, our sensitivity analysis for our 2011 fiscal year is set forth below.
Estimated Volume Requirements for the next 12 months (net of forward and futures contracts) | Unit of Measure | Hypothetical Adverse Change in Price | Approximate Adverse Change to Income | ||||||||
Ethanol | 49,000,000 | Gallons | 10 | % | $ | 10,192,000 | |||||
Corn | 15,065,059 | Bushels | 10 | % | $ | 9,340,337 | |||||
Natural Gas | 1,220,000 | MMBTU | 10 | % | $ | 435,540 | |||||
ITEM 4. CONTROLS AND PROCEDURES.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosures.
Our management, including our Chief Executive Officer (the principal executive officer), Scott Mundt, along with our Chief Financial Officer (the principal financial officer), Rob Buchholtz, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2012. Based on this review and evaluation, these officers believe that our disclosure controls and procedures are effective in ensuring that material information related to us is recorded, processed, summarized and reported within the time periods required by the forms and rules of the Securities and Exchange Commission.
For the fiscal quarter ended March 31, 2012, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time in the ordinary course of business, Dakota Ethanol or Lake Area Corn Processors may be named as a defendant in legal proceedings related to various issues, including, worker's compensation claims, tort claims, or contractual disputes. We are not currently involved in any material legal proceedings, directly or indirectly, and we are not aware of any claims pending or threatened against us or any of the managers that could result in the commencement of material legal proceedings.
ITEM 1A. RISK FACTORS.
None.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. Mine Safety Disclosures.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
The following exhibits are filed as part of this report.
Exhibit No. | Exhibit | |
10.1 | Third Amendment of First Amended and Restated Construction Loan Agreement between Dakota Ethanol, L.L.C. and First National Bank of Omaha dated May 1, 2012.* | |
10.2 | Second Amended and Restated Revolving Promissory Note (Operating Line of Credit) between Dakota Ethanol, L.L.C. and First National Bank of Omaha dated May 1, 2012.* | |
10.3 | Second Amended and Restated Promissory Note (Long Term Reducing Revolver) between Dakota Ethanol, L.L.C. and First National Bank of Omaha dated May 1, 2012.* | |
31.1 | Certificate Pursuant to 17 CFR 240.13a-14(a)* | |
31.2 | Certificate Pursuant to 17 CFR 240.13a-14(a)* | |
32.1 | Certificate Pursuant to 18 U.S.C. Section 1350* | |
32.2 | Certificate Pursuant to 18 U.S.C. Section 1350* | |
101 | The following financial information from Lake Area Corn Processors, LLC's Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011, (ii) Consolidated Statements of Income for the three months ended March 31, 2012 and 2011, (iii) Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011, and (iv) the Notes to Consolidated Financial Statements.** | |
* Filed herewith.
** Furnished herewith
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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.
LAKE AREA CORN PROCESSORS, LLC | |||
Date: | May 14, 2012 | /s/ Scott Mundt | |
Scott Mundt | |||
President and Chief Executive Officer (Principal Executive Officer) | |||
Date: | May 14, 2012 | /s/ Rob Buchholtz | |
Rob Buchholtz | |||
Chief Financial Officer (Principal Financial and Accounting Officer) | |||
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