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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

Form 10-Q

 

 

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2013

or

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number: 000-52421

 

 

ADVANCED BIOENERGY, LLC

(Exact name of Registrant as Specified in its Charter)

 

 

 

Delaware		20-2281511
(State or Other Jurisdiction of Incorporation or Organization)		(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 Registrant’s 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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of 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  x    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. (Check one):

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		x  (Do not check if a smaller reporting company)		Smaller reporting company		¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of February 1, 2014, the number of outstanding units was 25,410,851.

 

 

 

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ADVANCED BIOENERGY, LLC

FORM 10-Q

Index

 

		Page
Part I. Financial Information
Item 1. Financial Statements			3
Consolidated Balance Sheets			3
Consolidated Statements of Operations			4
Consolidated Statement of Changes in Members’ Equity			5
Consolidated Statements of Cash Flows			6
Notes to Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 3. Quantitative and Qualitative Disclosures About Market Risk			33
Item 4. Controls and Procedures			34
Part II. Other Information
Item 1. Legal Proceedings			35
Item 1A. Risk Factors			35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			35
Item 3. Defaults Upon Senior Securities			36
Item 4. Mine Safety Disclosure			36
Item 5. Other Information			36
Item 6. Exhibits			36
Signatures			37
Exhibit Index			38

 

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ADVANCED BIOENERGY, LLC & SUBSIDIARIES

Consolidated Balance Sheets

(Dollars in thousands)

 

		December 31,				September 30,
		2013				2013
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	23,365			$	27,796
Accounts receivable:
Trade accounts receivable			9,074				8,541
Other receivables			109				108
Inventories			5,437				4,538
Prepaid expenses			1,121				741
Current portion of restricted cash			13,773				10,961
Total current assets			52,879				52,685
Property and equipment, net			56,153				58,645
Other assets			1,051				1,211
Total assets		$	110,083			$	112,541
LIABILITIES AND MEMBERS’ EQUITY
Current liabilities:
Accounts payable		$	5,540			$	5,745
Accrued expenses			4,324				3,770
Distribution payable			—				7,877
Current portion of long-term debt (stated principal amount of $2,911 and $71,735 at December 31, 2013 and September 30, 2013, respectively)			5,407				77,847
Total current liabilities			15,271				95,239
Other liabilities			71				79
Long-term debt (stated principal amount of $68,047 at December 31, 2013)			71,024				—
Total liabilities			86,366				95,318
Members’ equity:
Members’ capital, no par value, 25,410,851 units issued and outstanding			60,835				60,835
Accumulated deficit			(37,118	)			(43,612	)
Total members’ equity			23,717				17,223
Total liabilities and members’ equity		$	110,083			$	112,541

See notes to consolidated financial statements.

 

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ADVANCED BIOENERGY, LLC & SUBSIDIARIES

Consolidated Statements of Operations

(in thousands, except per unit data)

(Unaudited)

 

		Three Months Ended
		December 31,				December 31,
		2013				2012
Net sales
Ethanol and related products		$	47,987			$	59,491
Other			250				250
Total net sales			48,237				59,741
Cost of goods sold			40,098				62,337
Gross profit (loss)			8,139				(2,596	)
Selling, general and administrative			1,084				2,126
Operating income (loss)			7,055				(4,722	)
Other income (expense)			(93	)			54
Interest income			10				7
Interest expense			(478	)			(1,585	)
Income (loss) from continuing operations			6,494				(6,246	)
Income from discontinued operations			—				78,877
Net income		$	6,494			$	72,631
Weighed average units outstanding - basic			25,411				25,101
Weighed average units outstanding - diluted			25,411				25,101
Income (loss) from continuing operations per unit - basic and diluted		$	0.26			$	(0.25	)
Income from discontinued operations per unit-basic and diluted			—				3.14
Income per unit - basic and diluted		$	0.26			$	2.89
Distributions declared per unit		$	—			$	4.15

 

See notes to consolidated financial statements.

 

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ADVANCED BIOENERGY, LLC & SUBSIDIARIES

Consolidated Statements of Changes in Members’ Equity

For the Three Months Ended December 31, 2013

(Dollars in thousands)

(Unaudited)

 

		Member				Members’				Accumulated
		Units				Capital				Deficit				Total
MEMBERS’ EQUITY - September 30, 2013			25,410,851			$	60,835			$	(43,612	)		$	17,223
Net income			—				—				6,494				6,494
MEMBERS’ EQUITY - December 31, 2013			25,410,851			$	60,835			$	(37,118	)		$	23,717

 

 

 

See notes to consolidated financial statements

 

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ADVANCED BIOENERGY, LLC & SUBSIDIARIES

Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)

 

		Three Months Ended
		December 31,				December 31,
		2013				2012
Cash flows from operating activities:
Net income		$	6,494			$	72,631
Adjustments to reconcile net income to operating activities cash flows:
Depreciation			2,714				2,714
Amortization of deferred financing costs			23				44
Amortization of deferred revenue and rent			(8	)			(119	)
Amortization of additional carrying value of debt			(639	)			(494	)
Unit compensation expense			—				276
(Gain) loss on disposal of assets			6				(76,688	)
Loss on warrant derivative liability			—				1,416
Change in working capital components:
Accounts receivable			(534	)			8,389
Inventories			(899	)			3,947
Prepaid expenses			(380	)			475
Accounts payable			(205	)			(3,514	)
Accrued expenses			554				(1,909	)
Net cash provided by operating activities			7,126				7,168
Cash flows from investing activities:
Purchase of property and equipment			(228	)			(771	)
Proceeds from sale of assets, net of transaction costs			—				155,039
Change in other assets			160				—
Change in restricted cash			(2,812	)			3,128
Net cash provided by (used in) investing activities			(2,880	)			157,396
Cash flows from financing activities:
Payments on debt			(800	)			(50,306	)
Exercise of warrant			—				799
Distribution to members			(7,877	)			(104,511	)
Net cash used in financing activities			(8,677	)			(154,018	)
Net increase (decrease) in cash and cash equivalents			(4,431	)			10,546
Beginning cash and cash equivalents			27,796				11,210
Ending cash and cash equivalents		$	23,365			$	21,756
Supplemental disclosure of cash flow information:
Cash paid for interest		$	755			$	1,299
Supplemental disclosure of non-cash financing and investing activities:
Exercise of options from distribution proceeds		$	—			$	432
Note receivable settled from distribution proceeds			—				513

 

See notes to consolidated financial statements.

 

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ADVANCED BIOENERGY, LLC & SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013 and 2012

(Unaudited)

1. Organization and Significant Accounting Policies

The consolidated financial statements include the accounts of Advanced BioEnergy, LLC (“ABE” or the “Company”) and its wholly owned operating 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 accompanying unaudited consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles, or GAAP, for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The interim financial statements should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended September 30, 2013. The financial information as of December 31, 2013 and the results of operations for the three months ended December 31, 2013 are not necessarily indicative of the results for the fiscal year ending September 30, 2014. In the opinion of management, the interim financial statements reflect all normal recurring adjustments necessary for fair presentation. Certain items in the December 31, 2012 statement of operations have been reclassified to match the presentation on the Form 10-K for fiscal 2013 and do not affect net income.

The Company currently operates three ethanol production facilities in the U.S. with a combined production capacity of 85 million gallons per year. The Company acquired existing facilities in Aberdeen, South Dakota (9 million gallons) and Huron, South Dakota (32 million gallons) in November 2006 and began operations at the 44 million gallon Aberdeen expansion facility in January 2008.

The Company, through ABE Fairmont, also owned a production facility in Fairmont, NE. On December 7, 2012, the Company and ABE Fairmont sold the production facility in Fairmont, NE to Flint Hills Resources, LLC. See Note 3 of the financial statements for further description of the transaction. In accordance with the guidance under ASC Topic 205, section 20 Discontinued Operations, the results of operations for ABE Fairmont are disclosed as discontinued operations.

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 Company’s cash balances are maintained in bank depositories and periodically exceed federally insured limits. The Company has not experienced losses in these accounts. The Company’s restricted cash includes cash held for debt service under the terms of its debt agreements, a deposit for a rail car sublease, as well as cash held in an escrow account relating to the sale of the Fairmont facility. The escrow account totals $8.0 million and has a scheduled release date in June 2014.

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.

 

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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 incorporating 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 Chicago Board of Trade (“CBOT’) and New York Mercantile Exchange (“NYMEX”) markets.

The Company calculated the fair value of the warrants using the Black-Scholes valuation model. During the three months ended December 31, 2012, the Company recognized a loss of $1,416,000, related to the change in the fair value of the warrant derivative liability. On November 1, 2012, the warrant was exercised and the Company issued 532,671 units. Prior to its exercise, the warrant’s value increased in the first quarter of fiscal 2013 due to the pending sale of the Fairmont facility.

The following table reflects the activity for the warrant derivative, the only liability measured at fair value using Level 3 inputs, for the three months ended December 31, 2012 (amounts in thousands):

 

		2012
Beginning balance, October 1		$	75
Loss related to the change in fair value			1,416
Transfer to equity upon exercise			(1,491	)
Ending balance, December 31		$	—

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 customer’s 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 Company’s 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.

 

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In addition, certain derivative financial instruments that meet the criteria for derivative accounting treatment also qualify for a scope exception to derivative accounting, as they are considered normal purchases and sales. The availability of this exception is based on the assumption that the hedging party has the ability and it is probable to deliver or take delivery of the underlying item. Derivatives that are considered to be normal purchases and sales are exempt from derivative accounting treatment, and are accounted for under accrual accounting.

Inventories

Chemicals, supplies, work in process, ethanol and distillers grains inventories are stated at the lower of weighted average 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			3-7 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. Under the terms of the marketing agreements with Gavilon, revenue is recognized when product is loaded into rail cars or trucks for shipment. Revenue was previously 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. Co-products are normally shipped free on board (“FOB”) shipping point. Interest income is recognized as earned. In accordance with the Company’s 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. Unit warrants are considered unit equivalents and are considered in the diluted income-per-unit computation, but have been excluded from the computations as they are exercisable only under certain limited circumstances.

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.

 

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Discontinued Operations

The Company classified the results of operations of the Fairmont facility as discontinued operations in the first quarter of fiscal 2013 as a result of the sale of the Fairmont production facility in December 2012, and removed the operating results of the Fairmont facility from continuing operations for all periods presented.

Risks and Uncertainties

The supply and demand for ethanol are impacted by federal and state legislation and regulation, most significantly the Renewable Fuels Standard (“RFS”), and any changes in legislation or regulation could cause the demand for ethanol to decline or its supply to increase, which could have a material adverse effect on our business, results of operations and financial condition, and the ability to operate at a profit.

In November 2013, the U.S. Environmental Protection Agency proposed a reduction of the original 2014 corn-based ethanol blending volume requirements to approximately 13.0 billion gallons per year, subject to a 60 day comment period. This is a reduction from the 2013 requirement of 13.8 billion gallons for corn-based ethanol, and the original 2014 volumes of 14.4 billion gallons. The Company is uncertain as to the potential impact these proposed changes may have on the Company and the overall ethanol industry.

2. ABE South Dakota Liquidity and Management’s Plans

As of September 30, 2013, ABE South Dakota had not replenished the debt service reserve under its senior loan to the greater of six months of principal and interest or $3.0 million, or satisfied a non-financial requirement, both of which constituted events of default under its senior credit agreement. The senior lenders waived the events of default until December 31, 2013.

As of December 31, 2013, ABE South Dakota funded the debt service reserve to the required level of $3.0 million and stopped accruing default interest, which totaled $1.1 million. ABE South Dakota paid the default interest in January 2014, and the senior lenders waived the non-financial default until June 30, 2014. The Company expects that the non-financial requirement will be cured in the next quarter.

At December 31, 2013, ABE South Dakota had working capital of $20.6 million, excluding current principal due. Net working capital, excluding current principal due, increased by $8.0 million since September 2013.

ABE South Dakota intends to continue its discussions with the senior lenders regarding its overall capital structure and long-term solutions to its obligations under the senior credit agreement in advance of the debt’s maturity in March 2016. The Company believes that a successful long-term solution would include a restructuring or refinancing of the debt, and could involve a reduction of principal and an additional equity infusion into ABE South Dakota by the Company. We believe we have adequate existing liquidity and cash flows from operations to fund capital requirements and the minimum annual principal and interest payments required under the terms of the senior credit agreement for at least the next 12 months.

3. Discontinued Operations

On October 15, 2012, ABE Fairmont (“Seller”), the Company, Flint Hills Resources Fairmont, LLC, a Delaware limited liability company (“Flint Hills” or “Buyer”), and Flint Hills Resources, LLC, a Delaware limited liability company, signed an Asset Purchase Agreement under which ABE Fairmont agreed to sell to Buyer, substantially all of the assets of ABE Fairmont (the “Asset Sale”), pursuant to the terms and conditions of the Asset Purchase Agreement. The Asset Sale was completed on December 7, 2012.

Cash consideration for the Asset Sale consisted of $160.0 million, plus Seller’s inventory value of $10.7 million, for the finished products, raw materials, ingredients and certain other supplies located at Seller’s

 

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facility. Of the total proceeds payable at closing, $12.5 million was placed in escrow to serve as security to satisfy the Seller’s and the Company’s indemnification obligations to the Buyer, and the Company received approximately $157.2 million. The Company has received $4.5 million of the escrow through December 31, 2013.

The Company used these proceeds to repay the outstanding debt principal and interest of $39.8 million as of the closing date and to pay the outstanding transaction costs of approximately $2.4 million. The Company will have no continuing involvement in the cash flows of the Fairmont facility.

The remaining sale-related Fairmont assets included in the consolidated balance sheets as of December 31, 2013 and September 30, 2013 are disclosed below (amounts in thousands):

 

		As of				As of
		December 31, 2013				September 30, 2013
Current portion of restricted cash/escrow		$	8,000			$	8,000
Current assets of discontinued operations		$	8,000			$	8,000

Summarized preliminary revenues and expenses included in discontinued operations in the Statements of Operations for the three months ended December 31, 2013 and 2012 are included in the following table (amounts in thousands):

 

		Three Months Ended
		December 31, 2013				December 31, 2012 (1)
Net sales
Ethanol and related products		$	—			$	74,099
Total net sales			—				74,099
Cost of goods sold			—				70,583
Gross profit			—				3,516
Selling, general and administrative			—				1,124
Operating income			—				2,392
Other income			—				206
Interest income			—				6
Interest expense			—				(415	)
Income from operations of discontinued components			—				2,189
Gain on disposal of discontinued components			—				76,688
Income from discontinued operations		$	—			$	78,877

 

(1)	Period ended December 31, 2012 includes only 67 days of activity.

 

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The gain on disposal of discontinued operations in fiscal 2013 is included in Income from Discontinued Operations on the Statement of Operations. The gain on disposal is composed of the following items (in thousands):

 

Proceeds:
Cash proceeds		$	157,249
Escrow			12,500
Inventory holdback			1,071
Total Proceeds			170,820
Assets Sold:
Property, plant and equipment, net			83,097
Inventory			10,864
Restricted cash			673
Deferred financing costs			396
Prepaid expenses			140
Deferred income			(3,422	)
Total Assets Sold			91,748
Transaction costs			2,384
Gain on Disposal of Discontinued Operations		$	76,688

4. Inventories

A summary of inventories is as follows (in thousands):

 

		December 31, 2013				September 30, 2013
Chemicals		$	843			$	792
Work in process			1,032				1,018
Ethanol			1,497				858
Distillers grain			566				311
Supplies and parts			1,499				1,559
Total		$	5,437			$	4,538

5. Property and Equipment

A summary of property and equipment is as follows (in thousands):

 

		December 31, 2013				September 30, 2013
Land		$	1,811			$	1,811
Buildings			9,886				9,886
Process equipment			103,158				102,971
Office equipment			1,391				1,357
Construction in process			80				117
			116,326				116,142
Accumulated depreciation			(60,173	)			(57,497	)
Property and equipment, net		$	56,153			$	58,645

 

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6. Debt

A summary of debt is as follows (in thousands, except percentages):

 

		December 31, 2013 Interest Rate				December 31, 2013				September 30, 2013
ABE South Dakota:
Senior debt principal - variable			4.24	%		$	67,882			$	68,632
Restructuring fee			N/A				3,076				3,103
Additional carrying value of restructured debt			N/A				5,473				6,112
Total outstanding							76,431				77,847
Additional carrying value of restructured debt			N/A				(5,473	)			(6,112	)
Stated principal						$	70,958			$	71,735

The estimated maturities of debt at December 31 are as follows (in thousands):

 

						Amortization of
						Additional Carrying
		Stated				Value of
		Principal				Restructured Debt				Total
2014		$	2,911			$	2,496			$	5,407
2015			3,187				2,394				5,581
2016			64,860				583				65,443
Total debt		$	70,958			$	5,473			$	76,431

Letter of Credit

In connection with the execution of a rail car sublease, the Company, as parent of ABE South Dakota, agreed to post a $2.5 million irrevocable and non-transferable standby letter of credit on May 4, 2012 for the benefit of Gavilon as security for the payment obligations of ABE South Dakota under certain agreements with Gavilon. The Company has deposited $2.5 million in a restricted account as collateral for this letter of credit and has classified it as restricted cash.

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, and amended on December 9, 2011, 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 an 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. The interest accrued on outstanding term and working capital loans under the previous credit agreement were reduced to zero. ABE South Dakota agreed to pay a $3.0 million restructuring fee to the lenders due at the earlier of March 31, 2016 and the date on which the loans are repaid in full. ABE South Dakota recorded the restructuring fee as non-interest bearing debt on its consolidated balance sheets. See Additional Carrying Value of Restructured Debt below.

The principal amount of the term loan facility is payable in quarterly payments of $750,000, with the remaining principal amount fully due and payable on March 31, 2016. ABE South Dakota is also obligated to pay a waiver fee to the senior lenders of $275,000, payable in installments in fiscal 2014 and 2015. The Company has recorded this fee as non-interest bearing debt on its consolidated balance sheet, and is amortizing it against interest expense over the remaining term of the loan.

 

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As described in Note 2, at December 31, 2013, ABE South Dakota was in default of the provisions of its Senior Credit Agreement due to its failure to satisfy a non-financial obligation. The lenders waived the non-financial default until June 30, 2014. The Company expects that the violation will be cured in the next quarter.

ABE South Dakota has the option to select the interest rate on the senior term loan between base rate and euro-dollar rates for maturities of one to six months. Base rate loans bear interest at the administrative agent’s base rate plus an applicable margin of 3.0%. Euro-dollar loans bear interest at LIBOR plus the applicable margin of 4.0%. As of December 31, 2013, ABE South Dakota had selected the LIBOR rate for a period of one month. Under the terms of the Senior Credit Agreement, ABE South Dakota accrued an additional 2% default interest charge through December 31, 2013, that it paid in January 2014.

ABE South Dakota’s obligations under the Senior Credit Agreement are secured by a first-priority security interest in the equity and assets of ABE South Dakota.

ABE South Dakota is allowed to make equity distributions (other than certain tax distributions) to ABE only if ABE South Dakota meets 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 Dakota’s 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.

Additional Carrying Value of Restructured Debt

Since the future maximum undiscounted cash payments on the amended and restated senior credit facility (including principal, interest and the restructuring fee) exceeded the adjusted carrying value at the time of the restructuring, no gain for the forgiven interest was recorded, the carrying value was not adjusted and the modification of terms was 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 has resulted in the additional carrying value being amortized as a reduction in interest expense over the term of the loan, the Company’s effective interest rate over the term of the restructuring note agreement is approximately 0.26% over LIBOR (0.50 % at December 31, 2013), prior to any default interest.

7. Major Customers

The operating subsidiary of the Company, ABE South Dakota, entered into marketing agreements (“Ethanol Marketing Agreements”) with Gavilon, LLC, a commodity marketing firm, and affiliated companies (collectively “Gavilon”), on May 4, 2012 (amended on July 31, 2012). The Ethanol Marketing Agreements require that the subsidiary sell to Gavilon all of the denatured fuel-grade ethanol produced at the South Dakota plants. The terms of the Ethanol Marketing Agreements began on August 1, 2012, and expire on December 31, 2015.

ABE South Dakota is party to a co-product marketing agreement with Dakotaland Feeds, LLC (“Dakotaland Feeds”), whereby 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 had an agreement with Hawkeye

 

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Gold, LLC to market the distillers grains produced at the ABE South Dakota Aberdeen plants through June 30, 2013. ABE South Dakota is party to an agreement with Gavilon to market the dried distillers grains from the Aberdeen plant, effective July 1, 2013 until July 31, 2016.

Sales and receivables from the ABE South Dakota’s major customers were as follows (in thousands):

 

		December 31,				December 31,
		2013				2012
Gavilon-Ethanol and Distillers Grains
Three months revenues		$	42,796			$	43,494
Receivable balance at period end			8,362				4,633
Hawkeye Gold - Distillers Grains
Three months revenues		$	—			$	8,731
Receivable balance at period end			—				676
Dakotaland - Distillers Grains
Three months revenues		$	3,058			$	5,605
Receivable balance at period end			414				1,003

8. 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 Company’s 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 0.2 million bushels of corn in which the futures or basis price was not locked, the Company had entered into the following fixed price forward contracts at December 31, 2013 (in thousands):

 

Quantity (000s)

Amount

Period Covered Through

Corn (bushels)

Purchase Contracts

1,295

$

5,467

March 31, 2014

Ethanol (gallons)

Sale Contracts

2,310

3,786

March 31, 2014

Distillers grains (tons)

Sale Contracts

11

2,429

January 31, 2014

Corn Oil (pounds)

Sale Contracts

144

41

January 31, 2014

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 while changes in market price of corn-related items are reflected in cost of goods sold. There was no futures activity during the quarters presented.

9. One-time Termination Benefit

Subsequent to the sale of its Fairmont facility in fiscal 2013, the Company implemented a cost reduction program reducing the numbers of its headquarters staff to align its staffing with the smaller remaining operations. Some of the affected employees were required to provide services to the Company through various dates until June 30, 2013. In connection with the expected debt restructuring at ABE South Dakota, some employees will continue to provide services until the debt negotiations with the senior lenders at ABE South Dakota are resolved. The Company has also accrued benefits due to the chief executive officer for services to be provided through June 2014 under his amended employment agreement signed in January 2013.

 

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In connection with this cost reduction program, the Company has recognized administrative expense of $0.1 million in fiscal 2014, with an additional $0.3 million expected through June 2014.

At December 31, the accrued liability associated with the one-time termination benefits consisted of the following (in thousands):

 

		2013				2012
Beginning balance at October 1		$	994			$	—
Charges			135				516
Payments			—				—
Ending balance at December 31		$	1,129			$	516

10. Members’ Equity

Employment Agreements

In January 2013, the Company awarded its Chief Executive Officer a unit appreciation right for 200,000 units that was approved by the Company’s unit holders on March 22, 2013 at the Company’s Regular Meeting of Members. The UAR vests 1/18 per month over an 18-month period beginning December 7, 2012 so long as Mr. Peterson remains employed by the Company, and will be paid in cash upon such time as ABE sells all or substantially all the assets of the South Dakota plants. The UAR was issued for no consideration and had a grant price of $1.15 per unit at the time of the grant. The grant price for the UAR will be reduced by any distribution received by the Company’s unit holders from (i) the $12.5 million placed in escrow or (ii) the $10 million of cash reserved by the Company in connection with the sale of the Fairmont plant, or (iii) any other cash dividend received by the Company’s unit holders from the cash reserves at Advanced BioEnergy, LLC. The grant price will also be reduced in the event the $12.5 million of escrow proceeds or the $10.0 million of cash retained by the Company are not distributed to the Company’s unit holders. The grant price will be reduced by $0.31 per unit to $0.84 per unit as a result of the cash distribution paid in October 2013. The units are contingently exercisable only under certain limited circumstances, and therefore the Company is not recognizing compensation expense related to the awards until these defined circumstances are probable of occurring.

Distributions

On September 18, 2013, the Board declared a cash distribution to unit holders of $0.31 per unit, which was paid in October 2013.

11. Parent Financial Statements

The following financial information represents the unconsolidated financial statements of Advanced BioEnergy, LLC (“ABE”) as of December 31, 2013 and September 30, 2013, and for the three months ended December 31, 2013 and 2012. ABE’s ability to receive distributions from ABE South Dakota is based on the terms and conditions in ABE South Dakota’s credit agreement. 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. At December 31, 2013, there was $7.0 million of cash at ABE Fairmont, which has no restrictions on distribution to the parent.

 

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Advanced BioEnergy, LLC (Unconsolidated)

Balance Sheets

(Unaudited)

 

		December 31,				September 30,
		2013				2013
		(Dollars in thousands)
ASSETS
Current assets:
Cash and cash equivalents		$	6,536			$	6,558
Restricted cash			2,500				2,500
Prepaid expenses			63				20
Total current assets			9,099				9,078
Property and equipment, net			458				425
Other assets:
Investment in ABE Fairmont			14,984				23,138
Investment in ABE South Dakota			894				(5,972	)
Other assets			32				32
Total assets		$	25,467			$	26,701
LIABILITIES AND MEMBERS’ EQUITY
Current liabilities:
Accounts payable		$	8			$	10
Accrued expenses			1,671				1,512
Distribution payable			—				7,877
Total current liabilities			1,679				9,399
Other liabilities			71				79
Total liabilities			1,750				9,478
Members’ equity:
Members’ capital, no par value, 25,410,851 units issued and outstanding			60,835				60,835
Accumulated deficit			(37,118	)			(43,612	)
Total members’ equity			23,717				17,223
Total liabilities and members’ equity		$	25,467			$	26,701

 

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Advanced BioEnergy, LLC (Unconsolidated)

Statements of Operations

(Unaudited)

 

		Three Months Ended
		December 31,				December 31,
		2013				2012
		(Dollars in thousands)
Equity in earnings (losses) of consolidated subsidiary		$	6,712			$	(3,512	)
Management fee income from subsidiary			395				391
Selling, general and administrative expenses			(629	)			(1,716	)
Operating income (loss)			6,478				(4,837	)
Other income			12				7
Interest income (expense)			4				(1,416	)
Income (loss) from continuing operations			6,494				(6,246	)
Income from discontinued operations			—				78,877
Net income		$	6,494			$	72,631

 

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Advanced BioEnergy, LLC (Unconsolidated)

Statements of Cash Flows

(Unaudited)

 

		Three Months Ended
		December 31,				December 31,
		2013				2012
		(Dollars in thousands)
Cash flows from operating activities:
Net income		$	6,494			$	72,631
Adjustments to reconcile net income to operating activities cash flows:
Depreciation			40				41
Equity in earnings of consolidated subsidiaries			(6,712	)			(74,337	)
Distributions from consolidated subsidiaries			8,000				104,319
Gain on disposal of fixed assets			6				—
Amortization of deferred revenue and rent			(8	)			(7	)
Unit compensation expense			—				276
Loss on warrant derivative liability			—				1,416
Change in working capital components:
Accounts receivable			—				(4	)
Prepaid expenses			(43	)			(30	)
Accounts payable and accrued expenses			157				1,757
Net cash provided by operating activities			7,934				106,062
Cash flows from investing activities:
Purchase of property and equipment			(79	)			—
Net cash used in investing activities			(79	)			—
Cash flows from financing activities:
Exercise of warrant			—				799
Distribution to members			(7,877	)			(104,511	)
Net cash used in financing activities			(7,877	)			(103,712	)
Net increase (decrease) in cash and cash equivalents			(22	)			2,350
Beginning cash and cash equivalents			6,558				5,400
Ending cash and cash equivalents		$	6,536			$	7,750

 

 

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Item 2. Management’s 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, which 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, 2013 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 could become negative, which has previously affected our ability to meet current obligations and debt service requirements at our ABE South Dakota entity;

 

•

our hedging transactions and risk 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 government-mandated tariffs, credits and standards such as the Renewable Fuels Standard (“RFS”) 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 operating 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, no public market exists for our units, and we do not expect a public market to develop;

 

•

$8.0 million of the proceeds from the sale of our Fairmont facility are subject to the terms of an escrow agreement with the buyer;

 

•

the ability of our ABE South Dakota subsidiary to make distributions to ABE in light of restrictions in this subsidiary’s credit facility;

 

•

the supply of ethanol rail cars in the market is extremely tight, which could affect our ability to obtain new tanker cars or negotiate new leases at a reasonable fee when our current leases expire; and

 

•

the ability of the Company and its ABE South Dakota subsidiary to restructure, or otherwise negotiate new terms on, ABE South Dakota’s debt in a manner that would enable ABE South Dakota to service this debt over the long term.

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

 

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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.

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, as well as corn oil. 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. Ethanol has also recently become available in some states in limited locations as E15.

In November 2006, we acquired ABE South Dakota, LLC, which owned existing ethanol production facilities in Aberdeen and Huron, South Dakota. 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, LLC, which owned and operated the Fairmont, Nebraska plant until December 2012, and ABE South Dakota, which owns and operates plants in Aberdeen and Huron, South Dakota.

On December 7, 2012, the Company and its wholly-owned subsidiary ABE Fairmont, LLC sold substantially all of the assets of ABE Fairmont’s ethanol and related distillers and non-food grade corn oil businesses located in Fairmont, Nebraska (the “Asset Sale”) to Flint Hills Resources, LLC.

The purchase price for the Asset Sale was $160.0 million, plus $10.7 million for ABE Fairmont’s inventory at closing. Of the gross proceeds, $12.5 million was paid into an escrow account to secure the indemnification obligations of the Company and ABE Fairmont, with $4.5 million already received by the Company and $8.0 million scheduled to be released in June 2014.

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 Company’s plants are aggregated into one reporting 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 conveyed directly from South Dakota Wheat Growers to the plant where it is weighed and transferred to a scalper to remove rocks, cobs, and other debris. The corn is then 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-

 

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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.

Corn oil is produced by processing evaporated thin stillage through a disk stack-style centrifuge. Corn oil has a lower density than water or solids that make up the syrup. The centrifuges separate the relatively light oil from the heavier components of the syrup, eliminating the need for significant retention time. De-oiled syrup is returned to the process for blending into wet, modified, or dry distillers grains. The corn oil is then pumped into storage tanks before being loaded onto trucks for sale.

FACILITIES

The table below provides a summary of our ethanol plants in operation as of December 31, 2013:

 

Estimated

Estimated

Annual

Estimated

Annual

Distillers

Annual

Ethanol

Grains

Corn

Primary

Location

Production

Production(1)

Processed

Energy Source

(Million gallons)

(000’s Tons)

(Million bushels)

Aberdeen, SD(2)

9

27

3.2

Natural Gas

Aberdeen, SD(2)

44

134

15.7

Natural Gas

Huron, SD

32

97

11.4

Natural Gas

Consolidated

85

258

30.3

 

(1)	Our plants produce and sell wet, modified 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 production facilities.

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.

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 creditors of these plants.

 

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Plan of Operations through December 31, 2014

Over the next twelve months, 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.

Results of Operations for the Quarter Ended December 31, 2013 Compared to Quarter Ended December 31, 2012

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 December 31, 2013 and 2012:

 

		Three Months Ended December 31, 2013								Three Months Ended December 31, 2012
		Sold/Consumed				Average				Sold/Consumed				Average
		(In thousands)				Net Price/Cost				(In thousands)				Net Price/Cost
Ethanol (gallons)			19,317			$	1.93				20,183			$	2.21
Dried distillers grains (tons)			39				191.95				36				240.35
Wet/modified distillers grains (tons)			38				69.44				56				99.26
Corn Oil (pounds)			1,904				0.25				1,864				0.30
Corn (bushels)			6,858				4.01				7,082				7.07
Gas (mmbtus)			610				4.61				577				3.98

Net Sales

Net sales for quarter ended December 31, 2013 were $48.2 million compared to $59.7 million for the quarter ended December 31, 2012, a decrease of $11.5 million or 19%. The $7.3 million decrease in ethanol sales in fiscal 2014 was supplemented by a decrease in distillers grains sales of $4.1 million, and a decrease in corn oil sales of $0.1 million.

The drop in ethanol sales resulted from lower production in fiscal 2014, and a drop in ethanol prices of 13%. The drop in ethanol prices is attributed to the drop in corn prices as result of a record 2013 corn crop, mitigated by higher gasoline demand and lower nation-wide ethanol stocks in fiscal 2014. Lower ethanol prices have resulted in a drop in imports and higher exports in fiscal 2014 compared to fiscal 2013, which has contributed to the lower ethanol stocks in fiscal 2014. Lower production was a result of a reduction in output in December 2013 due to rail traffic congestion, which delayed the return of our rail cars to the Aberdeen plant.

The decrease in distillers grain sales was primarily a result of a 24% price decrease in the first fiscal quarter of 2014 compared to fiscal 2013. The drop in distillers prices is attributed to the drop in corn prices in fiscal 2014, mitigated by strong export sales to Asia.

During the fiscal quarters ended December 31, 2013 and 2012, 77% and 75%, 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 and corn oil.

Cost of Goods Sold

Costs of goods sold for the quarter ended December 31, 2013 were $40.1 million, compared to $62.3 million for the quarter ended December 31, 2012, a decrease of $22.2 million or 36%. Corn costs represented 69% and 80% of cost of sales for the fiscal quarters ended December 31, 2013 and 2012, respectively. Corn prices decreased 43% to $4.01 per bushel in the quarter ended December 31, 2013 from $7.07 per bushel in the quarter ended December 31, 2012, primarily due to a record 2013 corn crop, and favorable local basis. We expect that corn prices will remain low until the next crop year.

 

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Natural gas costs represented 7% of cost of sales for the fiscal quarter ended December 31, 2013 and 4% in the quarter ended December 31, 2012. Our average gas prices increased to $4.61 per mmbtu in the quarter ended December 31, 2013 from $3.98 per mmbtu in the quarter ended December 31, 2012, which is attributed to colder weather in fiscal 2014. We expect higher natural gas prices to continue through the colder winter months.

Gross Profit

Our gross profit for the quarter ended December 31, 2013 was $8.1 million, compared to gross loss of $2.6 million for the quarter ended December 31, 2012. The increase in gross profit was primarily due to improved industry-wide market conditions as noted above. Crush margins for the quarter ended December 31, 2013 increased by 161% to $16.8 million, compared to $6.5 million in fiscal 2012. We define the crush margin as the price of ethanol and co-products per gallon less the costs of corn and natural gas on a per gallon basis. We expect that margins may decrease towards the end of the second fiscal quarter as the current favorable margins may result in more ethanol plants returning to service in the coming months, which may result in lower ethanol prices. The 2014 decrease in the required ethanol blending volumes proposed by the Environmental Protection Agency may also result in a decrease in ethanol prices.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses are comprised of recurring administrative personnel compensation, legal, technology, consulting, insurance and accounting fees.

For the quarter ended December 31, 2013, selling, general and administrative expenses were $1.1 million compared to $2.1 million for the quarter ended December 31, 2012. As a percentage of sales, selling, general and administrative expenses decreased to 2.2% for the quarter ended December 31, 2013, compared to 3.6% for the quarter ended December 31, 2012, primarily as a result of cost reductions subsequent to the sale of the Fairmont facility, and some non-recurring expenses. In the quarter ended December 31, 2013, we incurred charges of $0.1 million relating to the accrual of benefits due to our chief executive officer for services to be provided through June 2014 under his amended employment contract. In the quarter ended December 31, 2012, we incurred charges relating to severance accruals of $0.4 million relating to reductions in headcount at our corporate headquarters, and other costs of $0.2 million.

Excluding these non-recurring costs, the administrative costs for the quarter ended December 31, 2013 were $1.0 million, which was 2.0% of net sales, compared to $1.6 million or 2.6% of net sales for the quarter ended December 31, 2012.

Interest Expense

Interest expense for the quarter ended December 31, 2013 was $0.5 million, compared to $1.6 million for the quarter ended December 31, 2012. The primary reason for the drop was the $1.4 million loss on a unit warrant in fiscal 2013. The accrual of additional default interest of $0.4 million in fiscal 2014 offset part of the drop from fiscal 2013.

Income from Discontinued Operations

Income from discontinued operations in the first quarter of 2013 consisted primarily of a gain on the sale of the Fairmont facility of approximately $76.7 million.

Changes in Financial Position for the Three Months ended December 31, 2013

Current Assets

The $0.2 million increase in current assets at December 31, 2013 compared to September 30, 2013 was primarily due to improved cash flows from operations being mostly offset by cash outflows for a unit holder distribution and debt service payments.

 

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Property, Plant and Equipment

The $2.5 million decrease in property, plant and equipment at December 31, 2013 compared to September 30, 2013, was primarily due to recognizing $2.7 million of depreciation expense in the first quarter, partially offset by $0.2 million of capital expenditures.

Current Liabilities

Accounts payable and accrued expenses increased by $0.3 million at December 31, 2013 compared to September 30, 2013, primarily due the accrual of additional default interest on the senior loan for the quarter.

Distribution Payable

The distribution of $0.31 per unit declared in September 2013 was paid in October 2013.

Debt

Interest bearing debt decreased by $0.8 million during the quarter due to normal principal payments. An additional $0.6 million of restructured debt carrying value was amortized against interest expense during the quarter.

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 (“RFA”), as of December 2013, the estimated ethanol production capacity in the United States was 14.9 billion gallons per year, with approximately 1.2 billion gallons currently idle. 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 134 billion gallons per year and a blend rate of 10% ethanol and 90% gasoline, the current blend wall is approximately 13.4 billion gallons of ethanol per year.

Ethanol is most commonly sold as E10, the 10 percent blend of ethanol for use in all American automobiles. Increasingly, ethanol is also available as E85, a higher percentage ethanol blend for use in flexible fuel vehicles. To further drive growth in ethanol usage, Growth Energy, an ethanol industry trade association, requested a waiver from the Environmental Protection Agency (“EPA”) to increase the allowable amount of ethanol blended into gasoline from the current 10% level to a 15% level. In June 2012, the EPA approved E15 for use in vehicles with model years 2001 and later. Although regulatory and infrastructure issues remain in many states, E15 is now available in limited locations in at least twelve states per the RFA.

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 our plants.

We focus on locking in margins based on a 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

 

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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 December 31, 2013, the average Chicago Opis Spot Ethanol Assessment was $1.86 per gallon and the average NYMEX RBOB spot gasoline price was $2.66 per gallon, or approximately $0.80 per gallon above ethanol prices.

Federal policy has a significant impact on ethanol market demand. Ethanol blenders previously benefited from incentives that encouraged usage and a tariff on imported ethanol that supported the domestic industry, both of which have now expired. Additionally, the Environmental Protection Agency’s 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. We believe the ethanol industry expanded due to these federal mandates, policies, and incentives. These government mandates have supported a market for ethanol that might disappear without these programs. Alternatively, the government mandates may be continued at lower levels than those at which they currently exist. 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 Renewable Fuels Standard (“RFS”) is a national program that imposes requirements with respect to the amount of renewable fuel produced and used in the United States. The RFS was revised by the EPA in July 2010 (“RFS2”) and applies to refineries, blenders, distributors and importers. We believe the RFS2 program will increase the market for renewable fuels, such as ethanol, as a substitute for petroleum-based fuels. The RFS2 required that 16.55 billion gallons be sold or dispensed in 2013, increasing to 36.0 billion gallons by 2022, representing 7% of the anticipated gasoline and diesel consumption in 2022. In 2013, RFS2 required refiners and importers to blend renewable fuels totaling at least 9.74% of total fuel volume, of which 8.12% of total fuel volume, or 13.8 billion gallons, could be derived from corn-based ethanol. The remainder of the requirement is to be met by non-corn related advanced renewable fuels such as cellulosic ethanol and biomass-based biodiesel. The RFS requirement for corn-based ethanol is capped at 15.0 billion gallons starting in 2015.

In November 2013, the EPA proposed a 9.7% reduction of the original 2014 statutory corn-based ethanol blending volume requirements to approximately 13.0 billion gallons per year. This would be a reduction from the 2013 requirement of 13.8 billion gallons for corn-based ethanol, and the original statutory 2014 volume of 14.4 billion gallons. The proposal is subject to a 60-day comment period. If the proposal becomes a final rule, ethanol demand may decrease. Current ethanol production capacity is approximately 14.9 billion gallons per the RFA.

 

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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
2014 (1)			18.15				1.75				—				3.75				14.40
2014 (2)			15.21				0.02				1.28				2.20				13.01
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

 

(1)	Original statutory 2014 volumes.

(2)	Proposed EPA 2014 Renewable Fuel Standards issued November 2013.

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.

California Low-Carbon Fuel Standard

In April 2009, the California air regulators approved the Low-Carbon Fuel Standard (“LCFS”) 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 pollution created from converting a forest to cultivated land for corn feedstock. 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.

In December 2011, the United States District Court for the Eastern District of California ruled that the low-carbon fuel standard violated the commerce clause on the grounds that it discriminates against out-of-state ethanol producers and out-of-state and foreign crude oil transporters in favor of in-state competitors, and issued an injunction. In April 2012, the United States Ninth Circuit Court of Appeals stayed the injunction, and expedited briefing of the appeal. In September 2013, the Ninth Circuit Court of Appeals upheld California’s low-carbon fuel standard. The Court of Appeals returned the case to the District Court in Fresno, California to decide whether the fuel standard, while neutral in design, has a discriminatory impact on non-California producers in practice.

This standard and other similar standards by other states may impact the way ethanol producers procure feed stocks, 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 prevented from selling ethanol in California and be required to market their ethanol in other regions with possible material adverse effects on our profitability.

 

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European Union Anti-Dumping Investigation

On December 19, 2012, the Antidumping Advisory Committee of the EU endorsed a 9.5 percent penalty on U.S. ethanol imports to Europe, which was approved by a majority of EU states on December 20, 2012. The anti-dumping duty was imposed as a regulation by the Council of the European Union on February 18, 2013. The Company does not export any ethanol to Europe at this time. Imposition of tariffs could reduce U.S. exports to Europe, and possibly other export markets. A reduction of exports to Europe could have an adverse effect on domestic ethanol prices, as the available supply of ethanol for the domestic market would increase.

COMPETITION

Ethanol

The ethanol we produce is similar to ethanol produced by other plants. The RFA reports that as of December 2013, current U.S. ethanol production capacity is approximately 14.9 billion gallons per year, with approximately 1.2 billion gallons idle at the current time. On a national level there are many other production facilities with which we compete directly, many of whom have greater resources than we do. As of December 2013, South Dakota had 15 ethanol plants producing an aggregate of 1.0 billion gallons of ethanol per year.

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 stronger negotiating positions with purchasers. We market our ethanol 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.

Co-Products

In the sales of our distillers grains, we compete with other ethanol producers, 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 74% of our distillers grain revenues are derived from the sale of dried distillers grains, which have an indefinite shelf life and can be transported by truck or rail, and 26% as modified and wet distillers grains, which have a shorter shelf life and are typically sold in local markets.

In the sales of corn oil, we compete with other ethanol producers.

LIQUIDITY AND CAPITAL RESOURCES

Financing and Existing Debt Obligations

We conduct our business activities and plant operations through the parent company, Advanced BioEnergy, and its primary operating subsidiary, ABE South Dakota. ABE Fairmont has minimal activity following the sale of the Fairmont facility. The liquidity and capital resources for each entity are based on the entity’s existing financing arrangements and capital structure. There are provisions contained in the financing agreements at ABE South Dakota 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 ABE South Dakota for the benefit of Advanced BioEnergy, with the exception of allowable distributions as defined in the ABE South Dakota financing agreements.

Advanced BioEnergy, LLC (“ABE”)

ABE had cash and cash equivalents of $6.5 million on hand at December 31, 2013. ABE did not have any debt outstanding as of December 31, 2013. ABE’s primary source of operating cash comes from charging a

 

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monthly management fee to ABE South Dakota for services provided in connection with operating the ABE South Dakota plants. The primary management services provided include risk management, accounting and finance, human resources and other general management related responsibilities. The Company intends to renegotiate the terms of its administrative services agreement with the senior lenders of ABE South Dakota, and has notified the senior lenders of its intent to terminate the administrative services agreement in its current form at the end of the required six month notice period. From time to time, ABE may also receive certain allowable distributions from ABE South Dakota based on the terms and conditions in its senior credit agreement. ABE will not receive any distribution from ABE South Dakota for its fiscal 2013 financial results.

In connection with the execution of a rail car sublease, the Company, as parent of ABE South Dakota agreed to post a $2.5 million irrevocable and non-transferable standby letter of credit in May 2012 for the benefit of Gavilon as security for the payment obligations of ABE South Dakota under certain agreements with Gavilon. The Company has deposited $2.5 million in a restricted account as collateral for this letter of credit and has classified it as restricted cash.

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 $7.0 million on hand at December 31, 2013, which is unrestricted and can be distributed to Advanced BioEnergy at any time. ABE Fairmont also has a short term escrow balance of $8.0 million to secure the indemnification obligations of the Company and ABE Fairmont, with a scheduled escrow release date in June 2014.

ABE Fairmont has agreed to cooperate with Flint Hills Resources, LLC with respect to post-closing matters, including completing the transfer of certain railway lines. The Company anticipates that ABE Fairmont will remain in existence as a separate entity until it completes all its obligations under the asset purchase agreement and other ongoing agreements, except to the extent that the Company determines that it can perform these obligations itself after the liquidation of ABE Fairmont.

ABE South Dakota

ABE South Dakota had cash and cash equivalents of $9.8 million and $3.3 million of restricted cash on hand at December 31, 2013. The restricted cash consists of $3.0 million for a debt service payment reserve, and $0.3 million in an account for maintenance capital expenditures. As of December 31, 2013, ABE South Dakota had interest-bearing term debt outstanding of $67.9 million.

In June 2010, ABE South Dakota entered into an Amended and Restated Senior Credit Agreement effective as of June 18, 2010, and amended on December 9, 2011 (the “Senior Credit Agreement”) among ABE South Dakota, the lenders from time to time party thereto, and an Administrative Agent and Collateral Agent. The principal amount of the term loan facility is payable in quarterly payments of $750,000, with the remaining principal amount fully due and payable on March 31, 2016. 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.

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. ABE South Dakota recorded the restructuring fee as long-term, non-interest bearing debt. ABE South Dakota is also obligated to pay a waiver fee to the senior lenders of $275,000, payable in installments in fiscal 2014 and 2015. The Company has recorded this fee as non-interest bearing debt on its consolidated balance sheet, and is amortizing the fee to interest expense over the remaining life of the debt.

 

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ABE South Dakota’s 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. The Senior Credit Agreement and the related loan documentation include, among other terms and conditions, limitations (subject to specified exclusions) on ABE South Dakota’s 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.

As of September 30, 2013, ABE South Dakota had not replenished the debt service reserve under its senior loan to the greater of six months of principal and interest or $3.0 million, or satisfied a non-financial requirement, both of which constituted events of default under its Senior Credit Agreement. The senior lenders waived the events of default through December 31, 2013.

As of December 31, 2013, ABE South Dakota funded the debt service reserve to the required level of $3.0 million and stopped accruing default interest which totaled $1.1 million. ABE South Dakota paid the default interest in January 2014, and the senior lenders waived the non-financial default through June 30, 2014. The Company expects that the non-financial requirement will be cured in the next quarter.

At December 31, 2013, ABE South Dakota had working capital of $20.6 million, excluding current principal due. Net working capital, excluding current principal due, increased by $8.0 million since September 2013.

ABE South Dakota intends to continue its discussions with the senior lenders regarding its overall capital structure and long-term solutions to its obligations under the Senior Credit Agreement in advance of the debt’s stated maturity in March 2016. The Company believes that a successful long-term solution would include a restructuring or refinancing of the debt, and could involve a reduction of principal and an additional equity infusion into ABE South Dakota by the Company. We believe we have adequate existing liquidity and cash flows from operations to fund capital requirements and the minimum annual principal and interest payments required under the terms of the Senior Credit Agreement for at least the next 12 months.

CASH FLOWS

The following table shows our cash flows for the three months ended December 31, 2013 and 2012:

 

		Three Months Ended December 30
		2013				2012
		(In thousands)
Net cash provided by operating activities		$	7,126			$	7,168
Net cash provided by (used in) investing activities			(2,880	)			157,396
Net cash used in financing activities			(8,677	)			(154,018	)

Cash Flow from Operating Activities

Our net cash flows from operating activities for the three months ended December 31, 2013 were comparable to the same period in 2012. Significantly improved margins during fiscal 2014 generated positive cash flows that were comparable to the cash flows generated from the settlement of the Fairmont assets and liabilities that were not part of the sale transaction in the first quarter of fiscal 2013.

 

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Cash Flow from Investing Activities

We received net proceeds of $155 million from the sale of our Fairmont assets in fiscal 2013. Our restricted cash balances also decreased in fiscal 2013 due to the pay down of debt from the debt service reserves at Fairmont and South Dakota, and the inability of our ABE South Dakota subsidiary to replenish its debt service reserve account. In the first quarter of fiscal 2014, ABE South Dakota replenished its debt service reserve account, accounting for the increase in restricted cash during the quarter.

Cash Flow from Financing Activities

We used $49.2 million in additional cash for financing activities in fiscal 2013 due to the pay down of all outstanding debt at ABE Fairmont after the sale of the facility as well as normal principal payments of $1.1 million at South Dakota, compared to normal principal payments of $0.8 million in fiscal 2014. In addition, we paid a cash distribution to unit holders of $4.15 per unit or $104.5 million from the proceeds of the sale of the Fairmont facility in fiscal 2013, compared to a cash distribution of $0.31 per unit or $7.9 million in fiscal 2014.

CREDIT ARRANGEMENTS

Long-term debt consists of the following (in thousands, except percentages):

 

		December 31,
		2013				December 31,				September 30,
		Interest Rate				2013				2013
ABE South Dakota:
Senior debt principal - variable			4.24	%		$	67,882			$	68,632
Restructuring fee			N/A				3,076				3,103
Additional carrying value of restructured debt			N/A				5,473				6,112
Total outstanding							76,431				77,847
Additional carrying value of restructured debt			N/A				(5,473	)			(6,112	)
Stated principal						$	70,958			$	71,735

The estimated maturities of debt at December 31 are as follows (in thousands):

 

						Amortization of
						Additional Carrying
		Stated				Value of
		Principal				Restructured Debt				Total
2014		$	2,911			$	2,496			$	5,407
2015			3,187				2,394				5,581
2016			64,860				583				65,443
Total debt		$	70,958			$	5,473			$	76,431

 

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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 management’s 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:

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. Under the terms of the marketing agreements with Gavilon, revenue is recognized when product is loaded into rail cars or trucks for shipment. Revenue was previously 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. Co-products are normally shipped free on board (“FOB”) shipping point. Interest income is recognized as earned. In accordance with the Company’s 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.

Derivative Instruments/Due From Broker

On occasion, the Company has entered into derivative contracts to hedge the Company’s 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 in the statement of financial position 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, none have been designated as a hedge for accounting purposes and derivative positions are recorded on the balance sheet at their fair market value, with changes in fair value recognized in current period earnings.

In addition, certain derivative financial instruments that meet the criteria for derivative accounting treatment also qualify for a scope exception to derivative accounting, as they are considered normal purchases and sales. The availability of this exception is based on the assumption that the Company has the ability and it is probable to deliver or take delivery of the underlying item. Derivatives that are considered to be normal purchases and sales are exempt from derivative accounting treatment, and are accounted for under accrual accounting.

Inventories

Chemicals, supplies, work in process, ethanol and distillers grains inventories are stated at the lower of weighted average 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			3-7 Years
Process equipment			10 Years
Buildings			40 Years

 

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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.

OFF-BALANCE SHEET ARRANGEMENTS

We have no off-balance sheet arrangements.

GOVERNMENT PROGRAMS AND TAX CREDITS

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 received $0.25 million in fiscal 2014.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

COMMODITY PRICE RISK

We consider our principal market risk to be the potential changes in commodity prices and their effect 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 December 31, 2013, sales of ethanol represented 77% of our total revenues and corn costs represented 69% 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 December 31, 2013, the price per gallon of ethanol and the cost per bushel of corn on the Chicago Board of Trade, or CBOT, were $1.91 and $4.22, respectively.

We are also subject to market risk on the selling prices of our distillers grains, which represent 21% 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 South Dakota local customers was $205 per ton at December 31, 2013.

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 7% of total cost of goods sold for the quarter ended December 31, 2013. The price of natural gas is affected by weather conditions and general economic, market and regulatory factors. At December 31, 2013, the price of natural gas on the NYMEX was $4.23 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 December 31, 2013, we guaranteed prices representing 11% of our estimated ethanol production through March 2014 by entering into flat-priced contracts. At December 31, 2013, we had entered into forward sale contracts representing 18% of our expected distillers grains production through March 2014. At December 31, 2013, prices of 18% of our expected corn requirements through March 2014 were fixed by contract.

 

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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:

 

		Estimated at Risk Volume (1)				Units				Hypothetical Change in Price				Spot Price(2)				Change in Annual Operating Income
		(In millions)																(In millions)
Ethanol			75.8				gallons				10.0	%		$	1.91			$	14.5
Distillers grains			0.2				tons				10.0	%			205.00				4.4
Corn			25.1				bushels				10.0	%			4.22				10.6
Natural gas			2.4				btus				10.0	%			4.23				1.0

 

(1)

The volume of ethanol at risk is based on the assumption that we will enter into contracts for 11% of our expected annual gallons capacity of 85 million gallons. The volume of distillers grains at risk is based on the assumption that we will enter into contracts for 17% of our expected annual distillers grains production of 258,000 tons. The volume of corn is based on the assumption that we will enter into forward contracts for 17% of our estimated current 30.3 million bushel annual requirement. The volume of natural gas at risk is based on the assumption that we will continue to lock in none of our 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 December 31, 2013.

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 December 31, 2013, we had $67.9 million of outstanding borrowings with variable interest rates. With each 1% change in interest rates our annual interest would change by $0.7 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 Company’s 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.

 

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

There are no material changes from risk factors as previously discussed in our September 30, 2013 Annual Report on Form 10-K, except as follows:

Proposed regulations governing the production and sale of animal feeds, including distillers grains, may change our operating procedures and increase our operating costs, and could affect the export markets for distillers grains.

Food Safety Modernization Act (“FSMA”)

In 2011, the FSMA was signed into law by President Obama, and is intended to strengthen the food safety system in the United States. The U.S. Food and Drug Administration (“FDA”) will administer the law, which will require food producers, including distillers grains producers, to document, implement and monitor preventative contamination controls in the food production process. The FDA has released a proposed rule governing the implementation of the FSMA, and is seeking comments by the end of February 2014. The ethanol industry is examining the proposed rule in order to determine the potential impact on the industry. The implementation of the final regulations may change our operating procedures for the production, handling and sale of distillers grains, and may increase our operating and compliance costs.

Distillers Grains Exports to China

China is currently the largest export market for U.S. dry distillers grains, reaching 4.49 million metric tons in 2013 or 46% of all distillers grains exported. The Chinese government recently signaled its intent to regulate the quality of food imports into China. To achieve this goal, the China AQSIQ (General Administration of Quality Supervision, Inspection and Quarantine) agency has indicated that it will require U.S. food producers to register and comply with Chinese food preparation guidelines, and the U.S. government to monitor the production of food products in the U.S. that are exported to China, in a manner similar to the system proposed under the FSMA. The ethanol industry and U.S. government are examining these requirements in order to determine appropriate responses.

We cannot estimate the effect these regulations, if implemented, would have on the overall distillers grains market. They could have the effect of reducing exports to China if U.S. producers are unable to comply with the regulations, which could reduce distillers grains prices in the domestic market by decreasing worldwide demand for distillers grains.

Rail traffic congestion may affect our ability to return our tanker rail cars to our plants on a timely basis, and could require us to reduce or cease production in the event we exceed our ethanol storage capacity.

There has been a recent increase in rail traffic congestion on the BNSF rail line which services the Aberdeen plant due to the increase in cargo trains carrying oil from the oil shale fields in Western North Dakota. This congestion is affecting our ability to return our tanker rail cars to the Aberdeen plant on a timely basis. Delays in returning rail cars to our plants may affect our ability to operate our plants at full capacity due to ethanol storage capacity constraints.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

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Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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: February 13, 2014				By:		/s/ Richard R. Peterson
						Richard R. Peterson
						Chief Executive Officer and President, Chief Financial Officer (Duly authorized signatory and Principal Financial Officer)

 

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EXHIBIT INDEX

 

Exhibit No.		Description		Method of Filing
10.1		ABE South Dakota, LLC – January 2014 Waiver Agreement between ABE South Dakota and the Lenders, and Wilmington Trust, National Association, in its capacity as successor Administrative Agent and Collateral Agent for the Lenders and Senior Secured Parties.		Filed herewith
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
101		The following materials from Advanced Bio Energy’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2013, formatted in XBRL: (i) Consolidated Balance Sheets at December 31, 2013 and September 30, 2013; (ii) Consolidated Statements of Operations for the three months ended December 31, 2013 and December 31, 2012; (iii) Consolidated Statements of Changes in Member’s Equity for the three months ended December 31, 2013; (iv) Consolidated Statements of Cash Flows for the three months ended December 31, 2013 and 2012; and (v) Notes to the Consolidated Financial Statements.		Filed Electronically

 

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