SOUTHWEST IOWA RENEWABLE ENERGY, LLC - FORM 10-Q

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - SOUTHWEST IOWA RENEWABLE ENERGY, LLC	Financial_Report.xls
EX-31.2 - EXHIBIT SIRE-2014.06.30-10Q EX 31.2 - SOUTHWEST IOWA RENEWABLE ENERGY, LLC	sire-20140630x10qex312.htm
EX-32.1 - EXHIBIT SIRE-2014.06.30-10Q EX 32.1 - SOUTHWEST IOWA RENEWABLE ENERGY, LLC	sire-20140630x10qex321.htm
EX-32.2 - EXHIBIT SIRE-2014.06.30-10Q EX 32.2 - SOUTHWEST IOWA RENEWABLE ENERGY, LLC	sire-20140630x10qex322.htm
EX-31.1 - EXHIBIT SIRE-2014.06.30-10Q EX 31.1 - SOUTHWEST IOWA RENEWABLE ENERGY, LLC	sire-20140630x10qex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark one)



ý	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ending June 30, 2014

o	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to __________

Commission file number 000-53041



SOUTHWEST IOWA RENEWABLE ENERGY, LLC
(Exact name of registrant as specified in its charter)

Iowa	20-2735046
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

10868 189th Street, Council Bluffs, Iowa	51503
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number (712) 366-0392

Securities registered under Section 12(b) of the Exchange Act:	None.

Title of each class	Name of each exchange on which registered

Securities registered under Section 12(g) of the Exchange Act:
Series A Membership Units
(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o No x

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the 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 o

Indicate by check mark whether the registrant has submitted electronically on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company x

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

As of August 13, 2014, the Company had 8,993 Series A, 3,334 Series B and 1,000 Series C Membership Units outstanding.

DOCUMENTS INCORPORATED BY REFERENCE—None

TABLE OF CONTENTS



Item No.	Item Matter	PAGE NO.
	PART 1 – FINANCIAL INFORMATION
Item 1.	FINANCIAL STATEMENTS	1
Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	14
Item 3.	QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISKS	23
Item 4.	CONTROLS AND PROCEDURES	23
	PART II – OTHER INFORMATION	23
Item 1.	LEGAL PROCEEDINGS	23
Item 1A.	RISK FACTORS	24
Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	24
Item 3.	DEFAULTS UPON SENIOR SECURITIES	24
Item 4.	MINE SAFETY DISCLOSURES	24
Item 5.	OTHER INFORMATION	24
Item 6.	Exhibits	24
	SIGNATURES	25
	CERTIFICATIONS	SEE EXHIBITS 31 AND 32

PART I – FINANCIAL STATEMENTS

Item 1. Financial Statements

SOUTHWEST IOWA RENEWABLE ENERGY, LLC Balance Sheets (Dollars in thousands)

ASSETS	June 30, 2014			September 30, 2013
	(Unaudited)
Current Assets
Cash and cash equivalents	$	3,504		$	12,437
Restricted cash	304			303
Accounts receivable	721			722
Accounts receivable, related party	9,523			10,441
Derivative financial instruments	862			767
Inventory	12,803			8,445
Prepaid expenses and other	871			438
Total current assets	28,588			33,553

Property, Plant and Equipment
Land	2,064			2,064
Plant, building and equipment	206,971			205,356
Office and other equipment	1,069			751
	210,104			208,171
Accumulated depreciation	(73,506		)	(64,987		)
Net property and equipment	136,598			143,184

Other Assets
Financing costs, net of amortization of $1 and $3,772, respectively	418			431
Other assets	1,258			1,258
	1,676			1,689
Total Assets	$	166,862		$	178,426

Notes to Financial Statements are an integral part of this statement

SOUTHWEST IOWA RENEWABLE ENERGY, LLC Balance Sheets (Dollars in thousands)

LIABILITIES AND MEMBERS' EQUITY	June 30, 2014		September 30, 2013
	(Unaudited)
Current Liabilities
Accounts payable	$	1,980	$	1,130
Accounts payable, related party	3,687		6,457
Derivative financial instruments, related party	2,056		493
Accrued expenses	3,926		3,318
Accrued expenses, related parties	574		932
Current maturities of notes payable	4,523		123,887
Total current liabilities	16,746		136,217

Long Term Liabilities
Notes payable, less current maturities	61,948		212
Other long-term liabilities	325		400
Total long term liabilities	62,273		612

Members' Equity
Members' capital, 13,327 and 13,144 Units issued and outstanding	87,165		76,488
Accumulated earnings (deficit)	678		(34,891		)
Total members' equity	87,843		41,597

Total Liabilities and Members' Equity	$	166,862	$	178,426

Notes to Financial Statements are an integral part of this statement

SOUTHWEST IOWA RENEWABLE ENERGY, LLC Statements of Operations (Dollars in thousands except for net income (loss) per unit)

(Unaudited)
	Three Months Ended		Three Months Ended			Nine Months Ended		Nine Months Ended
	June 30, 2014		June 30, 2013			June 30, 2014		June 30, 2013

Revenues	$	88,158	$	94,472		$	251,315	$	247,996
Cost of Goods Sold
Cost of goods sold-non hedging	65,841		92,069			190,326		247,195
Realized & unrealized hedging (gains) losses	3,205		(2,336		)	5,542		443
	69,046		89,733			195,868		247,638

Gross Margin	19,112		4,739			55,447		358

General and administrative expenses	1,344		942			3,701		2,930

Operating Income (Loss)	17,768		3,797			51,746		(2,572		)

Interest expense and other income, net	2,080		2,296			6,049		7,034
Loss from debt extinguishment	10,128		—			10,128		—

Net Income (Loss)	$	5,560	$	1,501		$	35,569	$	(9,606	)

Weighted average units outstanding - basic	13,205		13,139			13,164		13,139
Weighted average units outstanding - diluted	25,234		29,375			25,424		13,139
Income (loss) per unit - basic	$	421.05	$	114.24		$	2,701.99	$	(731.11	)
Income (loss) per unit - diluted	$	247.52	$	83.71		$	1,483.44	$	(731.11	)

Notes to Financial Statements are an integral part of this statement

SOUTHWEST IOWA RENEWABLE ENERGY, LLC Statements of Cash Flows (Dollars in thousands)

(Unaudited)
	Nine Months Ended			Nine Months Ended
	June 30, 2014			June 30, 2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	35,569		$	(9,606	)
Adjustments to reconcile to net cash provided by operating activities:
Depreciation	8,601			8,546
Amortization	431			405
Accrued interest added to long term debt	2,018			1,952
Loss on disposal of property	150			18
Loss from debt extinguishment	10,128			—
(Increase) decrease in current assets:
Accounts receivable	919			1,299
Inventories	(4,658		)	(5,321		)
Prepaid expenses and other	(433		)	(284		)
Derivative financial instruments	(95		)	4,871
Decrease in other long-term liabilities	(75		)	(75		)
Increase (decrease) in current liabilities:
Accounts payable	(1,920		)	2,745
Derivative financial instruments	1,563			76
Accrued expenses	250			—
Net cash provided by operating activities	52,448			4,626

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment	(1,865		)	(452		)
Increase in restricted cash	(1		)	(1		)
Net cash (used in) investing activities	(1,866		)	(453		)

CASH FLOWS FROM FINANCING ACTIVITIES
Payments for financing costs	(418		)	—
Proceeds from notes payable	86,000			74,900
Payments on borrowings	(145,097		)	(75,626		)
Net cash (used in) financing activities	(59,515		)	(726		)

Net increase (decrease) in cash and cash equivalents	(8,933		)	3,447

CASH AND EQUIVALENTS
Beginning	12,437			6,285
Ending	$	3,504		$	9,732

SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest	$	4,425		$	3,855

Non-cash financing activities:
Conversion of Subordinated Debt to Units	$	549		—
Increase in Members' equity due to significant premium on modification of convertible debt	$	10,128		—

SOUTHWEST IOWA RENEWABLE ENERGY, LLC Statements of Cash Flows (Dollars in thousands)


SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION
Purchase of property and equipment	(300	)	—
Inventory	300		—

Disposal of property and equipment	232		—

SOUTHWEST IOWA RENEWABLE ENERGY, LLC

Notes to Financial Statements

Note 1: Nature of Business

Southwest Iowa Renewable Energy, LLC (the “Company”), located in Council Bluffs, Iowa, was formed in March, 2005 and began producing ethanol in February, 2009. The Company is permitted to produce up to 125 million gallons of ethanol per year. The Company sells its ethanol, distillers grains, corn syrup, and corn oil in the continental United States, Mexico, and the Pacific Rim.

Note 2: Summary of Significant Accounting Policies

Basis of Presentation and Other Information

The accompanying financial statements as of June 30, 2014 and for the three and nine months ended June 30, 2014 and 2013 are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. These unaudited financial statements and notes should be read in conjunction with the audited financial statements and notes thereto, for the fiscal year ended September 30, 2013 contained in the Company’s Annual Report on Form 10-K. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire year.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Revenue Recognition

The Company sells ethanol and related products pursuant to marketing agreements. Revenues are recognized when the marketing company (the “customer”) has taken title to the product, prices are fixed or determinable and collectability is reasonably assured.

The Company’s products are generally shipped FOB loading point. The Company’s ethanol sales are handled through an ethanol purchase agreement (the “Ethanol Agreement”) with Bunge North America, Inc. (“Bunge”). Syrup and distillers grain (co-products) are sold through a distillers grains agreement (the “DG Agreement”) with Bunge, based on market prices. Corn oil is sold through a corn oil agreement (the “Corn Oil Agency Agreement”) with Bunge based on market prices. Marketing fees, agency fees, and commissions due to the marketer are paid separately from the settlement for the sale of the ethanol products and co-products and are included as a component of cost of goods sold. Shipping and handling costs incurred by the Company for the sale of ethanol and co-products are included in cost of goods sold.

Accounts Receivable

Trade accounts receivable are recorded at original invoice amounts less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Most of the trade accounts are with Bunge. Management determines the allowance for doubtful accounts by regularly evaluating customer receivables and considering customer’s financial condition, credit history and current economic conditions. As of June 30, 2014 and September 30, 2013, management had determined no allowance was necessary. Receivables are written off when deemed uncollectable and recoveries of receivables written off are recorded when received.

Investment in Commodities Contracts, Derivative Instruments and Hedging Activities

The Company’s operations and cash flows are subject to fluctuations due to changes in commodity prices. The Company is subject to market risk with respect to the price and availability of corn, the principal raw material used to produce ethanol and ethanol by-products. Exposure to commodity price risk results from the Company’s dependence on corn in the ethanol production process. In general, rising corn prices can result in lower profit margins and, therefore, represent unfavorable market conditions. This is especially true when market conditions do not allow the Company to pass along increased corn costs to customers. The availability and price of corn is subject to wide fluctuations due to unpredictable factors such as weather conditions, farmer planting decisions, governmental policies with respect to agriculture and international trade and global demand and supply.

To minimize the risk and the volatility of commodity prices, primarily related to corn and ethanol, the Company uses various derivative instruments, including forward corn, ethanol, and distillers grains purchase and sales contracts, over-the-counter and exchange-traded futures and option contracts. From time to time, when market conditions are appropriate and the Company has sufficient working capital available, the Company will enter into derivative contracts to hedge its exposure to price risk related to forecasted corn needs and forward corn purchase contracts. The Company uses cash, futures and options contracts to hedge changes to the commodity prices of corn and ethanol.

Management has evaluated the Company’s contracts to determine whether the contracts are derivative instruments. Certain contracts that literally meet the definition of a derivative may be exempted from derivative accounting as normal purchases or normal sales. Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. Gains and losses on contracts designated as normal purchases or normal sales contracts are not recognized until quantities are delivered or utilized in production.

The Company applies the normal purchase and sale exemption to forward contracts relating to ethanol and distillers grains and solubles and therefore these forward contracts are not marked to market. As of June 30, 2014, the Company was committed to sell 12.1 million gallons of ethanol and 68.1 thousand tons of distillers grains.

The Company enters into short-term cash, options and futures contracts as a means of managing exposure to changes in commodity prices. The Company enters into derivative contracts to hedge the exposure to volatile commodity price fluctuations. The Company maintains a risk management strategy that uses derivative instruments to minimize significant, unanticipated earnings fluctuations caused by market volatility. The Company’s specific goal is to protect itself from large moves in commodity costs. Although the contracts are intended to be effective economic hedges of specified risks, they are not designated as a hedge for accounting purposes and are recorded on the balance sheet at fair market value with changes in market value recognized in current period earnings.

Corn purchase contracts are treated as derivative financial instruments. Changes in market value of forward corn contracts, which are marked to market each period, are included in costs of goods sold. As of June 30, 2014, the Company was committed to purchasing 3.6 million bushels of corn on a forward contract basis resulting in a total commitment of $16.7 million.

In addition the Company was committed to purchasing 1.1 million bushels of corn on basis contracts.

As part of its trading activity, the Company uses futures and option contracts offered through regulated commodity exchanges to reduce risk and risk of loss in the market value of inventories. To reduce that risk, the Company generally takes positions using cash and futures contracts and options. The gains or losses on derivative instruments are included in revenue if the contracts relate to ethanol, and cost of goods sold if the contracts relate to corn. The Company reports all contracts with the same counter-party on a net basis on the balance sheet due to a master netting agreement.

Derivatives not designated as hedging instruments along with cash held by brokers at June 30, 2014 and September 30, 2013 at market value are as follows:



	Balance Sheet Classification	June 30, 2014			September 30, 2013
		in 000's			in 000's
Futures and option contracts
In gain position		$	626		$	356
In loss position		(1,962		)	(518		)
Cash held by broker		2,198			929
	Current asset	862			767

Forward contracts, corn, related party	Current liability	2,056			493

Net futures, options, and forward contracts		$	(1,194	)	$	274

The net realized and unrealized gains and losses on the Company’s derivative contracts for the three and nine months ended June 30, 2014 and 2013 consist of the following (in thousands of dollars):



		Three months ended					Nine months ended
	Statement of Operations Classification	June 30, 2014		June 30, 2013			June 30, 2014		June 30, 2013
Net realized and unrealized (gains) losses related to:

Forward purchase contracts (corn)	Cost of Goods Sold	$	2,713	$	(150	)	$	3,873	$	4,559
Futures and option contracts (corn)	Cost of Goods Sold	$	492	(2,186		)	$	1,669	$	(4,116	)
Futures and option contracts (ethanol)	Revenue	$	1,146	—			$	1,146	—

Inventory

Inventory is stated at the lower of cost or market value using the average cost method. Market value is based on current replacement values, to the extent that it does not exceed net realizable values and it is not less than the net realizable values reduced by an allowance for normal profit margin.

Fair value of financial instruments

The carrying amounts of cash and cash equivalents, derivative financial instruments, accounts receivable, accounts payable, and accrued expenses approximate fair value due to the short term nature of these instruments. The carrying value of senior debt approximates fair value based on the variable interest rate and it being issued close to the end of the period.

Income (loss) Per Unit

Basic income (loss) per unit is calculated by dividing net income (loss) by the weighted average units outstanding for each period. Diluted income (loss) per unit is calculated by dividing income (loss) adjusted for interest on the convertible debt (when anti-dilutive) by the sum of the weighted average units outstanding and the weighted average dilutive units, using the treasury stock method. Units from convertible term notes are considered unit equivalents and are considered in the diluted income per unit computation, but have not been included in the computations of diluted income (loss) per unit for the nine months ended June 30, 2013, because their effect would be anti-dilutive during those periods. Basic earnings and diluted per unit data were computed as follows (in thousands except per unit data):



	Three Months Ended				Nine Months Ended
	June 30, 2014		June 30, 2013		June 30, 2014		June 30, 2013
Numerator:
Net income (loss) for basic earnings per unit	$	5,560	$	1,501	$	35,569	$	(9,606	)
Interest expense on convertible term note	686		958		2,146		—
Net income (loss) for diluted earnings per unit	$	6,246	$	2,459	$	37,715	$	(9,606	)

Denominator:
Weighted average units outstanding - basic	13,205		13,139		13,164		13,139
Weighted average units outstanding - diluted	25,234		29,375		25,424		13,139
Income (loss) per unit - basic	$	421.05	$	114.24	$	2,701.99	$	(731.11	)
Income (loss) per unit - diluted	$	247.52	$	83.71	$	1,483.44	$	(731.11	)

Note 3: Inventory

Inventory is comprised of the following at:



	June 30, 2014		September 30, 2013
	(000's)		(000's)
Raw Materials - corn	$	3,001	$	2,607
Supplies and Chemicals	3,174		2,780
Work in Process	1,892		2,090
Finished Goods	4,736		968
Total	$	12,803	$	8,445

Note 4: Members’ Equity

At June 30, 2014 outstanding member units were:



Series A Units Outstanding	8,993
Series B Units Outstanding	3,334
Series C Units Outstanding	1,000
Series U Units Outstanding	—

The Series A, B and C unit holders all vote on certain matters with equal rights. The Series C unit holders as a group have the right to elect one member of the Board of Directors (the “Board”). The Series B unit holders as a group have the right to elect two Board members. Series A unit holders as a group have the right to elect the remaining number of Directors not elected by the Series C and B unit holders.

On May 31, 2014, convertible notes payable to unit holders totaling $549,000 were converted into 183 A units at $3,000 per unit. The remaining $25,219 plus accrued interest of $14,994 was paid to completely retire the notes.

At June 30, 2014, book value was $6,591 per unit.

Note 5: Revolving Loan/Credit Agreements

FCSA/CoBank

The Company entered into a credit agreement with Farm Credit Services of America, FLCA (“ FCSA ”) and CoBank, ACB, as cash management provider and agent (“CoBank ”) which provides the Company with a term loan in the amount of $30,000,000 (the “ Term Loan ”) and a revolving term loan in the amount of up to $36,000,000 (the “ Revolving Term Loan ,” together with the Term Loan, the “ FCSA Credit Facility ”). The FCSA Credit Facility is secured by a security interest on all of the Company’s assets.

The Term Loan provides for payments by the Company to FCSA of quarterly installments of $1,500,000 each, beginning on December 20, 2014 with a maturity date of September 20, 2019. The Revolving Term Loan has a maturity date of June 1, 2023 and requires reductions in principal availability in increments of $6,000,000 each June 1 commencing on June 1, 2020. Under the FCSA Credit Facility, the Company has the right to select from the several LIBOR based interest rate options with respect to each of the Term Loan and the Revolving Term Loan.

As of June 30, 2014 , there was $40.0 million outstanding under the FCSA Credit Facility, with $26.0 million available under the Revolving Term Loan.

AgStar

The Company originally entered into a Credit Agreement, with AgStar Financial Services, PCA (“AgStar”) and a group of lenders for $126,000,000 senior secured debt, consisting of a $101,000,000 term loan, a term revolver of up to $10,000,000 and a revolving working capital term facility of up to $15,000,000.

As of September 30, 2013, the outstanding balance under the Credit Agreement was $68,837,175.

All outstanding principal under the AgStar Credit Facility was paid off on June 24, 2014 with proceeds from the FSCA Credit Facility and the AgStar Credit Agreement was retired.

Bunge

Effective June 23, 2014, the Company amended and restated its Subordinated Term Loan Note by and between the Company and Bunge (the “ Bunge Term Loan Note ”). The Bunge Term Loan Note provides a loan in the principal amount of $19,517,137 and matures on July 1, 2023. Interest under the Bunge Term Loan Note payable is calculated at a rate of Six and One Quarter Percent (6.25%) over LIBOR. Interest under the Bunge Term Loan Note is due and payable quarterly commencing on September 30, 2014. The Company may prepay any or all of the outstanding principal balance on the Bunge Term Loan Note at any time with thirty (30) days prior written notice to Bunge without penalty or premium. As under the prior Subordinated Term Loan Note between Bunge and the Company, Bunge may convert any or all of a portion of the outstanding principal to Series U Units of the Company at a price of $3,000 per unit at its option upon fifteen (15) days prior notice to the Company by Bunge. As part of the amendment and restatement, the Company paid a total of $19,922,241 of principal and accrued interest on the outstanding loan, extended the term as indicated and reduced the interest rate from Seven and One Half Percent (7.5%) over LIBOR to the indicated rate.

As of June 30, 2014 and September 30, 2013, there was $24,601 and $491,957 of accrued interest (included in accrued expenses, related parties) due to Bunge, respectively. Interest on the renewed note accrues monthly and is payable quarterly.

The Company had a revolving note with Bunge with a balance as of September 30, 2013 of $5,000,000, which was not renewed June 23, 2014.

ICM

Effective June 23, 2014, the Company amended and restated its Subordinated Term Loan Note by and between the Company and ICM (the “ ICM Term Loan Note ”). The ICM Term Loan Note provides a loan in the principal amount of $6,726,758. The ICM Term Loan Note matures on July 1, 2023. Interest under the ICM Term Loan Note is calculated at a rate of Six and One Quarter Percent (6.25%) per annum over LIBOR. Interest under the ICM Term Loan Note is due and payable quarterly commencing on September 30, 2014. The Company may prepay any or all of the outstanding principal balance on the ICM Term Loan Note at any time with thirty (30) days prior written notice to ICM without penalty or premium. As under the prior Subordinated Term Loan Note by and between ICM and the Company, ICM may convert any or all of a portion of the outstanding principal to Series C Units of the Company at a price of $3,000 per unit at its option upon fifteen (15) days prior notice to the Company by ICM. As part of the amendment and restatement, the Company paid a total of $6,866,381 of principal and accrued interest on the outstanding loan, extended the term as indicated and reduced the interest rate from Seven and One Half Percent (7.5%) over LIBOR to the indicated rate.

As of June 30, 2014 and September 30, 2013, there was $8,479 and $169,557 of accrued interest due (included in accrued expenses, related parties) to ICM, respectively.

Loss from debt extinguishment

As a result of amending and restating the Bunge and ICM Subordinated Term Loan (Subdebt) agreements on June 23, 2014 to a new maturity date, the Company evaluated the change under the debt modification accounting guidance for an instrument with an embedded conversion feature. As a result of this evaluation, the Company determined an extinguishment occurred, which required determination of the fair value of the related debt. The Company determined that the Subdebt fair value exceeded the face value by approximately $10.1 million due to the substantial premium contained in the conversion feature resulting in loss on debt extinguishment. Due to the substantial premium on the conversion feature in accordance with ASC 470-20-25-13, the resulting offset to the loss was reflected as an increase to members’ equity with the debt remaining at face value.

Notes payable

Notes payable consists of the following:



	June 30, 2014		September 30, 2013
	(000's)		(000's)
$300,000 Note payable to IDED, a non-interest bearing obligation with monthly payments of $2,500 due through the maturity date of March 26, 2016 on the non-forgivable portion.	$	197	$	220
Note payable to affiliate Bunge bearing interest at LIBOR plus 6.25% (6.48260% at June 30, 2014); maturity on July 1, 2023.	19,517		36,765
Note payable to affiliate ICM bearing interest at LIBOR plus 6.25% (6.48260% at June 30, 2014); maturity on July 1, 2023.	6,727		12,671
Capital leases payable to AgStar bearing interest at 3.088% matures May 15, 2015.	30		53
Term facility payable to FSCA bearing interest at LIBOR plus 3.35% (3.50% at June 30, 2014); maturity date of September 20, 2019.	30,000		—
Term Revolver payable to FSCA bearing interest at LIBOR plus 3.35% (3.50% at June 30, 2014); maturity at June 1, 2023.	10,000		—
Convertible Notes payable to unit holders was retired or converted May 31, 2014	—		552
Term facility payable to AgStar was retired June 24, 2014.	—		28,232
Term facility payable to AgStar was retired June 24, 2014.	—		30,606
Term revolver payable to AgStar was retired June 24, 2014.	—		10,000
Revolving line of credit payable to Bunge was retired June 24, 2014.	—		5,000
	66,471		124,099
Less Current Maturities	4,523		123,887
Total Long Term Debt	61,948		212

The approximate aggregate maturities of notes payable as of June 30, are as follows:



2014	$	4,523

2015	6,052

2016	6,152

2017	6,000

2018	6,000

2019 and Thereafter	37,744

Total	$	66,471

Note 6: Fair Value Measurement

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company used various methods including market, income and cost approaches. Based on these approaches, the Company often utilized certain assumptions that market participants

would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observable inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy.

The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:


Level 1 -	Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities.


Level 2 -	Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities.


Level 3 -	Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

A description of the valuation methodologies used for instruments measured at fair value, including the general classifications of such instruments pursuant to the valuation hierarchy, is set below.

Derivative financial instruments. Commodity futures and exchange traded options are reported at fair value utilizing Level 1 inputs. For these contracts, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the Chicago Mercantile Exchange (“CME”) market. Ethanol contracts are reported at fair value utilizing Level 1 inputs from third-party pricing services. Forward purchase contracts are reported at fair value utilizing Level 2 inputs. For these contracts, the Company obtains fair value measurements from local grain terminal values. The fair value measurements consider observable data that may include live trading bids from local elevators and processing plants which are based on the CME market.

The following table summarizes financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2014 and September 30, 2013, categorized by the level of the valuation inputs within the fair value hierarchy:



	June 30, 2014
	Level 1		Level 2		Level 3
Assets:
Derivative financial instruments	$	625,638	$	—	$	—

Liabilities:
Derivative financial instruments	1,961,813		2,056,281		—


	September 30, 2013
	Level 1		Level 2		Level 3
Assets:
Derivative financial instruments	$	355,575	$	—	$	—

Liabilities:
Derivative financial instruments	517,525		493,175		—

Note 7: Related Party Transactions

Bunge

On November 1, 2006, in consideration of its agreement to invest $20.0 million in the Company, Bunge purchased the only Series B Units under an arrangement whereby the Company would (i) enter into various agreements with Bunge or its affiliates (discussed below) for management, marketing and other services, and (ii) have the right to elect a number of Series B Directors which are proportionate to the number of Series B Units owned by Bunge, as compared to all Units. Under the Company’s Third Amended and Restated Operating Agreement (the “Operating Agreement”), the Company may not, without Bunge’s approval (i) issue additional Series B Units, (ii) create any additional Series of Units with rights which are superior to the Series B Units, (iii) modify the Operating Agreement to adversely impact the rights of Series B Unit holders, (iv) change its status from one which is managed by managers, or vise versa, (v) repurchase or redeem any Series B Units, (vi) take any action which would cause a bankruptcy, or (vii) approve a transfer of Units allowing the transferee to hold more than 17% of the Company’s Units or to a transferee which is a direct competitor of Bunge.

Under the Ethanol Agreement, the Company sells Bunge all of the ethanol produced at its facility, and Bunge purchases the same. The Company pays Bunge a per-gallon fee for ethanol sold by Bunge, subject to a minimum annual fee of $750 thousand adjusted according to specified indexes after three years. The Ethanol Agreement runs through August 31, 2014 and will automatically renew for successive three-year terms thereafter unless one party provides the other with notice of their election to terminate 180 days prior to the end of the term. The Company has incurred expenses of $351 thousand and $397 thousand during the three months ended June 30, 2014 and 2013, respectively, under the Ethanol Agreement. The Company has incurred expenses of $1.0 million and $1.0 million during the nine months ended June 30, 2014 and 2013, respectively, under the Ethanol Agreement.

On February 28, 2014, the Company notified Bunge of its intent to terminate the Ethanol Agreement, pending final negotiations of the senior and subordinated debt, as well as evaluating the Ethanol Agreement compared to others in the industry.

Under a Risk Management Services Agreement effective January 1, 2009, Bunge agreed to provide the Company with assistance in managing its commodity price risks for a quarterly fee of $75 thousand. The Risk Management Services Agreement has an initial term of three years and automatically renews for successive three year terms, unless one party provides the other notice of their election to terminate 180 days prior to the end of the term. Expenses under the Risk Management Services Agreement for the three months ended June 30, 2014 and 2013 were $75 thousand. Expenses under the Risk Management Services Agreement for the nine months ended June 30, 2014 and 2013 were $225 thousand.

On June 26, 2009, the Company executed a Railcar Agreement with Bunge for the lease of 325 ethanol cars and 300 hopper cars which are used for the delivery and marketing of ethanol and distillers grains. Under the Railcar Agreement, the Company leases railcars for terms lasting 120 months and continuing on a month to month basis thereafter. The Railcar Agreement will terminate upon the expiration of all railcar leases. Expenses under this agreement for the three months ended June 30, 2014 and 2013 were $0.8 million and $1.1 million net of subleases and accretion, respectively. Expenses under this agreement for the nine months ended June 30, 2014 and 2013 were $2.5 million and $3.3 million net of subleases and accretion, respectively. The Company has a sublease for 200 hopper cars that expires September 14, 2014. As the sublease rate is less than the original lease rate, a loss was recorded at inception of the sublease and is being accreted to rent expense over the life of the sublease. Upon expiration of the sublease, the Company will continue to work with Bunge to determine the most economic use of the available ethanol and hopper cars in light of the current market conditions. In December 2013 the Company subleased 55 cars to an unrelated party and recalled 25 cars from Bunge. The Company has subleased other cars to other unrelated parties on a short term basis.

The Company entered into a Distillers Grain Purchase Agreement dated October 13, 2006, as amended with Bunge, under which Bunge is obligated to purchase from the Company and the Company is obligated to sell to Bunge all distillers grains produced at the facility. If the Company finds another purchaser for distillers grains offering a better price for the same grade, quality, quantity, and delivery period, it can ask Bunge to either market directly to the other purchaser or market to another purchaser on the same terms and pricing. The initial 10-year term of the DG Agreement began February 1, 2009. The DG Agreement automatically renews for additional 3-year terms unless one party provides the other party with notice of election to not renew 180 days or more prior to expiration.

Under the DG Agreement, Bunge pays the Company a purchase price equal to the sales price minus the marketing fee and transportation costs. The sales price is the price received by Bunge in a contract consistent with the Company's DG Marketing Policy or the spot price agreed to between Bunge and the Company. Bunge receives a marketing fee consisting of a percentage of the net sales price, subject to a minimum yearly payment of $150 thousand. Net sales price is the sales price less the transportation costs and rail lease charges. The transportation costs are all freight charges, fuel surcharges, and other accessorial charges applicable to delivery of distillers grains. Rail lease charges are the monthly lease payment for rail cars along with all administrative and tax filing fees for such leased rail cars. Expenses under this agreement for the three months ended June 30, 2014 and 2013 were $509

thousand and $600 thousand, respectively. Expenses under this agreement for the nine months ended June 30, 2014 and 2013 were $1.5 million and $1.7 million, respectively.

On August 26, 2009, the Company also executed a Bunge Agreement—Equity Matters (the “Equity Agreement”). The Bunge Equity Agreement provides that (i) Bunge has preemptive rights to purchase new securities in the Company.

The Company is a party to a Grain Feedstock Supply Agreement (the “Supply Agreement”) with Bunge on July 15, 2008. Under the Supply Agreement, Bunge provides the Company with all of the corn it needs to operate the ethanol plant, and the Company has agreed to only purchase corn from Bunge. Bunge provides grain originators for purposes of fulfilling its obligations under the Supply Agreement. The Company pays Bunge a per-bushel fee for corn under the Supply Agreement, subject to a minimum annual fee of $675 thousand and adjustments according to specified indexes after three years. The term of the Supply Agreement is 10 years, subject to earlier termination upon specified events. Expenses under this agreement for the three months ended June 30, 2014 and 2013 were $333 thousand and $330 thousand, respectively. Expenses under this agreement for the nine months ended June 30, 2014 and 2013 were $993 thousand and $862 thousand, respectively.

On November 12, 2010, the Company entered into a Corn Oil Agency Agreement with Bunge to market its corn oil, which has an initial term of three years and will automatically renew for successive three-year terms unless one party provides the other notice of their election to terminate 180 days prior to the end of the term. Expenses under this agreement for the three months ended June 30, 2014 and 2013 were $63 thousand and $43 thousand, respectively. Expenses under this agreement for the nine months ended June 30, 2014 and 2013 were $173 thousand and $122 thousand, respectively.

The Company and Bunge have also entered into certain term and revolving credit facilities. See Note 5 Revolving Loan/Credit Agreements for the terms of these financing arrangements.

ICM

On November 1, 2006, in consideration of its agreement to invest $6.0 million in the Company, ICM became the sole Series C Member. As part of ICM’s agreement to invest in Series C Units, the Operating Agreement provides that the Company will not, without ICM’s approval (i) issue additional Series C Units, (ii) create any additional Series of Units with rights senior to the Series C Units, (iii) modify the Operating Agreement to adversely impact the rights of Series C Unit holders, or (iv) repurchase or redeem any Series C Units. Additionally, ICM, as the sole Series C Unit owner, is afforded the right to elect one Series C Director to the Board so long as ICM remains a Series C Member.

To induce ICM to agree to the ICM Term Note, the Company entered into an equity agreement with ICM (the “ICM Equity Agreement”) on June 17, 2010, whereby ICM (i) retains preemptive rights to purchase new securities in the Company.

The Company and ICM have also entered into a convertible term note. See Note 5 Revolving Loan/Credit Agreements for the terms of this financing arrangement.

Note 8: Major Customer

The Company is party to the Ethanol, Supply, and Corn Oil Agency Agreements with Bunge for the exclusive marketing, selling, and distributing of all the ethanol, distillers grains, syrup, and corn oil produced by the Company. Revenues with Bunge were $86.3 million and $92.3 million for the three months ended June 30, 2014 and 2013, respectively and were $244.6 million and $241.9 million for the nine months ended June 30, 2014 and 2013, respectively.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation.

General

The following discussion and analysis provides information which 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 and our Form 10-K for the year ended September 30, 2013 including the consolidated financial statements, accompanying notes and the risk factors contained herein.

Cautionary Statements Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q contains historical information, as well as forward-looking statements that involve known and unknown risks and relate to future events, our future financial performance, or our expected future operations and actions. In some cases, you can identify forward-looking statements by terminology such as “may,” “will”, “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “future,” “intend,” “could,” “hope,” “predict,” “target,” “potential,” or “continue” or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions based on current information and involve numerous assumptions, risks and uncertainties. Our actual results or actions may differ materially from these forward-looking statements for many reasons, including the reasons described in this report. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include:


•	Changes in the availability and price of corn, natural gas, and steam;


•	Our inability to comply with our credit agreements required to continue our operations;


•	Negative impacts that our hedging activities may have on our operations;


•	Decreases in the market prices of ethanol and distillers grains;


•	Ethanol supply exceeding demand; and corresponding ethanol price reductions;


•	Changes in the environmental regulations that apply to our plant operations including the levels of ethanol and other renewable fuel sources mandated by federal and state regulations;


•	Changes in plant production capacity or technical difficulties in operating the plant;


•	Changes in general economic conditions or the occurrence of certain events causing an economic impact in the agriculture, oil or automobile industries;


•	Changes in federal and/or state laws (including the elimination of any federal and/or state ethanol tax incentives);


•	Changes and advances in ethanol production technology;


•	Competition from alternative fuel additives;


•	Changes in interest rates and lending conditions of our loan covenants;


•	Our ability to retain key employees and maintain labor relations;

These forward-looking statements are based on management’s estimates, projections and assumptions as of the date hereof and include the assumptions that underlie such statements. Our actual results or actions could and likely will differ materially from those anticipated in the forward-looking statements for many reasons, including the reasons described in this reports. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed below and in the section titled “Risk Factors” in our Form 10-K for the fiscal year ended September 30, 2013 and in our other prior Securities and Exchange Commission filings. These and many other factors could affect our future financial condition and operating results and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by the Company or on its behalf. We undertake no obligation to revise or update any forward-looking statements. The forward-looking statements contained in this report are included in the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended.

Overview, Status and Recent Developments

The Company is an Iowa LLC, located in Council Bluffs, Iowa, formed in March, 2005 to construct and operate a 125 million gallon capacity ethanol plant (the "Facility"). We began producing ethanol in February, 2009 and sell our ethanol, distillers grains, corn oil and corn syrup in the continental United States, Mexico, and the Pacific Rim.

Industry Factors Affecting our Results of Operations

During the three months ended June 30, 2014, the ethanol industry experienced improved ethanol margins as a result of a combination of factors.


•	During the winter and spring months of 2014, there were numerous delays in the rail system, causing periods of plant slowdowns and shutdowns throughout the ethanol industry. These have abated somewhat industry-wide. SIRE had minimal effect from these issues, as our railcars were readily available the majority of the time.


•	Corn prices have decreased substantially during the three months ended June 30, 2014, from the same period in the previous fiscal year, as a result of the near record United States corn crop in 2013. For the three months ended June 30, 2014 as compared to the three months ended June 30, 2013, the average price per bushel paid decreased 35.3%.

•

The latest estimates of supply and demand provided by the U.S. Department of Agriculture (the “USDA”) forecast 2014 corn production of 13.9 billion bushels and ending corn stocks of 1.2 billion bushels suggesting stable to lower corn prices through fiscal 2014. Lower than normal ethanol stocks continue to have a positive effect on ethanol margins in the last three quarters of Fiscal 2013 and the first three quarters of Fiscal 2014.


•	Gasoline demand continues to increase over 2013 levels.

In response to the compressed ethanol margins which reached break-even and loss levels during the first quarter of our year ended September 30, 2013 ("Fiscal 2013") and effected our results of operations, we decreased production substantially in the first quarter of Fiscal 2013. We slightly increased production back toward capacity in the second quarter of Fiscal 2013 and during the third quarter of Fiscal 2013, we increased production further so that our plant began running at capacity and we have been running at capacity since. The full production during the nine months ended June 30, 2014 coupled with lower corn prices and good ethanol prices, resulted in net income of $35.6 million during the nine months ended June 30, 2014, as compared to a net loss of $(9.6) million in the nine months ended June 30, 2013.

Results of Operations

The following table shows our results of operations, stated as a percentage of revenue for the three months ended June 30, 2014 and 2013.



	Three months ended				Three months ended
	June 30, 2014				June 30, 2013
	Amounts		% of Revenues		Amounts		% of Revenues
	in 000's				in 000's
Income Statement Data
Revenues	$	88,158	100.0	%	$	94,472	100.0	%
Cost of Good Sold
Material Costs	51,624		58.6	%	74,552		78.9	%
Variable Production Exp	10,294		11.7	%	9,028		9.6	%
Fixed Production Exp	7,128		8.1	%	6,153		6.5	%
Gross Margin	19,112		21.6	%	4,739		5.0	%
General and Administrative Expenses	1,344		1.5	%	942		1.0	%
Other Expenses	2,080		2.4	%	2,296		2.4	%
Loss from Debt Extinguishment	10,128		11.5	%	—		—	%
Net Income (Loss)	$	5,560	6.2	%	$	1,501	1.6	%

The following table shows our results of operations, stated as a percentage of revenue for the nine months ended June 30, 2014 and 2013.



	Nine months ended				Nine months ended
	June 30, 2014				June 30, 2013
	Amounts		% of Revenues		Amounts			% of Revenues
	in 000's				in 000's
Income Statement Data
Revenues	$	251,315	100.0	%	$	247,996		100.0	%
Cost of Good Sold
Material Costs	147,638		58.7	%	205,207			82.7	%
Variable Production Exp	30,083		12.0	%	25,055			10.1	%
Fixed Production Exp	18,147		7.2	%	17,376			7.0	%
Gross Margin (loss)	55,447		22.1	%	358			0.2	%
General and Administrative Expenses	3,701		1.5	%	2,930			1.2	%
Other Expenses	6,049		2.4	%	7,034			2.8	%
Loss from Debt Extinguishment	$	10,128	4.0	%	$	—		—	%
Net Income (Loss)	$	35,569	14.2	%	$	(9,606	)	(3.8	)%



	Three months ended				Three months ended
	June 30, 2014				June 30, 2013
	Amounts		% of Revenues		Amounts		% of Revenues
	in 000's				in 000's
Statistical Revenue Information
Ethanol	$	68,367	77.6	%	$	72,203	76.4	%
Distiller's Grains	$	16,580	18.8	%	$	19,460	20.6	%
Corn Oil	$	2,864	3.2	%	$	2,140	2.3	%
Other	$	347	0.4	%	$	669	0.7	%



	Nine months ended				Nine months ended
	June 30, 2014				June 30, 2013
	Amounts		% of Revenues		Amounts		% of Revenues
	in 000's				in 000's
Statistical Revenue Information
Ethanol	$	193,221	76.9	%	$	184,953	74.5	%
Distiller's Grains	$	49,496	19.7	%	$	55,045	22.2	%
Corn Oil	$	7,609	3.0	%	$	6,102	2.5	%
Other	$	989	0.4	%	$	1,896	0.8	%

Revenues

Our revenue from operations is derived from four primary sources: sales of ethanol, distillers grains, corn oil, and corn syrup. Revenues decreased 6.7% from the three months ended June 30, 2013 to the three months ended June 30, 2014 and increased 1.3% from the nine months ended June 30, 2013 to the nine months ended June 30, 2014. For the three months ended June 30, 2014 to the three months ended June 30, 2013 ethanol gallons sold decreased 1.1% . From the nine months ended June 30, 2014 to the nine months ended June 30, 2013 ethanol gallons sold increased 14.2%. The price per gallon of ethanol sold decreased 4.4% in the three months ended June 30, 2014 compared to 2013, and decreased 8.9% in the nine months ended June 30, 2014 compared to 2013.

Cost of Goods Sold

Our cost of goods sold as a percentage of our revenues was 78.4% and 95.0% for the three months ended June 30, 2014 and 2013 and 77.9% and 99.8% for the nine months ended June 30, 2014 and 2013, respectively. Our two primary costs of producing ethanol and distillers grains are corn and energy, with steam and natural gas as our primary energy sources. Cost of goods sold also includes net gains or (losses) from derivatives and hedging relating to corn.

Corn used in ethanol gallons sold decreased 0.5% from the three months ended June 30, 2014 compared to 2013 and the average price of the corn used from the three months ended June 30, 2014 to 2013 decreased 32.8%. In the nine months ended June 30, 2014 compared to 2013, corn used in ethanol gallons sold increased 15.9% and the average price decreased 37.3%.

Variable and Fixed Production Expense

Our average steam and natural gas energy cost increased 30.0% per MMBTU for the three months ended June 30, 2014 compared to the three months ended June 30, 2013 and increased 20.3% per MMBTU for the nine months ended June 30, 2014 to 2013, respectively.

Realized and unrealized gains (losses) related to our derivatives and hedging related to corn resulted in an increase (decrease) of approximately $3.2 million and $(2.3) million in our cost of goods sold for the three months ended June 30, 2014 and 2013 respectively, and an increase of $5.5 million and $0.4 million in our cost of goods sold for the nine months ended June 30, 2014 and 2013, respectively. We recognize the gains or losses that result from the changes in the value of our derivative

instruments related to corn in cost of goods sold as the changes occur. As corn prices fluctuate, the value of our derivative instruments are impacted, which affects our financial performance. We anticipate continued volatility in our cost of goods sold due to the timing of the changes in value of the derivative instruments relative to the cost and use of the commodity being hedged.

Variable production expenses showed an increase when comparing the three months ended June 30, 2014 and 2013 due to the production increase and an increase in natural gas and steam cost. Fixed production expenses showed an increase when comparing the three months ended June 30, 2014 and 2013 due to the more extensive shutdown in April 2014. Variable production expenses showed an increase when comparing the nine months ended June 30, 2014 and 2013 due to the production increase and an increase in natural gas and steam cost. Fixed production expenses showed an increase when comparing the nine months ended June 30, 2014 and 2013 due to the more extensive shutdown in April 2014.

Loss from Debt Extinguishment

The Company considers the $10.1 million loss from debt extinguishment (discussed in Note 5) to be a one-time event, and does not anticipate re-valuing the debt in the future.

Selected Financial Data

Modified EBITDA is defined as net income (loss) plus interest expense net of interest income, plus depreciation and amortization, or EBITDA, as adjusted for unrealized hedging losses (gains) and loss from debt extinguishment. Modified EBITDA is not required by or presented in accordance with generally accepted accounting principles in the United States of America, and should not be considered as an alternative to net income, operating income or any other performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities or as a measure of our liquidity.

We present modified EBITDA because we consider it to be an important supplemental measure of our operating performance and it is considered by our management and Board of Directors as an important operating metric in their assessment of our performance.

We believe modified EBITDA allows us to better compare our current operating results with corresponding historical periods and with the operational performance of other companies in our industry because it does not give effect to potential differences caused by variations in capital structures (affecting relative interest expense, including the impact of write-offs of deferred financing costs when companies refinance their indebtedness), the amortization of intangibles (affecting relative amortization expense), unrealized hedging losses (gains) and other items that are unrelated to underlying operating performance. We also present modified EBITDA because we believe it is frequently used by securities analysts and investors as a measure of performance. There are a number of material limitations to the use of modified EBITDA as an analytical tool, including the following:


•	Modified EBITDA does not reflect our interest expense or the cash requirements to pay our principal and interest. Because we have borrowed money to finance our operations, interest expense is a necessary element of our costs and our ability to generate profits and cash flows. Therefore, any measure that excludes interest expense may have limitations.

•

Although depreciation and amortization are non-cash expenses in the period recorded, the assets being depreciated and amortized may have to be replaced in the future, and modified EBITDA does not reflect the cash requirements for such replacement. Because we use capital assets, depreciation and amortization expense is a necessary element of our costs and ability to generate profits. Therefore, any measure that excludes depreciation and amortization expense may have limitations.

We compensate for these limitations by relying heavily on our GAAP financial measures and by using modified EBITDA as supplemental information. We believe that consideration of modified EBITDA, together with a careful review of our GAAP financial measures, is the most informed method of analyzing our operations. Because modified EBITDA is not a measurement determined in accordance with GAAP and is susceptible to varying calculations, modified EBITDA, as presented, may not be comparable to other similarly titled measures of other companies. The following table provides a reconciliation of modified EBITDA to net income (loss) (in thousands except per unit data):



	Three months ended		Three months ended		Nine months ended		Nine months ended
	June 30, 2014		June 30, 2013		June 30, 2014		June 30, 2013

EBITDA
Net Income (Loss)	$	5,560	$	1,501	$	35,569	$	(9,606	)
Interest Expense, Net	2,090		2,314		6,078		7,084
Depreciation	2,874		2,849		8,601		8,546
EBITDA	10,524		6,664		50,248		6,024

Unrealized Hedging Loss	3,320		535		2,737		3,985
Loss from debt extinguishment	10,128		—		10,128		—

Modified EBITDA	$	23,972	$	7,199	$	63,113	$	10,009

Modified EBITDA per unit - basic	$	1,815.37	$	547.91	$	4,794.36	$	761.78

Liquidity and Capital Resources

As of June 30, 2014, we had a cash balance of $3.5 million, $26.0 million available under the term revolver and working capital of $11.8 million.

In June, the Company announced the completion of a $66.0 million Senior Credit Agreement (the “Credit Agreement”) with FCSA and CoBank. The proceeds of the Credit Agreement were used to refinance senior bank debt previously outstanding and scheduled to mature in August 2014. The Credit Agreement provides SIRE with a term loan of $30 million, due in 2019, and a revolving term loan of $36 million, due in 2023. Interest rate on the Credit Agreement is LIBOR plus 3.35%. The Credit Agreement resulted in a significantly lower interest rate than under the prior credit facility.

SIRE also issued a total of $26.2 million Subordinated Term Loan Notes (the “Subordinated Notes”) due in 2023, with the interest rate of LIBOR plus 6.25%. The proceeds of the Subordinated Notes were used to refinance the remaining balance of subordinated debt previously outstanding and scheduled to mature in August 2014. Prior to completing these Subordinated Notes, SIRE also paid a total of $26.8 million to its subordinated lenders for principal and accrued interest.As with the Credit Agreement, the interest rate on the remaining Subordinated Notes was significantly reduced.

Primary Working Capital Needs

During the fourth quarter of Fiscal 2014, we estimate that we will require approximately $44.8 million for our primary input of corn and $4.9 million for our energy sources of electricity, steam, and natural gas. We currently have $26.0 million available under our Term Revolver for working capital needs. We cannot estimate the availability of funds for hedging in the future.

Commodity Price Risk

Our operations are highly dependent on commodity prices, especially prices for corn, ethanol and distillers grains and the spread between them. 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, governmental programs and foreign purchases. We may experience increasing costs for corn and natural gas and decreasing prices for ethanol and distillers grains which could significantly impact our operating results. Because the market price of ethanol is not directly related to corn prices, ethanol producers are generally not able to compensate for increases in the cost of corn through adjustments in prices for ethanol. We continue to monitor corn and ethanol prices and manage the "crush margin" to effect our longer-term profitability.

We enter into various derivative contracts with the primary objective of managing our exposure to adverse price movements in the commodities used for, and produced in, our business operations and, to the extent we have working capital available and available market conditions are appropriate, we engage in hedging transactions which involve risks that could harm our business. We measure and review our net commodity positions on a daily basis. Our daily net agricultural commodity position consists of inventory, forward purchase and sale contracts, over-the-counter and exchange traded derivative instruments. The effectiveness of our hedging strategies is dependent upon the cost of commodities and our ability to sell sufficient products to use all of the commodities for which we have futures contracts. Although we actively manage our risk and adjust hedging strategies as appropriate, there is no assurance that our hedging activities will successfully reduce the risk caused by market volatility which may leave us vulnerable to high commodity prices. Alternatively, we may choose not to engage in hedging transactions in the future. As a result, our future results of operations and financial conditions may also be adversely affected during periods in which price changes in corn, ethanol and distillers grain to not work in our favor.

In addition, as described above, hedging transactions expose us to the risk of counterparty non-performance where the counterparty to the hedging contract defaults on its contract or, in the case of over-the-counter or exchange-traded contracts, where there is a change in the expected differential between the price of the commodity underlying the hedging agreement and the actual prices paid or received by us for the physical commodity bought or sold. We have, from time to time, experienced instances of counterparty non-performance but losses incurred in these situations were not significant.

Although we believe our hedge positions accomplish an economic hedge against our future purchases and sales, management has chosen not to use hedge accounting, which would match any gain or loss on our hedge positions to the specific commodity purchase being hedged. We are using fair value accounting for our hedge positions, which means as the current market price of our hedge positions changes, the realized or unrealized gains and losses are immediately recognized in the current period (commonly referred to as the “mark to market” method). The immediate recognition of hedging gains and losses under fair value accounting can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged. As corn prices move in reaction to market trends and information, our income statement will be affected depending on the impact such market movements have on the value of our derivative instruments. Depending on market movements, crop prospects and weather, our hedging strategies may cause immediate adverse effects, but are expected to produce long-term positive impact.

In the event we do not have sufficient working capital to enter into hedging strategies to manage our commodities price risk, we may be forced to purchase our corn and market our ethanol at spot prices and as a result, we could be further exposed to market volatility and risk. However, during the past year, the spot market has been advantageous.

Credit and Counterparty Risks

Through our normal business activities, we are subject to significant credit and counterparty risks that arise through normal commercial sales and purchases, including forward commitments to buy and sell, and through various other over-the-counter (OTC) derivative instruments that we utilize to manage risks inherent in our business activities. We define credit and counterparty risk as a potential financial loss due to the failure of a counterparty to honor its obligations. The exposure is measured based upon several factors, including unpaid accounts receivable from counterparties and unrealized gains (losses) from OTC derivative instruments (including forward purchase and sale contracts). We actively monitor credit and counterparty risk through credit analysis (by our marketing agent).

Impact of Hedging Transactions on Liquidity

Our operations and cash flows are highly impacted by commodity prices, including prices for corn, ethanol, distillers grains and natural gas. We attempt to reduce the market risk associated with fluctuations in commodity prices through the use of derivative instruments, including forward corn contracts and over-the-counter exchange-traded futures and option contracts. Our liquidity position may be positively or negatively affected by changes in the underlying value of our derivative instruments. When the value of our open derivative positions decrease, we may be required to post margin deposits with our brokers to cover a portion of the decrease or we may require significant liquidity with little advanced notice to meet margin calls. Conversely, when the value of our open derivative positions increase, our brokers may be required to deliver margin deposits to us for a portion of the increase. We continuously monitor and manage our derivative instruments portfolio and our exposure to margin calls and while we believe we will continue to maintain adequate liquidity to cover such margin calls from operating results and borrowings, we cannot estimate the actual availability of funds from operations or borrowings for hedging transactions in the future.

The effects, positive or negative, on liquidity resulting from our hedging activities tend to be mitigated by offsetting changes in cash prices in our business. For example, in a period of rising corn prices, gains resulting from long grain derivative

positions would generally be offset by higher cash prices paid to farmers and other suppliers in local corn markets. These offsetting changes do not always occur, however, in the same amounts or in the same period.

We expect that a $1.00 per bushel fluctuation in market prices for corn would impact our cost of goods sold by approximately $45 million, or $0.36 per gallon, assuming our plant operates at 100% of our capacity. We expect the annual impact to our results of operations due to a $0.50 decrease in ethanol prices will result in approximately a $62 million decrease in revenue.

Off-Balance Sheet Arrangements

We do not have any off balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 4. Controls and Procedures.

The Company’s management, including its President and Chief Executive Officer (our principal executive officer), Brian T. Cahill, along with its Chief Financial Officer (our principal financial officer), Brett L. Frevert, have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15 under the Securities Exchange Act of 1934, as amending, the “Exchange Act”), as of June 30, 2014. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Based upon this review and evaluation, these officers believe that the Company’s disclosure controls and procedures are presently effective in ensuring that material information related to us is recorded, processed, summarized and reported within the time periods required by the forms and rules of the Securities and Exchange Commission (the “SEC”).

The Company’s management, including the Company’s principal executive officer and principal financial officer, have reviewed and evaluated any changes in the Company’s internal control over financial reporting that occurred as of June 30, 2014 and there has been no change that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.

The Company’s management assessed the effectiveness of the Company’s internal control over financing reporting as of June 30, 2014. In making this assessment, the Company’s management used the criteria set forth by the Committee Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework ("the 1992 Framework"). Based on this assessment, the Company’s management concluded that, as of June 30, 2014, the Company’s integrated controls over financial report were effective.

This quarterly report does not include an attestation report of the company’s registered public accounting firm pursuant to the exemption under Section 989G of the Dodd-Frank Act of 2010.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

On August 25, 2010, the Company entered into a Tricanter Purchase and Installation Agreement (the “Tricanter Agreement”) with ICM, pursuant to which ICM sold the Company a tricanter corn oil separation system (the “Tricanter Equipment”). Under the Tricanter Agreement, ICM has agreed to indemnify the Company from any and all lawsuit and damages with respect to the Company's installation and use of the Tricanter Equipment.

On August 5, 2013, GS Cleantech Corporation (“GS Cleantech”) filed a suit in United States District Court for the Southern District of Iowa, Western Division (Case No. 2:13-CV-00021-JAJ-CFB), naming the Company as a defendant (the “Lawsuit”). The Lawsuit alleges infringement of a patent assigned to GS Cleantech with respect to the corn oil separation technology used in the Tricanter Equipment. The Lawsuit seeks preliminary and permanent injunctions against the Company to prevent future infringement on the patent owned by GS CleanTech and damages in an unspecified amount adequate to compensate GS CleanTech for the alleged patent infringement, plus attorney's fees.

The Company is not currently able to predict the outcome of this Lawsuit with any degree of certainty. Under the Tricanter Agreement, ICM is obligated to, and has retained counsel at its expense to defend the Company in this Lawsuit. However, in the event that damages are awarded as a result of this Lawsuit and, if ICM is unable to fully indemnify the Company for any reason, the Company could be liable for such damages. In addition, the Company may need to cease use of its current oil separation process and seek out a replacement or cease oil production altogether.

Item 1A. Risk Factors.

There have been no material changes to the risk factors disclosed in Item 1A of our Form 10-K for the fiscal year ended September 30, 2013. Additional risks and uncertainties, including risks and uncertainties not presently known to us, or that we currently deem immaterial, could also have an adverse effect on our business, financial condition and/or results of operations.

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

None

Item 3. Defaults Upon Senior Securities.

None

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None

Item 6. Exhibits



31.1	Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002) executed by the Principal Executive Officer.

31.2	Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002) executed by the Principal Financial Officer.

32.1***	Rule 15d-14(b) Certifications (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) executed by the Principal Executive Officer.

32.2***	Rule 15d-14(b) Certifications (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) executed by the Principal Financial Officer.

101.XML^	XBRL Instance Document

101.XSD^	XBRL Taxonomy Schema

101.CAL^	XBRL Taxonomy Calculation Database

101.LAB^	XBRL Taxonomy Label Linkbase

101.PRE^	XBRL Taxonomy Presentation Linkbase

***	This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference.
^	Furnished, not filed.

SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



		SOUTHWEST IOWA RENEWABLE ENERGY, LLC

Date:	August 13, 2014	/s/ Brian T. Cahill
		Brian T. Cahill, President and Chief Executive Officer

Date:	August 13, 2014	/s/ Brett L. Frevert
		Brett L. Frevert, CFO and Principal Financial Officer

SOUTHWEST IOWA RENEWABLE ENERGY, LLC - FORM 10-Q - August 13, 2014

Attached files

SOUTHWEST IOWA RENEWABLE ENERGY, LLC Reports