Attached files
file | filename |
---|---|
EXCEL - IDEA: XBRL DOCUMENT - RED TRAIL ENERGY, LLC | Financial_Report.xls |
EX-32.2 - CERTIFICATION - RED TRAIL ENERGY, LLC | certification3226-30x14.htm |
EX-32.1 - CERTIFICATION - RED TRAIL ENERGY, LLC | certification3216-30x14.htm |
EX-31.2 - CERTIFICATION - RED TRAIL ENERGY, LLC | certification3126-30x14.htm |
EX-31.1 - CERTIFICATION - RED TRAIL ENERGY, LLC | certification3116-30x14.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the quarterly period ended June 30, 2014 | |
OR | |
o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the transition period from to . | |
COMMISSION FILE NUMBER 000-52033 |
RED TRAIL ENERGY, LLC
(Exact name of registrant as specified in its charter)
North Dakota | 76-0742311 | |||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||
3682 Highway 8 South, P.O. Box 11, Richardton, ND 58652 | ||||
(Address of principal executive offices) | ||||
(701) 974-3308 | ||||
(Registrant's telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate 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).
x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act:
Large Accelerated Filer o | Accelerated Filer o |
Non-Accelerated Filer x | Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes x No
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
As of August 14, 2014, there were 40,148,160 Class A Membership Units outstanding.
1
INDEX
Page Number | |
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
RED TRAIL ENERGY, LLC
Condensed Balance Sheets
ASSETS | June 30, 2014 | September 30, 2013 | ||||||
(Unaudited) | ||||||||
Current Assets | ||||||||
Cash and equivalents | $ | 7,308,993 | $ | 1,000 | ||||
Restricted cash | 3,222,290 | 153,210 | ||||||
Accounts receivable, primarily related party | 5,224,409 | 4,048,686 | ||||||
Other receivables | 46,980 | 42,472 | ||||||
Commodities derivative instruments, at fair value | 2,279,858 | — | ||||||
Inventory | 14,262,068 | 12,189,693 | ||||||
Prepaid expenses | 177,745 | 76,428 | ||||||
Total current assets | 32,522,343 | 16,511,489 | ||||||
Property, Plant and Equipment | ||||||||
Land | 836,428 | 836,428 | ||||||
Land improvements | 4,127,372 | 4,127,372 | ||||||
Buildings | 5,498,862 | 5,492,612 | ||||||
Plant and equipment | 77,739,675 | 77,660,841 | ||||||
Construction in progress | 1,527,012 | 25,885 | ||||||
89,729,349 | 88,143,138 | |||||||
Less accumulated depreciation | 39,036,610 | 35,949,952 | ||||||
Net property, plant and equipment | 50,692,739 | 52,193,186 | ||||||
Other Assets | ||||||||
Debt issuance costs, net of amortization | 50,483 | 64,046 | ||||||
Investment in RPMG | 605,000 | 605,000 | ||||||
Patronage equity | 2,651,229 | 2,325,640 | ||||||
Deposits | 41,500 | 41,500 | ||||||
Total other assets | 3,348,212 | 3,036,186 | ||||||
Total Assets | $ | 86,563,294 | $ | 71,740,861 |
Notes to Unaudited Condensed Financial Statements are an integral part of this Statement.
3
RED TRAIL ENERGY, LLC
Condensed Balance Sheets
LIABILITIES AND MEMBERS' EQUITY | June 30, 2014 | September 30, 2013 | ||||||
(Unaudited) | ||||||||
Current Liabilities | ||||||||
Disbursements in excess of bank balances | $ | — | $ | 3,126,883 | ||||
Accounts payable | 4,580,446 | 3,577,647 | ||||||
Accrued expenses | 1,956,821 | 1,052,314 | ||||||
Commodities derivative instruments, at fair value | — | 48,638 | ||||||
Accrued loss on firm purchase commitments (see note 7) | 372,000 | 203,000 | ||||||
Current maturities of long-term debt | 2,027,386 | 2,949,977 | ||||||
Total current liabilities | 8,936,653 | 10,958,459 | ||||||
Long-Term Liabilities | ||||||||
Notes payable | 13,105,822 | 17,836,281 | ||||||
Contracts payable | 275,000 | 275,000 | ||||||
Total long-term liabilities | 13,380,822 | 18,111,281 | ||||||
Members’ Equity (40,148,160 Class A Membership Units issued and outstanding) | 64,245,819 | 42,671,121 | ||||||
Total Liabilities and Members’ Equity | $ | 86,563,294 | $ | 71,740,861 |
Notes to Unaudited Condensed Financial Statements are an integral part of this Statement.
4
RED TRAIL ENERGY, LLC
Statements of Operations (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 | ||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | ||||||||||||
Revenues, primarily related party | $ | 35,011,137 | $ | 43,669,509 | $ | 110,719,307 | $ | 123,442,717 | |||||||
Cost of Goods Sold | |||||||||||||||
Cost of goods sold | 18,032,020 | 42,183,883 | 84,902,777 | 117,431,635 | |||||||||||
Lower of cost or market inventory adjustment | — | 24,000 | — | 365,500 | |||||||||||
Loss on firm purchase commitments | 372,000 | — | 372,000 | 1,091,000 | |||||||||||
Total Cost of Goods Sold | 18,404,020 | 42,207,883 | 85,274,777 | 118,888,135 | |||||||||||
Gross Profit | 16,607,117 | 1,461,626 | 25,444,530 | 4,554,582 | |||||||||||
General and Administrative Expenses | 517,686 | 496,387 | 1,555,358 | 1,570,245 | |||||||||||
Operating Income | 16,089,431 | 965,239 | 23,889,172 | 2,984,337 | |||||||||||
Other Income (Expense) | |||||||||||||||
Interest income | 24,624 | 15,154 | 64,448 | 45,211 | |||||||||||
Other income | 8,671 | 14,816 | 100,400 | 65,621 | |||||||||||
Interest expense | (146,853 | ) | (245,817 | ) | (471,871 | ) | (735,160 | ) | |||||||
Total other income (expense), net | (113,558 | ) | (215,847 | ) | (307,023 | ) | (624,328 | ) | |||||||
Net Income | $ | 15,975,873 | $ | 749,392 | $ | 23,582,149 | $ | 2,360,009 | |||||||
Weighted Average Units Outstanding | |||||||||||||||
Basic | 40,148,160 | 40,148,160 | 40,148,160 | 40,153,215 | |||||||||||
Diluted | 40,148,160 | 40,148,160 | 40,148,160 | 40,154,900 | |||||||||||
Net Income Per Unit | |||||||||||||||
Basic | $ | 0.40 | $ | 0.02 | $ | 0.59 | $ | 0.06 | |||||||
Diluted | $ | 0.40 | $ | 0.02 | $ | 0.59 | $ | 0.06 | |||||||
Notes to Condensed Unaudited Financial Statements are an integral part of this Statement.
5
RED TRAIL ENERGY, LLC
Condensed Statements of Cash Flows (Unaudited)
Nine Months Ended | Nine Months Ended | ||||||
June 30, 2014 | June 30, 2013 | ||||||
Cash Flows from Operating Activities | (Unaudited) | (Unaudited) | |||||
Net income | $ | 23,582,149 | $ | 2,360,009 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization | 3,100,223 | 3,030,562 | |||||
Change in fair value of derivative instruments | (2,328,496 | ) | 180,110 | ||||
Lower of cost or market inventory adjustment | — | 365,500 | |||||
Gain on disposal of fixed assets | — | (17,633 | ) | ||||
Loss on firm purchase commitments | 372,000 | 1,091,000 | |||||
Noncash patronage equity | (325,588 | ) | (87,500 | ) | |||
Change in operating assets and liabilities: | |||||||
Restricted cash | (3,069,081 | ) | (54,393 | ) | |||
Accounts receivable | (1,180,232 | ) | (1,384,055 | ) | |||
Other receivables | — | (5,909 | ) | ||||
Inventory | (2,444,375 | ) | (2,496,686 | ) | |||
Prepaid expenses | (101,317 | ) | (58,253 | ) | |||
Other assets | — | (1,350 | ) | ||||
Accounts payable | 1,002,800 | 226,147 | |||||
Accrued expenses | 904,507 | (31,530 | ) | ||||
Accrued purchase commitment losses | 169,000 | — | |||||
Net cash provided by operating activities | 19,681,590 | 3,116,019 | |||||
Cash Flows from Investing Activities | |||||||
Proceeds from disposal of fixed assets | — | 160,950 | |||||
Capital expenditures | (1,586,212 | ) | (605,935 | ) | |||
Net cash (used in) investing activities | (1,586,212 | ) | (444,985 | ) | |||
Cash Flows from Financing Activities | |||||||
Dividends Paid | (2,007,452 | ) | — | ||||
Disbursements in excess of bank balances | (3,126,883 | ) | 3,358,680 | ||||
Loan fees | — | (11,321 | ) | ||||
Net advances on short-term borrowings | (3,363,000 | ) | (242,000 | ) | |||
Debt repayments | (2,290,050 | ) | (5,776,393 | ) | |||
Net cash (used in) financing activities | (10,787,385 | ) | (2,671,034 | ) | |||
Net Increase in Cash and Equivalents | 7,307,993 | — | |||||
Cash and Equivalents - Beginning of Period | 1,000 | 1,000 | |||||
Cash and Equivalents - End of Period | $ | 7,308,993 | $ | 1,000 | |||
Supplemental Disclosure of Cash Flow Information | |||||||
Interest paid | $ | 490,598 | $ | 751,517 |
Notes to Unaudited Condensed Financial Statements are an integral part of this Statement.
6
RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 2014
The accompanying condensed unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as permitted by such rules and regulations. These financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the Company's audited financial statements for the fiscal year ended September 30, 2013, contained in the Company's Annual Report on Form 10-K.
In the opinion of management, the interim condensed unaudited financial statements reflect all adjustments considered necessary for fair presentation. The adjustments made to these statements consist only of normal recurring adjustments. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2014.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Red Trail Energy, LLC, a North Dakota limited liability company (the “Company”), owns and operates a 50 million gallon annual name-plate production ethanol plant near Richardton, North Dakota (the “Plant”).
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. Significant items subject to such estimates and assumptions include the useful lives of property, plant and equipment, valuation of derivatives, inventory, patronage equity and purchase commitments, the analysis of long-lived assets impairment and other contingencies. Actual results could differ from those estimates.
Net Income (Loss) Per Unit
Net income (loss) per unit is calculated on a basic and fully diluted basis using the weighted average units outstanding during the period. The Company has reviewed all recently issued, but not yet effective accounting pronouncements and does not expect the future adoption of any such pronouncements to have a material impact on the Company's financial condition or results of operations.
2. DERIVATIVE INSTRUMENTS
Commodity Contracts
As part of its hedging strategy, the Company may enter into ethanol, soybean oil, and corn commodity-based derivatives in order to protect cash flows from fluctuations caused by volatility in commodity prices in order to protect gross profit margins from potentially adverse effects of market and price volatility on ethanol sales, corn oil sales, and corn purchase commitments where the prices are set at a future date. These derivatives are not designated as effective hedges for accounting purposes. For derivative instruments that are not accounted for as hedges, or for the ineffective portions of qualifying hedges, the change in fair value is recorded through earnings in the period of change. Ethanol derivative fair market value gains or losses are included in the results of operations and are classified as revenue and corn derivative changes in fair market value are included in cost of goods sold.
7
RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 2014
As of: | June 30, 2014 (unaudited) | September 30, 2013 | |||||||||||||||||
Contract Type | # of Contracts | Notional Amount (Qty) | Fair Value | # of Contracts | Notional Amount (Qty) | Fair Value | |||||||||||||
Corn futures | 1,321 | 6,605,000 | bushels | $ | 2,014,175 | 80 | 400,000 | bushels | $ | (48,638 | ) | ||||||||
Soybean oil options | 200 | 1,000,000 | gal | $ | 788,750 | — | — | — | $ | — | |||||||||
Soybean oil futures | 117 | 70,200 | gal | $ | 109,176 | — | — | — | $ | — | |||||||||
Ethanol futures | 144 | 6,048,000 | gal | $ | (632,243 | ) | — | — | — | $ | — | ||||||||
Total fair value | $ | 2,279,858 | $ | (48,638 | ) |
The following tables provide details regarding the Company's derivative financial instruments at June 30, 2014 and September 30, 2013:
Derivatives not designated as hedging instruments: | ||||||||
Balance Sheet - as of June 30, 2014 (unaudited) | Asset | Liability | ||||||
Commodity derivative instruments, at fair value | $ | 2,279,858 | $ | — | ||||
Total derivatives not designated as hedging instruments for accounting purposes | $ | 2,279,858 | $ | — | ||||
Balance Sheet - as of September 30, 2013 | Asset | Liability | ||||||
Commodity derivative instruments, at fair value | $ | — | $ | 48,638 | ||||
Total derivatives not designated as hedging instruments for accounting purposes | $ | — | $ | 48,638 |
Statement of Operations Income/(Expense) | Location of gain (loss) in fair value recognized in income | Amount of gain(loss) recognized in income during the three months ended June 30, 2014 (unaudited) | Amount of gain (loss) recognized in income during the three months ended June 30, 2013 (unaudited) | Amount of gain(loss) recognized in income during the nine months ended June 30, 2014 (unaudited) | Amount of gain (loss) recognized in income during the nine months ended June 30, 2013 (unaudited) | |||||||||||||
Corn derivative instruments | Cost of Goods Sold | $ | 4,027,197 | $ | 383,168 | $ | 2,245,729 | $ | 1,015,199 | |||||||||
Ethanol derivative instruments | Revenue | 2,580,892 | — | (7,771,093 | ) | — | ||||||||||||
Soybean oil derivative instruments | Revenue | 416,722 | — | 416,722 | 3,084 | |||||||||||||
Total | $ | 7,024,811 | $ | 383,168 | $ | (5,108,642 | ) | $ | 1,018,283 |
8
RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 2014
3. INVENTORY
Inventory is valued at lower of cost or market. Inventory values as of June 30, 2014 and September 30, 2013 were as follows:
As of | June 30, 2014 (unaudited) | September 30, 2013 | ||||||
Raw materials, including corn, chemicals and supplies | $ | 10,367,548 | $ | 7,510,059 | ||||
Work in process | 914,248 | 1,056,340 | ||||||
Finished goods, including ethanol and distillers grains | 1,150,232 | 1,951,155 | ||||||
Spare parts | 1,830,040 | 1,672,139 | ||||||
Total inventory | $ | 14,262,068 | $ | 12,189,693 |
Lower of cost or market adjustments for the three and nine months ended June 30, 2014 and 2013 were as follows:
For the three months ended June 30, 2014 (unaudited) | For the three months ended June 30, 2013 (unaudited) | For the nine months ended June 30, 2014 (unaudited) | For the nine months ended June 30, 2013 (unaudited) | |||||||||||||
Loss on firm purchase commitments | $ | 372,000 | $ | — | 372,000 | 1,091,000 | ||||||||||
Loss on lower of cost or market adjustment for inventory on hand | — | 24,000 | — | 365,500 | ||||||||||||
Total loss on lower of cost or market adjustments | $ | 372,000 | $ | 24,000 | $ | 372,000 | $ | 1,456,500 |
The Company has entered into forward corn purchase contracts under which it is required to take delivery at the contract price. At the time the contracts were created, the price of the contract approximated market price. Subsequent changes in market conditions could cause the contract prices to become higher or lower than market prices. As of June 30, 2014, the average price of corn purchased under certain fixed price contracts, that had not yet been delivered, was greater than approximated market price. Based on this information, the Company has an estimated loss on firm purchase commitments of $372,000 and $1,091,000 for the nine months ended June 30, 2014 and 2013, respectively. The loss is recorded in “Loss on firm purchase commitments” on the statements of operations. The amount of the loss was determined by applying a methodology similar to that used in the impairment valuation with respect to inventory. Given the uncertainty of future ethanol prices, this loss may or may not be recovered, and further losses on the outstanding purchase commitments could be recorded in future periods.
The Company recorded inventory valuation impairments of $0 and $365,500 for the nine months ended June 30, 2014 and 2013, respectively. The impairments, as applicable, were attributable primarily to decreases in market prices of corn and ethanol. The inventory valuation impairment was recorded in “Lower of cost or market adjustment” on the statements of operations.
4. BANK FINANCING
As of | June 30, 2014 (unaudited) | September 30, 2013 | ||||||
Long-term notes payable under loan agreement to bank | $ | 15,079,000 | $ | 20,708,000 | ||||
Capital lease obligations (Note 6) | 54,208 | 78,258 | ||||||
Total Long-Term Debt | 15,133,208 | 20,786,258 | ||||||
Less amounts due within one year | 2,027,386 | 2,949,977 | ||||||
Total Long-Term Debt Less Amounts Due Within One Year | $ | 13,105,822 | $ | 17,836,281 |
The Company's notes payable consist of a term loan and a long-term revolver (LTR). As of June 30, 2014, the variable interest rate on both the term loan and the LTR was 3.73% . Both of these loans mature on April 16, 2017.
9
RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 2014
The Company also has a $10,000,000 operating line-of-credit that matures on February 28, 2015. At June 30, 2014, the Company had $0 drawn on this line-of-credit leaving a balance of $10,000,000 available. The variable interest rate was 3.66% for amounts drawn on the operating line of credit.
Scheduled debt maturities for the twelve months ending June 30 | Totals | |||
2014 | $ | 2,027,386 | ||
2015 | 2,026,822 | |||
2016 | 2,000,000 | |||
2017 | 9,079,000 | |||
Thereafter | — | |||
Total | $ | 15,133,208 |
As of June 30, 2014, the Company was in compliance with all of its debt covenants.
Interest Expense | For the three months ended June 30, 2014(unaudited) | For the three months ended June 30, 2013 (unaudited) | For the nine months ended June 30, 2014(unaudited) | For the nine months ended June 30, 2013 (unaudited) | ||||||||||||
Interest expense on long-term debt | $ | 146,853 | $ | 245,817 | $ | 471,872 | $ | 735,160 | ||||||||
Total interest expense | $ | 146,853 | $ | 245,817 | $ | 471,872 | $ | 735,160 |
5. FAIR VALUE MEASUREMENTS
The following table provides information on those assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2014 and September 30, 2013, respectively.
Fair Value Measurement Using | |||||||||||||||||||
Carrying Amount as of June 30, 2014 (unaudited) | Fair Value as of June 30, 2014 (unaudited) | Level 1 | Level 2 | Level 3 | |||||||||||||||
Assets | |||||||||||||||||||
Commodities derivative instruments | $ | 2,279,858 | $ | 2,279,858 | $ | 2,279,858 | $ | — | $ | — | |||||||||
Fair Value Measurement Using | |||||||||||||||||||
Carrying Amount as of September 30, 2013 | Fair Value as of September 30, 2013 | Level 1 | Level 2 | Level 3 | |||||||||||||||
Liabilities | |||||||||||||||||||
Commodities derivative instruments | $ | 48,638 | $ | 48,638 | $ | 48,638 | $ | — | $ | — | |||||||||
Total | $ | 48,638 | $ | 48,638 | $ | 48,638 | $ | — | $ | — |
The fair value of the corn, ethanol and soybean oil derivative instruments is based on quoted market prices in an active market.
10
RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 2014
Financial Instruments Not Measured at Fair Value
The estimated fair value of the Company's long-term debt, including the short-term portion, at June 30, 2014 and September 30, 2013 approximated the carrying value of approximately $15.1 million and $20.8 million, respectively. Fair value was estimated using estimated variable market interest rates as of June 30, 2014. The fair values and carrying values consider the terms of the related debt and exclude the impacts of debt discounts and derivative/hedging activity.
6. LEASES
The Company leases equipment under operating and capital leases through January 2020. The Company is generally responsible for maintenance, taxes, and utilities for leased equipment. Equipment under operating lease includes a locomotive and rail cars. Rent expense for operating leases was approximately $128,000 and $399,000 for the three and nine months ended June 30, 2014, respectively and $126,000 and $389,000 for the three and nine months ended June 30, 2013, respectively. Equipment under capital leases consists of office equipment and plant equipment.
Equipment under capital leases is as follows at:
As of | June 30, 2014 (unaudited) | September 30, 2013 | ||||||
Equipment | $ | 564,377 | $ | 564,377 | ||||
Less accumulated amortization | (78,122 | ) | (49,894 | ) | ||||
Net equipment under capital lease | $ | 486,255 | $ | 514,483 |
At June 30, 2014, the Company had the following minimum commitments, which at inception had non-cancelable terms of more than one year. Amounts shown below are for the 12 months period ending June 30:
Operating Leases | Capital Leases | |||||||
2014 | $ | 419,866 | $ | 27,386 | ||||
2015 | 318,571 | 26,822 | ||||||
2016 | 208,920 | — | ||||||
2017 | 163,870 | — | ||||||
2018 | 100,800 | — | ||||||
Thereafter | 58,800 | — | ||||||
Total minimum lease commitments | $ | 1,270,827 | 54,208 | |||||
Less amount representing interest | — | |||||||
Present value of minimum lease commitments included in current maturities of long-term debt on the balance sheet | $ | 54,208 |
7. COMMITMENTS AND CONTINGENCIES
Firm Purchase Commitments for Corn
To ensure an adequate supply of corn to operate the Plant, the Company enters into contracts to purchase corn from local farmers and elevators. At June 30, 2014, the Company had various fixed price contracts for the purchase of approximately 6.8 million bushels of corn. Using the stated contract price for the fixed price contracts, the Company had commitments of approximately $29.9 million related to the 6.8 million bushels under contract. The Company also has a contract with Modern Grain Inc. in Hebron to purchase 1 million bushels of corn. The purchase price for these bushels will be set at the time of purchase at the July index price less basis. The deadline for pricing these 1 million bushels is July 1, 2015. No purchase date has been set at this time.
11
RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 2014
Natural Gas Conversion
The Company has signed purchase orders to convert the energy source for the Plant from coal to natural gas. The total anticipated cost of this project is approximately $5,824,000. The Company has incurred approximately $1,303,000 in costs to date related to this project leaving approximately $4,521,000 in remaining costs. The project is expected to be completed by the end of our first quarter of our 2015 fiscal year. In conjunction with the natural gas conversion project, the Company entered into a seven year agreement for natural gas transmission which includes minimum required transmission and consumption volumes.
8. RELATED-PARTY TRANSACTIONS
The Company has balances and transactions in the normal course of business with various related parties for the purchase of corn, sale of distillers grains and sale of ethanol. The related parties include unit holders, members of the board of governors of the Company, and RPMG, Inc. (“RPMG”). Significant related party activity affecting the financial statements is as follows:
June 30, 2014 (unaudited) | September 30, 2013 | |||||||||||||||
Balance Sheet | ||||||||||||||||
Accounts receivable | $ | 5,149,440 | $ | 3,562,404 | ||||||||||||
Accounts payable and disbursements in excess of bank balances | 607,626 | 872,827 | ||||||||||||||
For the three months ended June 30, 2014 (unaudited) | For the three months ended June 30, 2013 (unaudited) | For the nine months ended June 30, 2014 (unaudited) | For the nine months ended June 30, 2013 (unaudited) | |||||||||||||
Statement of Operations | ||||||||||||||||
Revenues | $ | 34,672,018 | $ | 36,832,120 | $ | 108,531,973 | $ | 101,933,893 | ||||||||
Realized gain on corn hedge | — | — | 827,500 | — | ||||||||||||
Cost of goods sold | 60,655 | 799,787 | 2,243,049 | 2,310,155 | ||||||||||||
General and administrative | 26,705 | 25,986 | 50,213 | 81,690 | ||||||||||||
Inventory Purchases | $ | 2,314,657 | $ | 7,288,484 | $ | 8,904,730 | $ | 21,319,084 |
9. UNCERTAINTIES IMPACTING THE ETHANOL INDUSTRY AND OUR FUTURE OPERATIONS
The Company has certain risks and uncertainties that it experiences during volatile market conditions, which can have a severe impact on operations. The Company's revenues are derived from the sale and distribution of ethanol and distillers grains to customers primarily located in the United States. Corn for the production process is supplied to the plant primarily from local agricultural producers and from purchases on the open market. The Company's operating and financial performance is largely driven by prices at which the Company sells ethanol and distillers grains and by the cost at which it is able to purchase corn for operations. The price of ethanol is influenced by factors such as prices, supply and demand, weather, government policies and programs, and unleaded gasoline and the petroleum markets, although since 2005 the prices of ethanol and gasoline began a divergence with ethanol selling for less than gasoline at the wholesale level. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol. The Company's largest cost of production is corn. The cost of corn is generally impacted by factors such as supply and demand, weather, government policies and programs. The Company's risk management program is used to protect against the price volatility of these commodities.
The Company's financial performance is highly dependent on the Federal Renewable Fuels Standard ("RFS") which requires that a certain amount of renewable fuels must be used each year in the United States. Corn based ethanol, such as the ethanol the Company produces, can be used to meet a portion of the RFS requirement. In November 2013, the EPA issued a proposed rule which would reduce the RFS for 2014, including the RFS requirement related to corn based ethanol. The EPA proposed rule was subject to a comment period which expired in January 2014. The EPA has not yet finalized the proposed rule. If the EPA reduces the ethanol use requirement of the RFS, it may have a significant negative impact on the Company's financial performance.
12
RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 2014
The Company anticipates that the results of operations during the remainder of fiscal 2014 will continue to be affected by volatility in the commodity markets. The volatility is due to various factors, including uncertainty with respect to the availability and supply of corn, increased demand for grain from global and national markets, speculation in the commodity markets, demand for corn from the ethanol industry and drought conditions currently being experienced by much of the United States.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
We prepared the following discussion and analysis to help you better understand our financial condition, changes in our financial condition, and results of operations for the three and nine month periods ended June 30, 2014, compared to the same periods of the prior fiscal year. This discussion should be read in conjunction with the condensed financial statements, notes and information contained in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2013. Unless otherwise stated, references in this report to particular years, quarters, months, or periods refer to our fiscal years ended in September and the associated quarters, months, or periods of those fiscal years.
Forward Looking Statements
This report contains forward-looking statements that involve future events, our future performance and our future operations and actions. In some cases you can identify forward-looking statements by the use of words such as "may," "should," "anticipate," "believe," "expect," "plan," "future," "intend," "could," "estimate," "predict," "hope," "potential," "continue," or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions 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 following factors:
• | Reduction in ethanol demand due to a decrease or elimination of the ethanol use requirement in the Federal Renewable Fuels Standard; |
• | Logistics difficulties preventing us from delivering our products to our customers; |
• | Fluctuations in the price and market for ethanol, distillers grains and corn oil; |
• | Our ability to successfully implement our natural gas conversion project; |
• | Availability and costs of products and raw materials, particularly corn and coal; |
• | Changes in the environmental regulations that apply to our plant operations and our ability to comply with such regulations; |
• | Ethanol supply exceeding demand and corresponding ethanol price reductions impacting our ability to operate profitably and maintain a positive spread between the selling price of our products and our raw material costs; |
• | Our ability to generate and maintain sufficient liquidity to fund our operations, meet debt service requirements and necessary capital expenditures; |
• | Our ability to continue to meet our loan covenants; |
• | Limitations and restrictions contained in the instruments and agreements governing our indebtedness; |
• | Results of our hedging transactions and other risk management strategies; |
• | Changes and advances in ethanol production technology; and |
• | Competition from alternative fuels and alternative fuel additives. |
Overview
Red Trail Energy, LLC, a North Dakota limited liability company (the "Company," "Red Trail," or "we," "our," or "us"), owns and operates a 50 million gallon annual name-plate production ethanol plant near Richardton, North Dakota. Our revenues are derived from the sale and distribution of our ethanol, distillers grains and corn oil primarily in the continental United States. Corn is our largest cost component and our profitability is highly dependent on the spread between the price of corn and the price of ethanol.
During our second quarter of 2014, we commenced a project to convert our ethanol plant from a coal fired plant to a natural gas based ethanol plant. We anticipate that this project will be completed by the end of our first quarter of our 2015 fiscal year. We plan to finance the natural gas conversion project from cash we have on hand as well as funds we have available to borrow on our line of credit.
Results of Operations for the Three Months Ended June 30, 2014 and 2013
The following table shows the results of our operations and the percentages of revenues, cost of goods sold, general and administrative expenses and other items to total revenues in our unaudited statements of operations for the three months ended June 30, 2014 and 2013:
14
Three Months Ended June 30, 2014 (Unaudited) | Three Months Ended June 30, 2013 (Unaudited) | ||||||||||||
Statement of Operations Data | Amount | % | Amount | % | |||||||||
Revenues | $ | 35,011,137 | 100.00 | $ | 43,669,509 | 100.00 | |||||||
Cost of Goods Sold | 18,404,020 | 52.57 | 42,207,883 | 96.65 | |||||||||
Gross Profit | 16,607,117 | 47.43 | 1,461,626 | 3.35 | |||||||||
General and Administrative Expenses | 517,686 | 1.48 | 496,387 | 1.14 | |||||||||
Operating Income | 16,089,431 | 45.96 | 965,239 | 2.21 | |||||||||
Other Expense | (113,558 | ) | (0.32 | ) | (215,847 | ) | (0.49 | ) | |||||
Net Income | $ | 15,975,873 | 45.63 | $ | 749,392 | 1.72 |
The following table shows additional data regarding production and price levels for our primary inputs and products for the three months ended June 30, 2014 and 2013.
Three Months ended June 30, 2014 (unaudited) | Three Months ended June 30, 2013 (unaudited) | |||||||
Production: | ||||||||
Ethanol sold (gallons) | 12,852,971 | 14,077,453 | ||||||
Dried distillers grains sold (tons) | 26,857 | 25,094 | ||||||
Modified distillers grains sold (tons) | 9,317 | 20,882 | ||||||
Corn oil sold (pounds) | 2,523,992 | 2,220,640 | ||||||
Revenues: | ||||||||
Ethanol average price per gallon (net of hedging) | $ | 2.22 | $ | 2.45 | ||||
Dried distillers grains average price per ton | 178.01 | 230.61 | ||||||
Modified distillers grains average price per ton | 83.88 | 116.43 | ||||||
Corn oil average price per pound | 0.29 | 0.33 | ||||||
Primary Inputs: | ||||||||
Corn ground (bushels) | 4,323,278 | 5,074,485 | ||||||
Costs of Primary Inputs: | ||||||||
Corn average price per bushel (net of hedging) | $ | 4.04 | $ | 7.01 | ||||
Other Costs (per gallon of ethanol sold): | ||||||||
Chemical and additive costs | $ | 0.106 | $ | 0.085 | ||||
Denaturant cost | 0.050 | 0.049 | ||||||
Electricity cost | 0.053 | 0.057 | ||||||
Direct labor cost | 0.055 | 0.048 |
Revenue
Our total revenue was significantly less for our third quarter of 2014 compared to the same period of 2013, primarily due to decreased ethanol and distillers grains sales and prices for all of our products during the 2014 period. Our ethanol production was lower during our third quarter of 2014 compared to the same period of 2013 due to more plant downtime and railroad logistics issues which forced us to reduce production. During our third quarter of 2014, approximately 81.6% of our total revenue was derived from ethanol sales, approximately 15.9% was from distillers grains sales and approximately 2.1% was from corn oil sales. During our third quarter of 2013, approximately 79.0% of our total revenue was derived from ethanol sales, approximately 18.8% was from distillers grains sales and approximately 1.6% was from corn oil sales.
The average price we received for our ethanol was lower during our third quarter of 2014 compared to the same period of 2013 due primarily to lower market ethanol prices. Management attributes this decrease in market ethanol prices with lower corn prices. However, despite these lower ethanol prices, we have maintained strong operating margins due to lower corn costs which have allowed us to profitably operate the ethanol plant. Following the end of our third quarter of 2014, ethanol prices have
15
remained relatively flat and management anticipates that ethanol prices will continue to stay relatively flat through the rest of our 2014 fiscal year and into our 2015 fiscal year.
Uncertainty exists regarding ethanol demand for 2014 and into the future as the EPA is in the process of establishing the 2014 renewable volume obligation (RVO) pursuant to the Federal Renewable Fuels Standard (RFS). The RFS requires that a certain amount of renewable fuels must be used each year in the United States, however, the EPA has authority to adjust the RVO in certain circumstances. It appears that the EPA plans to use this authority during 2014. If the RVO for corn-based ethanol for 2014 is significantly reduced, as has been proposed by the EPA, it could have a significant negative impact on ethanol demand. While management anticipated that the EPA would announce the 2014 RVO during our third quarter of 2014, this announcement did not occur and management now anticipates that the announcement will be made sometime during our fourth quarter of 2014. However, some in the ethanol industry believe that the announcement of the 2014 RVO may not be made until after elections are held in November. If the 2014 RVO is reduced, it may impact demand for ethanol more in 2015 than in 2014 since the announcement is being made so late in the year. The effect of a reduction in the 2014 RVO may be that additional renewable fuels credits may be carried over into future years by fuel blenders which could impact ethanol demand in the future.
Ethanol prices have also been supported by strong ethanol exports during our 2014 fiscal year. Management anticipates that ethanol exports will continue to play a pivotal role in ethanol prices during our 2014 fiscal year, particularly if the RVO for 2014 is significantly reduced as has been proposed by the EPA. If ethanol exports fall off, especially at a time when domestic ethanol demand is lower, it may result in lower ethanol prices and unfavorable operating conditions in the ethanol industry.
Along with the decrease in ethanol production, our total distillers grains production was lower during our third quarter of 2014 compared to our third quarter of 2013. Since distillers grains are a co-product of the ethanol production process, when our ethanol production is lower it typically results in a comparable reduction in our distillers grains production. In addition to the decrease in distillers grains production, we experienced a decrease in the price we received for our distillers grains during our third quarter of 2014 compared to the same period of 2013. Management attributes the decrease in the average price we received per ton for our distillers grains with lower market corn prices. Since distillers grains are typically used as a feed substitute for corn and soybean meal, when corn prices decrease it typically results in lower distillers grains demand and prices. Management anticipates that distillers grains prices will continue to track corn prices and will be lower due to anticipated lower corn prices. We sold a greater percentage of our distillers grains in the dried form compared to the modified form during our third quarter of 2014 compared to the same period of 2013. This change in the composition of our distillers grains sales was a result of increased export demand for our dried distillers grains which resulted in a more favorable relative value for us to sell dried distillers grains as compared to modified distillers grains. Recently, export demand for distillers grains has been impacted by distillers grains shipments which have been rejected by the Chinese. These export disruptions have negatively impacted distillers grains prices and demand. Management anticipates that these trade disruptions could result in further distillers grains price volatility. Management continually evaluates market conditions as it determines the form in which our distillers grains will be marketed.
The total pounds of corn oil we sold was higher during our third quarter of 2014 compared to the same period of 2013 despite the decrease in total ethanol and distillers grains production during the 2014 period due to improved efficiency operating our corn oil extraction equipment. Corn oil prices were lower during our third quarter of 2014 compared to the same period of 2013 due to lower corn oil demand from the biodiesel industry and lower corn prices. Management anticipates continued lower corn oil prices as the supply of corn oil continues to increase with relatively stable corn oil demand. Further, the biodiesel industry is facing uncertainty regarding biodiesel demand related to anticipated reductions in the 2014 RVO which has negatively impacted demand from the biodiesel industry for corn oil. Management anticipates continued volatility in the market price of corn oil as increased corn oil supply interacts with volatile corn oil demand.
Cost of Goods Sold
Our cost of goods sold is primarily made up of corn and energy expenses. Our cost of goods sold as a percentage of revenues was 52.6% for our third quarter of 2014 as compared to 96.7% for the same period in 2013. The decrease in our cost of goods sold as a percentage of revenue was due to general improvements in our operating margins during the 2014 period, primarily due to a significant decrease in our corn costs per bushel.
Corn Costs
Our cost of goods sold related to corn was significantly lower for our third quarter of 2014 compared to the same period in 2013 due to decreased corn costs per bushel and decreased corn consumption. Market corn prices have been lower during our 2014 fiscal year due to the record corn crop which was harvested in the fall of 2013. Management anticipates that corn prices will remain lower during our final quarter of 2014 due to increased corn supplies and uncertainty regarding corn demand, especially due to recent efforts to reduce the RVO for corn-based ethanol which may reduce corn demand and prices further. In addition,
16
corn consumption was lower during our third quarter of 2014 compared to the same period of 2013 due to decreased ethanol production during the 2014 period.
From time to time we enter into forward purchase contracts for our commodity purchases and sales. At June 30, 2014, we had forward corn purchase contracts for various delivery periods through July 2015 for a total commitment of approximately $29.9 million. We also had a commitment to purchase 1 million bushels of corn at June 30, 2014 which had not yet been priced. The price for these bushels of corn will be set when they are purchased at the July 2015 index price less basis. We recognize the gains or losses that result from the changes in the value of our derivative instruments from corn in cost of goods sold as the changes occur. As corn prices fluctuate, the value of our derivative instruments is impacted, which affects our financial performance.
Coal Costs
We purchase the coal needed to power our ethanol plant from a supplier under a long-term contract. Our coal costs were higher during our third quarter of 2014 compared to the same period of 2013 primarily due to a higher price per ton of coal which was partially offset by decreased coal consumption due to our reduced production. Management anticipates using natural gas as the fuel source for the heat we require to operate the ethanol plant in the future as we implement our natural gas conversion process. Once this project is complete, we will be operating primarily on natural gas.
General and Administrative Expenses
Our general and administrative expense was slightly higher during our third quarter of 2014 compared to the same period of 2013 due primarily to additional bank fees related to a letter of credit we established during the 2014 period.
Other Income/Expense
We had more interest income during our third quarter of 2014 compared to the same period of 2013 due to having more cash on hand during the 2014 period. Our interest expense was lower during our third quarter of 2014 compared to the same period of 2013 due to having less borrowing on our loans during the 2014 period.
Results of Operations for the Nine Months Ended June 30, 2014 and 2013
The following table shows the results of our operations and the approximate percentage of revenues, costs of goods sold, operating expenses and other items to total revenues in our unaudited statements of operations for the nine months ended June 30, 2014 and 2013:
Nine Months Ended June 30, 2014 (Unaudited) | Nine Months Ended June 30, 2013 (Unaudited) | ||||||||||||
Statement of Operations Data | Amount | % | Amount | % | |||||||||
Revenues | $ | 110,719,307 | 100.00 | $ | 123,442,717 | 100.00 | |||||||
Cost of Goods Sold | 85,274,777 | 77.02 | 118,888,135 | 96.31 | |||||||||
Gross Profit | 25,444,530 | 22.98 | 4,554,582 | 3.69 | |||||||||
General and Administrative Expenses | 1,555,358 | 1.40 | 1,570,245 | 1.27 | |||||||||
Operating Income | 23,889,172 | 21.58 | 2,984,337 | 2.42 | |||||||||
Other Income (Expense) | (307,023 | ) | (0.28 | ) | (624,328 | ) | (0.51 | ) | |||||
Net Income | $ | 23,582,149 | 21.30 | $ | 2,360,009 | 1.91 |
17
The following table shows additional data regarding production and price levels for our primary inputs and products for the nine months ended June 30, 2014 and 2013:
Nine Months ended June 30, 2014 (unaudited) | Nine Months ended June 30, 2013 (unaudited) | |||||||
Production: | ||||||||
Ethanol sold (gallons) | 38,882,389 | 40,259,067 | ||||||
Dried distillers grains sold (tons) | 78,447 | 69,629 | ||||||
Modified distillers grains sold (tons) | 47,759 | 74,634 | ||||||
Corn oil sold (pounds) | 7,946,630 | 5,906,840 | ||||||
Revenues: | ||||||||
Ethanol average price per gallon (net of hedging) | $ | 2.28 | $ | 2.34 | ||||
Dried distillers grains average price per ton | 189.25 | 250.38 | ||||||
Modified distillers grains average price per ton | 88.25 | 123.43 | ||||||
Corn oil average price per pound | 0.28 | 0.33 | ||||||
Primary Input: | ||||||||
Corn ground (bushels) | 14,044,762 | 14,624,959 | ||||||
Costs of Primary Input: | ||||||||
Corn average price per bushel (net of hedging) | $ | 4.23 | $ | 6.78 | ||||
Other Costs (per gallon of ethanol sold): | ||||||||
Chemical and additive costs | $ | 0.109 | $ | 0.086 | ||||
Denaturant cost | 0.053 | 0.051 | ||||||
Electricity cost | 0.055 | 0.057 | ||||||
Direct labor cost | 0.055 | 0.048 |
Revenue
We generated less revenue during the nine month period ended June 30, 2014 compared to the same period of 2013, due primarily to decreased ethanol and distiller grains production and prices, partially offset by increased corn oil production. During the nine month period ended June 30, 2014, ethanol sales comprised approximately 80.2% of our revenues, distillers grains sales comprised approximately 17.3% of our revenues and corn oil sales comprised approximately 2.0% of our revenues. For the nine month period ended June 30, 2013, ethanol sales comprised approximately 76.2% of our revenues, distillers grains sales comprised approximately 21.6% of our revenues and corn oil sales comprised approximately 1.6% of our revenues.
The average price we received for our ethanol during the nine month period ended June 30, 2014 was lower compared to the same period in 2013 due primarily to lower corn prices which typically impact ethanol prices along with uncertainty regarding ethanol demand which management believes has impacted ethanol prices. We sold fewer gallons of ethanol during the nine month period ended June 30, 2014 compared to the same period of 2013 due to reduced ethanol production.
The average price we received for our distillers grains was lower during the nine month period ended June 30, 2014 compared to the same period of 2013. Management attributes these lower distillers grains prices to lower corn prices and increased corn supplies which both negatively impact market distillers grains prices.
We produced significantly more corn oil during the nine month period ended June 30, 2014 compared to the same period of 2013 due to improved efficiency we experienced in operating our corn oil extraction equipment. Partially offsetting the increase in the pounds of corn oil we produced was a decrease in the average price we received per pound of corn oil sold during the nine month period ended June 30, 2014 compared to the same period of 2013. Management attributes this decrease in the average price we received for our corn oil with increased corn oil supplies and relatively stable corn oil demand during the nine month period ended June 30, 2014 compared to the same period of 2013 which negatively impacted corn oil prices.
18
Cost of Good Sold
Our costs of goods sold as a percentage of revenues was approximately 77.0% for the nine month period ended June 30, 2014 compared to approximately 96.3% for the same period of 2013. Our total cost of goods sold was lower during the nine month period ended June 30, 2014 compared to the same period of 2013 primarily as a result of lower corn prices and consumption. We experienced more favorable operating margins during 2014 which have improved our profitability and further decreased our costs of goods sold as a percentage of our revenue.
General and Administrative Expenses
Our general and administrative expenses were comparable during the nine month period ended June 30, 2014 and the same period of 2013. We have continued to work to reduce general and administrative costs where possible.
Other Income/Expense
We had more interest income during the nine months ended June 30, 2014 compared to the same period of 2013 due to having more cash on hand during the 2014 period. Our interest expense was lower during the nine months ended June 30, 2014 compared to the same period of 2013 due to having less borrowing on our loans during the 2014 period. We received additional other income during the nine months ended June 30, 2014 compared to the same period of 2013 due to the receipt of higher patronage dividends.
Changes in Financial Condition for the Nine Months Ended June 30, 2014
Current Assets. We had more cash and equivalents on our balance sheet at June 30, 2014 compared to September 30, 2013 due to our improved profitability and increased net income. We had more restricted cash on our balance sheet at June 30, 2014 compared to September 30, 2013 due to cash that was held in our margin account with our commodities broker. Our commodities broker was holding more cash in our margin account at June 30, 2014 compared to September 30, 2013 due to unrealized losses on our risk management positions we had in place at June 30, 2014. We had more accounts receivable at June 30, 2014 compared to September 30, 2013 due primarily to timing issues related to our quarter end and the amount of gallons of ethanol we had sold for which we had not yet received payment. We had more inventory on hand at June 30, 2014 compared to September 30, 2013 due to having more more bushels of corn inventory, partially offset by lower corn prices.
Property, Plant and Equipment. The gross value of our property, plant and equipment was comparable at June 30, 2014 and September 30, 2013. However, the net value of our property, plant and equipment was lower at June 30, 2014 due to depreciation. We had a significant amount of construction in progress at June 30, 2014 primarily due to our natural gas conversion project.
Other Assets. Our other assets were comparable at June 30, 2014 and September 30, 2013.
Current Liabilities. We had no disbursements in excess of our bank balances as of June 30, 2014 compared to approximately $3.1 million at September 30, 2013 due to improved profitability. Checks we have outstanding which are in excess of cash balances we have in our accounts are paid from our line of credit. Our accounts payable was higher at June 30, 2014 compared to September 30, 2013 due to increased corn payables from increased corn purchases during our 2014 fiscal year. Our accrued expenses were higher at June 30, 2014 compared to September 30, 2013 due to increased corn purchases we made which were not yet priced. We had less current maturities of long-term debt at June 30, 2014 compared to September 30, 2013 due to amounts we paid on our long-term revolving loan during our 2014 fiscal year.
Long-term Liabilities. Our long-term liabilities were lower at June 30, 2014 compared to September 30, 2013, due to scheduled quarterly loan payments we made during our 2014 fiscal year along with payments we made on our long-term revolving loan.
Liquidity and Capital Resources
Based on financial forecasts performed by our management, we anticipate that we will have sufficient cash from our current credit facilities and cash from our operations to continue to operate the ethanol plant for the next 12 months. Should we experience unfavorable operating conditions in the future, we may have to secure additional debt or equity sources for working capital or other purposes.
19
We declared a distribution on March 20, 2014 of $0.05 per membership unit for a total distribution of $2,007,408. The distribution was paid on April 9, 2014.
The following table shows cash flows for the nine months ended June 30, 2014 and 2013:
2014 (unaudited) | 2013 (unaudited) | |||||||
Net cash provided by operating activities | $ | 19,681,590 | $ | 3,116,019 | ||||
Net cash (used in) investing activities | (1,586,212 | ) | (444,985 | ) | ||||
Net cash (used in) financing activities | (10,787,385 | ) | (2,671,034 | ) | ||||
Net increase in cash | $ | 7,307,993 | $ | — | ||||
Cash and cash equivalents, end of period | $ | 7,308,993 | $ | 1,000 |
Cash Flow from Operations
Our operations provided more cash during the nine month period ended June 30, 2014 compared to the same period in 2013 due to improved operating margins. We also used less cash for inventory during the nine month period ended June 30, 2014 compared to the same period in 2013 due to reduced corn prices. We experienced changes in our restricted cash and accounts payable which negatively impacted our cash flow from operations during the nine month period ended June 30, 2014 compared to the same period in 2013.
Cash Flow From Investing Activities
We used more cash for capital expenditures during the nine month period ended June 30, 2014 compared to the same period in 2013 related to ordinary repair and replacement at the ethanol plant and due to our natural gas conversion project. We also sold a residence adjacent to the ethanol plant during the 2013 period which provided cash from investing activities.
Cash Flow from Financing Activities
We used significantly more cash for financing activities during the nine month period ended June 30, 2014 compared to the same period in 2013, primarily due to increased debt repayments during the 2014 period compared to the 2013 period. We also had significantly less borrowing on our short-term loans during the nine month period ended June 30, 2014 compared to the same period in 2013 which reduced the amount of cash provided by our financing activities during the 2014 period. Finally, we paid a distribution during the nine month period ended June 30, 2014 and we did not pay a distribution during the 2013 period.
Our liquidity, results of operations and financial performance will be impacted by many variables, including the market price for commodities such as, but not limited to, corn, ethanol and other energy commodities, as well as the market price for any co-products generated by the facility and the cost of labor and other operating costs. Assuming future relative price levels for corn, ethanol and distillers grains remain consistent, we expect operations to generate adequate cash flows to maintain operations.
Capital Expenditures
The Company had approximately $1,303,338 in construction in progress as of June 30, 2014 related to costs incurred for a project to convert the plant to use natural gas as its fuel source instead of coal. During the nine months ended June 30, 2014, the Company placed in service approximately $85,000 in capital projects with the majority of these costs related to additional costs for the scrubber and pump projects.
Capital Resources
Short-Term Debt Sources
The Company has a revolving line-of-credit of $10,000,000 with $0 drawn on this line-of-credit as of June 30, 2014. This revolving line-of-credit matures on February 28, 2015. The variable interest rate on this line-of-credit is 3.5% over the one-month LIBOR with a rate of 3.66% as of June 30, 2014.
20
Long-Term Debt Sources
As of June 30, 2014, our long-term debt consisted of a term loan and a long-term revolving line-of-credit. The following table summarizes our long-term debt instruments with our senior lender.
Outstanding Balance (Millions) | Interest Rate | Estimated | ||||||||||||||||||
Term Note | June 30, 2014 (Unaudited) | September 30, 2013 | June 30, 2014 (Unaudited) | September 30, 2013 | Quarterly Principal Payment Amounts | Notes | ||||||||||||||
Term Note | $ | 15.1 | $ | 17.0 | 3.73 | % | 3.77 | % | $ | 500,000 | 1, 2 | |||||||||
Long-Term Revolving Note | — | 3.71 | 3.73 | % | 3.77 | % | $ | 125,000 | 1, 2, 3 |
Notes
1 - Maturity date of April 2017.
2 - Variable interest rate at 3.5% over the three-month LIBOR, reset quarterly.
3 - Quarterly payments are equal to required quarterly reductions in total available/principal payments of $125,000.
Restrictive Covenants
We are subject to a number of covenants and restrictions in connection with our credit facilities, including:
• | Providing FNBO with current and accurate financial statements; |
• | Maintaining certain financial ratios including minimum working capital and fixed charge coverage ratio; |
• | Maintaining adequate insurance; |
• | Making, or allowing to be made, any significant change in our business or tax structure; |
• | Limiting our ability to make distributions to members; and |
• | Maintaining a threshold of capital expenditures. |
Excess Cash Flow Payments
We are required to make a prepayment on our Term Loan within 120 days of the end of each of our fiscal years in an amount equal to 25% of our excess cash flow. Excess cash flow is defined in our loan agreement as our adjusted EBITDA earnings less scheduled payments which are due on our loans. Our adjusted EBITDA is calculated by reducing our EBITDA by approved capital expenditures and distributions we make during our fiscal year. Due to our increased profitability during our 2014 fiscal year, the amount of this excess cash flow payment could be significant. Any amount we prepay will reduce our Term Note.
As of June 30, 2014, we were in compliance with our loan covenants.
Industry Support
North Dakota Grant
In 2006, we entered into a contract with the State of North Dakota through the Industrial Commission for a lignite coal grant not to exceed $350,000. We received $275,000 from this grant during 2006 with this amount currently shown in the long-term liability section of our Balance Sheet as Contracts Payable. Because we have not met the minimum lignite usage requirements specified in the grant for any year in which the plant has operated, we expect to have to repay the grant and are awaiting instructions from the Industrial Commission as to the terms of the repayment schedule. This repayment could begin at some point in 2014, but as of June 30, 2014 we have not received any instructions from the Industrial Commission.
Critical Accounting Estimates
Our most critical accounting policies, which are those that require significant judgment, include policies related to the carrying amount of property, plant and equipment; valuation of derivatives, inventory and purchase commitments of inventory. An in-depth description of these can be found in our Annual Report on Form 10-K for the fiscal year ended September 30, 2013. For
21
valuation allowances related to firm purchase commitments of inventory, please refer to the disclosures in Note 3 of the Notes to the Unaudited Condensed Financial Statements in this Quarterly Report. Management has not changed the method of calculating and using estimates and assumptions in preparing our condensed financial statements in accordance with generally accepted accounting principles. There have been no changes in the policies for our accounting estimates for the quarter ended June 30, 2014.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to the impact of market fluctuations associated with interest rates and commodity prices as discussed below. We have no exposure to foreign currency risk as all of our business is conducted in U.S. Dollars. We use derivative financial instruments as part of an overall strategy to manage market risk. We use cash, futures and option contracts to hedge changes to the commodity prices of corn and ethanol. We do not enter into these derivative financial instruments for trading or speculative purposes, nor do we designate these contracts as hedges for accounting purposes pursuant to the requirements of Generally Accepted Accounting Principles ("GAAP").
Commodity Price Risk
We expect to be exposed to market risk from changes in commodity prices. Exposure to commodity price risk results from our dependence on corn in the ethanol production process and the sale of ethanol.
We enter into fixed price contracts for corn purchases on a regular basis. It is our intent that, as we enter into these contracts, we will use various hedging instruments (puts, calls and futures) to maintain a near even market position. For example, if we have 1 million bushels of corn under fixed price contracts we would generally expect to enter into a short hedge position to offset our price risk relative to those bushels we have under fixed price contracts. Because our ethanol marketing company (RPMG) is selling substantially all of the gallons it markets on a spot basis we also include the corn bushel equivalent of the ethanol we have produced that is inventory but not yet priced as bushels that need to be hedged.
Although we believe our hedge positions will accomplish an economic hedge against our future purchases, they are not designated as hedges for accounting purposes, which would match the gain or loss on our hedge positions to the specific commodity purchase being hedged. We use fair value accounting for our hedge positions, which means as the current market price of our hedge positions changes, the gains and losses are immediately recognized in our cost of sales. The immediate recognition of hedging gains and losses under fair value accounting can cause net income to be volatile from quarter to quarter and year to year due to the timing of the change in value of derivative instruments relative to the cost of the commodity being hedged. However, it is likely that commodity cash prices will have the greatest impact on the derivatives instruments with delivery dates nearest the current cash price.
As of June 30, 2014, we had approximately 6.8 million bushels of corn under fixed price contracts. As of June 30, 2014 some of these contracts were priced above current market prices so an accrual for a loss on firm purchase commitments of $372,000 was recorded.
It is the current position of our ethanol marketing company, RPMG, that under current market conditions selling ethanol in the spot market will yield the best price for our ethanol. RPMG will, from time to time, contract a portion of the gallons they market with fixed price contracts.
We estimate that our expected corn usage will be between 18 million and 20 million bushels per calendar year for the production of approximately 50 million to 54 million gallons of ethanol. As corn prices move in reaction to market trends and information, our income statements will be affected depending on the impact such market movements have on the value of our derivative instruments.
To manage our coal price risk, we entered into a coal purchase agreement with our supplier to supply us with coal, fixing the price at which we purchase coal. If we are unable to continue buying coal under this agreement, we may have to buy coal in the open market.
Interest Rate Risk
22
We are exposed to market risk from changes in interest rates on our senior debt which bears variable interest rates. We anticipate that a hypothetical 1% change in the interest rate on our senior debt as of June 30, 2014, would cause an adverse change to our income in the amount of approximately $150,000 for a 12 month period.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit pursuant to the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosures.
Our management, including our President and Chief Executive Officer (the principal executive officer), Gerald Bachmeier, along with our Chief Financial Officer, (the principal financial officer), Jodi Johnson, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2014. Based on this review and evaluation, these officers believe that our disclosure controls and procedures are effective in ensuring that material information related to us is recorded, processed, summarized and reported within the time periods required by the forms and rules of the Securities and Exchange Commission.
For the fiscal quarter ended June 30, 2014, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time in the ordinary course of business, we may be named as a defendant in legal proceedings related to various issues, including without limitation, workers' compensation claims, tort claims, or contractual disputes. We are not currently involved in any material legal proceedings.
Item 1A. Risk Factors
The following risk factors are provided due to material changes from the risk factors previously disclosed in our annual report on Form 10-K for the fiscal year ended September 30, 2013. The risk factors set forth below should be read in conjunction with the risk factors section and the Management's Discussion and Analysis section for the fiscal year ended September 30, 2013, included in our annual report on Form 10-K.
Government incentives for ethanol production may be reduced or eliminated in the future, which could hinder our ability to operate at a profit. The ethanol industry is assisted by various federal incentives, most importantly the RFS set forth in the Energy Policy Act of 2005. The RFS helps support a market for ethanol that might disappear without this incentive. Recently, there have been proposals in Congress to reduce or eliminate the RFS. In addition, on November 15, 2013, the EPA announced a proposal to significantly reduce the RFS levels for 2014 from the statutory volume requirement of 18.15 billion gallons to 15.21 billion gallons and reduce the renewable volume obligations that can be satisfied by corn based ethanol from 14.4 billion gallons to 13 billion gallons. This proposal would also result in a lowering of the 2014 numbers below the 2013 level of 13.8 billion gallons. According to the RFS, the EPA only has authority to waive the requirements of the RFS, in whole or in part, provided one of two conditions are met. The conditions are: (1) there is inadequate domestic renewable fuel supply; or (2) implementation of the requirement would severely harm the economy or environment of a state, region or the United States. Many in the ethanol industry believe that neither of these two conditions have been met. Any challenge to a reduction in the RFS may take time to work through the courts and the waiver may be implemented despite the legal challenges. If the EPA's proposal becomes a final rule which significantly reduces the RFS or if the RFS were to be otherwise reduced or eliminated, it may lead to a significant decrease in ethanol demand which could negatively impact our results of operations.
Lack of rail transportation infrastructure and delayed rail shipments could negatively impact our financial performance. The ethanol industry has recently been experiencing difficulty transporting the ethanol which is produced. Ethanol is typically transported by rail. At times during our 2014 fiscal year, we may be required to reduce production or cease production altogether when we have run out of ethanol storage capacity. Further, our ethanol inventory may increase due to the difficulty we may experienced shipping our ethanol which can impact our financial performance. The slower rail shipments have been due to a combination of factors including increased shipments of corn, coal and oil by rail, decreased shipment capacity by the railroads due to fewer railroad crews, and poor weather conditions which have slowed rail travel and loading times. Management anticipates that these slower railcar shipments may continue for some period off time until the rail transportation capacity in the United States
23
increases. These delays in shipping our products may have a negative impact on our financial performance which may negatively impact our ability to operate the ethanol plant profitably.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information
None.
Item 6. Exhibits.
(a) | The following exhibits are filed as part of this report. |
Exhibit No. | Exhibits | ||
31.1 | Certificate Pursuant to 17 CFR 240.13a-14(a)* | ||
31.2 | Certificate Pursuant to 17 CFR 240.13a-14(a)* | ||
32.1 | Certificate Pursuant to 18 U.S.C. Section 1350* | ||
32.2 | Certificate Pursuant to 18 U.S.C. Section 1350* | ||
101 | The following financial information from Red Trail Energy, LLC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Balance Sheets as of June 30, 2014 and September 30, 2013, (ii) Statements of Operations for the three and nine months ended June 30, 2014 and 2013, (iii) Statements of Cash Flows for the nine months ended June 30, 2014 and 2013, and (iv) the Notes to Unaudited Condensed Financial Statements.** |
(*) Filed herewith.
(**) Furnished herewith.
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.
RED TRAIL ENERGY, LLC | |||
Date: | August 14, 2014 | /s/ Gerald Bachmeier | |
Gerald Bachmeier | |||
President and Chief Executive Officer | |||
(Principal Executive Officer) | |||
Date: | August 14, 2014 | /s/ Jodi Johnson | |
Jodi Johnson | |||
Chief Financial Officer | |||
(Principal Financial and Accounting Officer) |
24