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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
x
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
 
 
For the fiscal year ended
October 31, 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 000-51177
 
GOLDEN GRAIN ENERGY, LLC
(Exact name of registrant as specified in its charter)
 
Iowa
 
02-0575361
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
1822 43rd Street SW, Mason City, Iowa 50401
(Address of principal executive offices)
 
(641) 423-8525
(Registrant's telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
None
 
Securities registered pursuant to Section 12(g) of the Act:
 
Class A Membership Units
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes     x No

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    
x Yes     o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
x Yes     o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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

As of April 30, 2014, the aggregate market value of the Class A membership units held by non-affiliates (computed by reference to the most recent offering price of Class A membership units) was $14,802,167. As of April 30, 2014, the aggregate market value of the Class B membership units held by non-affiliates (computed by reference to the most recent offering price of the Class B membership units) was $345,500.

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 

As of December 22, 2014, there were 18,953,000 Class A membership units outstanding and 920,000 Class B membership units outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The registrant has incorporated by reference into Part III of this Annual Report on Form 10-K portions of its definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this Annual Report.


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INDEX

 
Page Number


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Forward Looking Statements

This report contains forward-looking statements that involve future events, our future performance and our expected future operations and actions.  In some cases you can identify forward-looking statements by the use of words such as "may," "will," "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, including, but not limited to those listed below and those business risks and factors described elsewhere in this report and our other Securities and Exchange Commission filings. 

Ethanol, distiller grains and corn oil supply exceeding demand and corresponding price reductions;
Any delays in shipping our products by rail and corresponding decreases in our sales as a result of these shipping delays;
Changes in the availability and price of corn and natural gas;
Our ability to profitably operate the ethanol plant, including the sale of distiller grains and corn oil, and maintain a positive spread between the selling price of our products and our raw material costs;
The effect our hedging activities has on our financial performance and cash flows;
Our ability to generate free cash flow to invest in our business, service our debt and satisfy the financial covenants contained in our credit agreement with our lender;
Changes in our business strategy, capital improvements or development plans;
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 corn availability due to growing conditions, including unfavorable weather patterns;
Lack of transport, storage and blending infrastructure preventing our products from reaching high demand markets;
Changes in federal and/or state laws and environmental regulations (including the elimination or waiver of the Renewable Fuel Standard);
Changes and advances in ethanol production technology;
Competition from alternative fuel additives;
Changes in interest rates or the lack of credit availability; and
Our ability to retain key employees and maintain labor relations.

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 report.  We are not under any duty to update the forward-looking statements contained in this report.  We cannot guarantee future results, levels of activity, performance or achievements.  We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report.  You should read this report and the documents that we reference in this report and have filed as exhibits, completely and with the understanding that our actual future results may be materially different from what we currently expect.  We qualify all of our forward-looking statements with these cautionary statements. Unless otherwise stated, references in this report to particular years or quarters refer to our fiscal years ended in October and the associated quarters of those fiscal years.

PART I

ITEM 1.    BUSINESS

Business Development

Golden Grain Energy, LLC was formed as an Iowa limited liability company on March 18, 2002, for the purpose of constructing, owning and operating a fuel-grade ethanol plant in Mason City in north central Iowa. References to "we," "us," "our" and the "Company" refer to Golden Grain Energy, LLC. Since December 2004, we have been engaged in the production of ethanol and distiller grains at the plant. We started producing corn oil at the plant in 2009.

During our 2014 fiscal year, legislative uncertainty existed in the ethanol industry which management believes impacted our financial performance. The ethanol industry is dependent on the ethanol use requirement in the Federal Renewable Fuels Standard (the "RFS"). The RFS requires that in each year an increasing amount of renewable fuels must be used in the United States. During our 2014 fiscal year, proposals were presented 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 obligation (RVO) that can be satisfied by corn based ethanol from 14.4 billion gallons to 13 billion gallons. The EPA proposal was subject to a 60-day public comment period which expired on January 28, 2014 and pursuant to which the EPA received a significant number of comments. On November

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21, 2014, the EPA announced that it will not issue a final RVO for 2014 before the end of 2014. Instead, the EPA announced that in 2015 it will set RVOs for 2014 through 2016. If the EPA elects to reduce the renewable fuels use requirements in the RFS in any material manner, the market price and demand for ethanol will likely decrease which will negatively impact our financial performance.

The ethanol industry continues to experience difficulty moving its finished products by rail. We have been impacted by these rail shipping delays which at times have required us to slow or cease production when our ethanol storage tanks are full. The shipping delays were the most severe during our second quarter of 2014 but we have continued to be impacted by shipping delays during our last half of 2014. 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 bottlenecks on the railroads due to a lack of additional track where it is needed, and poor weather conditions which have slowed rail travel and loading times. Management anticipates that these slower rail shipments will continue for some period of time until the rail transportation capacity in the United States is expanded. While many ethanol producers are impacted by these rail shipment challenges, ethanol produced abroad may benefit due to higher domestic ethanol prices which could negatively impact demand for domestic supplies of ethanol. Despite the higher domestic prices, we have seen an increase in ethanol exports which has provided support for domestic ethanol prices.

Effective as of May 16, 2014, we terminated the Management Services Agreement with Homeland Energy Solutions, LLC. At the time of the termination, the only management position that was shared between us and Homeland Energy Solutions was the Chief Executive Officer position.

Effective as of May 16, 2014, Walter Wendland submitted his resignation as our President and Chief Executive Officer. Christine Marchand was appointed by our board of directors to serve as the interim Chief Executive Officer. Effective as of October 20, 2014, Curtis Strong was appointed as our Executive Vice President and will serve as our principal executive officer.

During our third quarter of 2014, we established an investment account with Vanguard. We deposited funds in this account at various times during our third and fourth quarters of 2014. As of October 31, 2014, we had approximately $5,264,000 in our Vanguard account. These funds are invested in short-term liquid investments which are intended to allow us to access the cash when we need it and preserve our capital while limiting our loss exposure. In addition, we had approximately $2,999,000 invested in certificates of deposit with Wells Fargo as of October 31, 2014.

GS CleanTech Corporation, a wholly owned subsidiary of GreenShift Corporation ("GreenShift") has sued more than twenty ethanol producers who operate corn oil extraction equipment claiming that these systems violate GreenShift's patents related to corn oil extraction technology. These lawsuits have been watched closely by the ethanol industry. On October 23, 2014, the Federal Court hearing the GreenShift patent infringement cases granted summary judgment in favor of the defendants and found GreenShift's patents invalid. While GreenShift has announced that it will appeal the decision, we believe it is unlikely that GreenShift will be successful in any such appeal.

We entered into an agreement with four companies which will develop a natural gas co-generation facility adjacent to our ethanol plant. We will purchase process steam from these companies at a discount compared to the cost of a comparable amount of natural gas which we would use to generate the process steam. We have also agreed to loan these companies $500,000 to assist in the development of the project. This natural gas co-generation facility will also produce electricity for sale. Management anticipates that this project will be operational by the end of 2015.

On December 3, 2013, our board of directors declared a distribution of $0.50 per membership unit for members of record as of December 3, 2013. The total amount of the distribution was $9,941,500 which was paid in January 2014. On April 21, 2014, our board of directors declared a distribution of $0.40 per membership unit for members of record as of April 21, 2014. The total amount of the distribution was $7,953,200 which was paid in May 2014. On November 17, 2014, our board of directors declared a distribution of $2.60 per membership unit for members of record as of November 17, 2014. The total amount of the distribution was $51,669,800 which was paid in December 2014.

Financial Information

Please refer to "ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for information about our revenue, profit and loss measurements and total assets and liabilities and "ITEM 8. Financial Statements and Supplementary Data" for our financial statements and supplementary data.

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Principal Products

The principal products that we produce are ethanol, distiller grains and corn oil. The table below shows the approximate percentage of our total revenue which is attributed to each of our principal products for each of our last three fiscal years.
  
Product
 
Fiscal Year 2014
 
Fiscal Year 2013
 
Fiscal Year 2012
Ethanol
 
81%
 
76%
 
77%
Distiller Grains
 
16%
 
21%
 
20%
Corn Oil
 
3%
 
3%
 
3%

Ethanol

Ethanol is ethyl alcohol, a fuel component made primarily from corn and various other grains, which can be used as: (i) an octane enhancer in fuels; (ii) an oxygenated fuel additive for the purpose of reducing ozone and carbon monoxide vehicle emissions; and (iii) a non-petroleum-based gasoline substitute. Ethanol produced in the United States is primarily used for blending with unleaded gasoline and other fuel products. Ethanol blended fuel is typically designated in the marketplace according to the
percentage of the fuel that is ethanol, with the most common fuel blend being E10, which includes 10% ethanol. The United States Environmental Protection Agency ("EPA") has approved the use of gasoline blends that contain 15% ethanol, or E15, for use in all vehicles manufactured in model year 2001 and later. In addition, flexible fuel vehicles can use gasoline blends that contain up to 85% ethanol called E85.

Distiller Grains

The principal co-product of the ethanol production process is distiller grains, a high protein, high-energy animal feed supplement primarily marketed to the dairy and beef industry. We produce two forms of distiller grains: Modified/Wet Distillers Grains ("MWDG") and Distillers Dried Grains with Solubles ("DDGS"). MWDG is processed corn mash that has been dried to approximately 50% moisture. MWDG has a shelf life of approximately seven days and is often sold to nearby markets. DDGS is processed corn mash that has been dried to approximately 10% moisture. It has a longer shelf life and may be sold and shipped to any market regardless of its vicinity to our ethanol plant.

Corn Oil

We separate a portion of the corn oil contained in our distiller grains which we market separately from our distiller grains. The corn oil that we produce is not food grade corn oil and therefore cannot be used for human consumption. The primary uses of the corn oil that we produce are for animal feed, industrial uses and biodiesel production.

Principal Product Markets

As described below in "Distribution Methods," we market and distribute all of our ethanol, distiller grains and corn oil through RPMG, Inc. ("RPMG") a professional third party marketer. We have very limited control over the decisions RPMG makes regarding where our products are marketed. Our products are primarily sold in the domestic market, however, as domestic production of ethanol, distiller grains and corn oil continue to expand, we anticipate increased international sales of our products. The principal purchasers of ethanol are generally wholesale gasoline marketers or blenders. The principal markets for our ethanol are petroleum terminals in the continental United States.

Currently, the United States ethanol industry exports a significant amount of distiller grains. During our 2014 fiscal year, the largest importers of United States distiller grains were China, Mexico, Turkey and Canada along with many Pacific Rim countries. However, demand for distiller grains from China decreased during the second half of 2014 when China announced in June 2014 that it would stop issuing import permits for distiller grains from the United States due to the presence in some shipments of a genetically modified corn trait not approved for import. This announcement was followed in July 2014 by a new requirement by China of a certification by the United States government that distiller grains shipments to China are free of the genetically modified corn trait. Officials from the United States and China have been unable to agree on testing procedures for distiller grains exported to China. If the certification requirements continue, export demand of distiller grains could be significantly reduced as a result.


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In 2014, exports of ethanol have increased with Canada receiving the largest percentage of ethanol produced in the United States and Brazil a distant second. The United Arab Emirates and the Philippines have also been top destinations. Ethanol exports could continue to increase in the future if market conditions are favorable. However, the imposition by the European Union in 2013 of a tariff on ethanol which is produced in the United States has created uncertainty as to the viability of that market for ethanol produced in the United States and may require United States producers to seek out other markets for their products. Lower ethanol prices have increased exports which may continue if ethanol prices remain at their current levels.

We expect our ethanol, distiller grains and corn oil marketer to explore all markets for our products, including export markets. However, due to high transportation costs, and the fact that we are not located near a major international shipping port, we expect a majority of our products to continue to be marketed and sold domestically.

Distribution Methods

On October 1, 2012, we entered into an ethanol marketing agreement with RPMG. Because we are an owner of Renewable Products Marketing Group, LLC ("RPMG, LLC"), the parent company of RPMG, we receive favorable marketing fees from RPMG. Our ethanol marketing agreement allows us to elect to sell our ethanol through an index arrangement or at a fixed price agreed to between us and RPMG. Pursuant to the ethanol marketing agreement, RPMG is our exclusive marketer. The term of our ethanol marketing agreement is perpetual, until it is terminated by either party. The primary reasons our ethanol marketing agreement would terminate are if we cease to be an owner of RPMG, LLC, if there is a breach of the ethanol marketing agreement which is not cured, or if we give advance notice to RPMG that we wish to terminate the ethanol marketing agreement. Notwithstanding our right to terminate the ethanol marketing agreement, we may be obligated to continue to market our ethanol through RPMG for a period of time after the termination. Further, following the termination, we agreed to accept an assignment of certain railcar leases which RPMG has secured to service our ethanol sales. If our ethanol marketing agreement is terminated, it would trigger a redemption of our ownership interest in RPMG, LLC at our contributed capital balance at the time of termination.

On December 15, 2010, we entered into a distiller grains marketing agreement with RPMG. Pursuant to the agreement, RPMG agreed to market all of the distiller grains we produce. We agreed to pay RPMG a fee to market our distiller grains equal to the actual cost of marketing the distiller grains due to the fact that we are an owner of RPMG, LLC. The initial term of the RPMG distiller grains marketing agreement was nine months. Following the nine month period, we have the right to terminate the contract by giving RPMG ninety days written notice.

On February 2, 2009, we executed a corn oil marketing agreement with RPMG. Pursuant to the agreement, RPMG agreed to market all of the corn oil we produce, except for certain corn oil we may sell to corn oil customers we identified before we executed the agreement. Currently, all of our corn oil is being sold through RPMG. The initial term of the agreement was for one year. The agreement automatically renews for additional one year terms unless either party gives 180 days notice that the agreement will not be renewed. We agreed to pay RPMG a commission based on each pound of our corn oil that is sold by RPMG.

Sources and Availability of Raw Materials

Corn

Our plant currently uses approximately 40 million bushels of corn per year, or approximately 110,000 bushels per day, as the feedstock for its dry milling process. In October 2008, we received our Iowa grain dealer license which allows us to purchase corn directly from local producers in addition to local grain elevators as intermediaries. Our commodity manager is responsible for purchasing corn for our operations, scheduling corn deliveries and establishing hedging positions to protect the price we pay for corn.

During the 2012 growing season, many of the corn producing regions of the United States experienced drought conditions. In addition, in 2013, corn planting was delayed in a large percentage of the corn belt. Both of these factors negatively impacted corn supplies and resulted in a significant increase in corn prices during our 2013 fiscal year. However, the corn harvest in the fall of 2013 and the 2014 growing season have resulted in two years of very strong corn crops which significantly reduced our corn costs during our 2014 fiscal year. Corn prices have continued lower following the end of our 2014 fiscal year due to adequate corn supplies and relatively stable corn demand. Further, since China has rejected corn exports from the United States, domestic supplies of corn have been strong which has resulted in lower corn prices. Management expects that corn prices will remain lower due to the large corn crop that was harvested in the fall of 2014 along which relatively stable corn demand. Management does not anticipate difficulty securing corn for our production process during our 2015 fiscal year. However, if corn demand increases or if we experience unfavorable growing conditions during 2015, either locally or globally, it could impact the price we pay for corn which can have a negative impact on our profitability.


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Natural Gas

Natural gas is an important input to our manufacturing process. We use natural gas to dry our distiller grains products to moisture contents at which they can be stored for longer periods of time. This allows the distiller grains we produce to be transported greater distances to serve broader livestock markets. We entered into an agreement with Interstate Power and Light Company to deliver all of the natural gas required by the plant. The agreement commenced in December 2004 and continued for a period of 10 years with an option for a 5 year renewal. During our 2014 fiscal year we provided notice to Interstate Power and Light Company of our election to renew our natural gas transportation agreement. We do not anticipate any problems securing the natural gas that we require to continue to operate the ethanol plant at capacity during our 2015 fiscal year or beyond.

Electricity
    
We entered into an agreement with Interstate Power and Light Company to supply all electrical energy required by the plant. The agreement commenced on June 2004 and continued through May 2007. After the expiration of the initial term, the agreement continues on a month-to-month basis and may be terminated by either party by giving 60 days prior written notice. We have elected to continue this contract on a month-to-month basis and have not given or received notice of termination of this agreement. We do not anticipate any problems securing the electricity that we require to continue to operate the ethanol plant at capacity during our 2015 fiscal year or beyond.

Water

The primary water supply for our plant is generated by one 800 gallon-per-minute pump at the well drilled at the plant site. We have a second high capacity well that has capacity to produce 600 gallons of water per minute. These two wells provide adequate water capacity to operate the plant under normal circumstances. In addition, we are connected to the City of Mason City's water supply for fire protection and in the event the water supplied by our wells is not sufficient. We have installed an underground distribution system for potable water, process water, fire protection and sanitary sewer lines. We will pay a special fixed user fee of $3,333 per month to Mason City for our back-up water supply until February 2015. In addition, we pay Mason City for any potable water usage at the plant based on our actual usage times the current rate ordinance. We do not anticipate any problems securing the water that we require to continue to operate the ethanol plant at capacity during our 2015 fiscal year or beyond.

Patents, Trademarks, Licenses, Franchises and Concessions

We do not currently hold any patents, trademarks, franchises or concessions. We were granted a perpetual and royalty free license by ICM to use certain ethanol production technology necessary to operate our ethanol plant. The cost of the license granted by ICM was included in the amount we paid to Fagen to design and build our ethanol plant and expansion.

Seasonality Sales

We experience some seasonality of demand for our ethanol, distiller grains and corn oil. Since ethanol is predominantly blended with gasoline for use in automobiles, ethanol demand tends to shift in relation to gasoline demand. As a result, we experience some seasonality of demand for ethanol in the summer months related to increased driving and, as a result, increased gasoline demand. In addition, we experience some increased ethanol demand during holiday seasons related to increased gasoline demand. We also experience decreased distiller grains demand during the summer months due to natural depletion in the size of herds at cattle feed lots and when the animals are turned out to pasture or are slaughtered. Further, we expect some seasonality of demand for our corn oil since a major corn oil user is biodiesel plants which typically reduce production during the winter months.

Working Capital

We primarily use our working capital for purchases of raw materials necessary to operate the ethanol plant and for capital expenditures to maintain and upgrade the ethanol plant. Our primary sources of working capital are income from our operations as well as our revolving term loan with our primary lender, Farm Credit. For our 2015 fiscal year, we anticipate adding a centrifuge, making improvements to our stack coils, water treatment facility and ethanol loadout functions along with completing the railroad track expansion and other smaller capital projects using cash from our operations. In addition, we anticipate using cash from our operations to maintain our current plant infrastructure. Management believes that our current sources of working capital are sufficient to sustain our operations and complete our capital expenditures during our 2015 fiscal year and beyond.
    

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Dependence on a Major Customer

As discussed above, we rely on RPMG for the sale and distribution of all of our products and are highly dependent on RPMG for the successful marketing of our products. We do not currently have the ability to market our ethanol, distiller grains and corn oil internally should RPMG be unable to market these products for us at acceptable prices. We anticipate that we would be able to secure alternate marketers should RPMG fail, however, a loss of our marketer could significantly harm our financial performance.

Competition

We are in direct competition with numerous ethanol producers, many of which have greater resources than we do. Ethanol is a commodity product where competition in the industry is predominantly based on price and consistent fuel quality. While management believes we are a lower cost producer of ethanol, larger ethanol producers may be able to take advantage of economies of scale due to their larger size and increased bargaining power with both customers and raw material suppliers which could put us at a competitive disadvantage compared to these larger ethanol producers. As of December 11, 2014, the Renewable Fuels Association ("RFA") estimates that there are 213 ethanol production facilities in the United States with capacity to produce approximately 15.1 billion gallons of ethanol per year and another 3 plants under expansion or construction with capacity to produce an additional 100 million gallons of ethanol per year. The RFA estimates that approximately 3% of the ethanol production capacity in the United States was not operating as of December 11, 2014. The largest ethanol producers include Archer Daniels Midland, Flint Hills Resources, Green Plains Renewable Energy, POET, and Valero Renewable Fuels, each of which are capable of producing significantly more ethanol than we produce.

The following table identifies the largest ethanol producers in the United States along with their production capacities.

U.S. FUEL ETHANOL PRODUCTION CAPACITY
BY TOP PRODUCERS
Producers of Approximately 700
million gallons per year (MMgy) or more
Company
 
Current Capacity
(MMgy)
 
Under Construction/Expansions
(MMgy)
 
Percent of Market
Archer Daniels Midland
 
1,762

 

 
12
%
Poet Biorefining
 
1,626

 

 
11
%
Valero Renewable Fuels
 
1,240

 

 
8
%
Green Plains Renewable Energy
 
1,004

 

 
7
%
Flint Hills Resources
 
760

 

 
5
%
Updated: December 11, 2014

We have experienced increased competition from oil companies which are purchasing ethanol production facilities. These oil companies are required to blend a certain amount of ethanol each year. Therefore, the oil companies may be able to operate their ethanol production facilities at times when it is unprofitable for us to operate our ethanol plant. Further, some ethanol producers own multiple ethanol plants which may allow them to compete more effectively by providing them flexibility to run certain production facilities while they have other facilities shut down. This added flexibility may allow these ethanol producers to compete more effectively, especially during periods when operating margins are unfavorable in the ethanol industry. Finally some ethanol producers who own ethanol plants in geographically diverse areas of the United States may spread the risk they encounter related to feedstock prices. For example, ethanol producers that own production facilities in different areas of the United States may reduce their risk of experiencing higher feedstock prices due to localized decreased corn crops.
  
Research and Development

We are continually working to develop new methods of operating the ethanol plant more efficiently. We continue to conduct research and development activities in order to realize these efficiency improvements.

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Governmental Regulation and Federal Ethanol Supports

Federal Ethanol Supports

The ethanol industry is dependent on several economic incentives to produce ethanol, including federal tax incentives and ethanol use mandates. One significant federal ethanol support is the Federal Renewable Fuels Standard (the "RFS"). The RFS requires that in each year, a certain amount of renewable fuels must be used in the United States. The RFS is a national program that does not require that any renewable fuels be used in any particular area or state, allowing refiners to use renewable fuel blends in those areas where it is most cost-effective. The RFS statutory volume requirement increases incrementally each year until the United States is required to use 36 billion gallons of renewable fuels by 2022. Starting in 2009, the RFS required that a portion of the RFS must be met by certain "advanced" renewable fuels. These advanced renewable fuels include ethanol that is not made from corn, such as cellulosic ethanol and biomass based biodiesel. The use of these advanced renewable fuels increases each year as a percentage of the total renewable fuels required to be used in the United States.

The United States Environmental Protection Agency (the "EPA") has the authority to waive the RFS statutory volume requirement, in whole or in part, provided one of the following two conditions have been met: (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. Annually, the EPA passes a rule that establishes the number of gallons of different types of renewable fuels that must be used in the United States which is called the renewable volume obligations.

The RFS statutory volume requirement for 2014 is approximately 18.15 billion gallons, of which corn based ethanol can be used to satisfy approximately 14.4 billion gallons. The RFS statutory volume requirement for 2015 is approximately 20.5 billion gallons, of which corn based ethanol can be used to satisfy approximately 15 billion gallons. However, on November 15, 2013, the EPA announced a proposal to significantly reduce the RFS levels for 2014 to 15.21 billion gallons of which corn based ethanol could be used to satisfy only 13 billion gallons. This proposed rule would result in a lowering of the 2014 standard below the 2013 level of 13.8 billion gallons. The EPA also sought comment on several petitions it has received for partial waiver of the statutory volumes for 2014. The 60-day public comment period ended on January 28, 2014 and the rule was submitted by the EPA to the Office of Management and Budget ("OMB") for review on August 22, 2014. On November 21, 2014, the EPA announced that it would delay finalizing the rule on the 2014 RFS standards until after the end of 2014. The EPA indicated that it intends to take action on the 2014 standards in 2015 prior to or in conjunction with action on the 2015 standards. If the EPA's proposal becomes a final rule significantly reducing the volume requirements under the RFS or if the RFS were to be otherwise reduced or eliminated by the exercise of the EPA waiver authority or by Congress, the market price and demand for ethanol could decrease which will negatively impact our financial performance. Current ethanol production capacity exceeds the EPA's proposed 2014 standard which can be satisfied by corn based ethanol.

In February 2010, the EPA issued new regulations governing the RFS. These new regulations have been called RFS2. The most controversial part of RFS2 involves what is commonly referred to as the lifecycle analysis of greenhouse gas emissions. Specifically, the EPA adopted rules to determine which renewable fuels provided sufficient reductions in greenhouse gases, compared to conventional gasoline, to qualify under the RFS program. RFS2 establishes a tiered approach, where regular renewable fuels are required to accomplish a 20% greenhouse gas reduction compared to gasoline, advanced biofuels and biomass-based biodiesel must accomplish a 50% reduction in greenhouse gases, and cellulosic biofuels must accomplish a 60% reduction in greenhouse gases. Any fuels that fail to meet this standard cannot be used by fuel blenders to satisfy their obligations under the RFS program. The scientific method of calculating these greenhouse gas reductions has been a contentious issue. Many in the ethanol industry were concerned that corn based ethanol would not meet the 20% greenhouse gas reduction requirement based on certain parts of the environmental impact model that many in the ethanol industry believed was scientifically suspect. However, RFS2 as adopted by the EPA provides that corn-based ethanol from modern ethanol production processes does meet the definition of a renewable fuel under the RFS program. Our ethanol plant was grandfathered into the RFS due to the fact that it was constructed prior to the effective date of the lifecycle greenhouse gas requirement and is not required to prove compliance with the lifecycle greenhouse gas reductions. Many in the ethanol industry are concerned that certain provisions of RFS2 as adopted may disproportionately benefit ethanol produced from sugarcane. This could make sugarcane based ethanol, which is primarily produced in Brazil, more competitive in the United States ethanol market. If this were to occur, it could reduce demand for the ethanol that we produce.

Most ethanol that is used in the United States is sold in a blend called E10. E10 is a blend of 10% ethanol and 90% gasoline. E10 is approved for use in all standard vehicles. Estimates indicate that gasoline demand in the United States is approximately 134 billion gallons per year. Assuming that all gasoline in the United States is blended at a rate of 10% ethanol and 90% gasoline, the maximum demand for ethanol is 13.4 billion gallons per year. This is commonly referred to as the "blend wall," which represents a theoretical limit where more ethanol cannot be blended into the national gasoline pool. This is a theoretical

9


limit because it is believed that it would not be possible to blend ethanol into every gallon of gasoline that is being used in the United States and it discounts the use of higher percentage blends such as E15 or E85.

Many in the ethanol industry believe that it will be impossible to meet the RFS requirement in future years without an increase in the percentage of ethanol that can be blended with gasoline for use in standard (non-flex fuel) vehicles. The United States Environmental Protection Agency (the "EPA") has approved the use of E15, gasoline which is blended at a rate of 15% ethanol and 85% gasoline, in vehicles manufactured in the model year 2001 and later. However, there were still significant federal and state regulatory hurdles that needed to be addressed. The EPA has made gains towards clearing those federal regulatory hurdles. In February 2012, the EPA approved health effects and emissions testing on E15 which was required by the Clean Air Act before E15 can be sold into the market. In March 2012, the EPA approved a model Misfueling Mitigation Plan and fuel survey which must be submitted by applicants before E15 registrations can be approved. In April 2012, the EPA approved the first E15 registrations approving twenty producers which have successfully registered their product to be used as E15. Finally, in June 2012, the EPA gave the final approval to allow the sale of E15. Although management believes that these developments are significant steps towards introduction of E15 in the marketplace, there are still obstacles to meaningful market penetration by E15. Many states still have regulatory issues that prevent the sale of E15. Sales of E15 may be limited because it is not approved for use in all vehicles, the EPA requires a label that management believes may discourage consumers from using E15, and retailers may choose not to sell E15 due to concerns regarding liability. In addition, different gasoline blendstocks may be required at certain times of the year in order to use E15 due to federal regulations related to fuel evaporative emissions which may limit E15 sales in these markets. As a result, E15 has not had an immediate impact on ethanol demand in the United States.

State Ethanol Supports

In 2006, Iowa passed legislation promoting the use of renewable fuels in Iowa. One of the most significant provisions of the Iowa renewable fuels legislation is a renewable fuels standard encouraging 10% of the gasoline sold in Iowa to be renewable fuels by 2009 and increasing incrementally to 25% renewable fuels by 2019. This is expected to be achieved through the use of tax credits that are designed to encourage the further utilization of renewable fuels in Iowa. This legislation could increase local demand for ethanol and may increase the local price for ethanol. In 2011, the Iowa legislature increased the E85 tax credit to 18 cents per gallon, created an E15 tax credit of 3 cents per gallon from 2011 until 2014, decreasing to 2.5 cents per gallon from 2015 until 2017 and waived the misfueling liability for retailers associated with E15. These changes were intended to encourage the use of higher level blends of ethanol in Iowa.

Effect of Governmental Regulation

The government's regulation of the environment changes constantly. We are subject to extensive air, water and other environmental regulations and we have been required to obtain a number of environmental permits to construct and operate the ethanol plant. It is possible that more stringent federal or state environmental rules or regulations could be adopted, which could increase our operating costs and expenses. It also is possible that federal or state environmental rules or regulations could be adopted that could have an adverse effect on the use of ethanol. Plant operations are governed by the Occupational Safety and Health Administration ("OSHA"). OSHA regulations may change such that the costs of operating the ethanol plant may increase. Any of these regulatory factors may result in higher costs or other adverse conditions effecting our operations, cash flows and financial performance.

We have obtained all of the necessary permits to operate the ethanol plant. During our 2014 fiscal year, we incurred costs and expenses of approximately $180,000 complying with environmental laws, including the cost of obtaining permits. Although we have been successful in obtaining all of the permits currently required, any retroactive change in environmental regulations, either at the federal or state level, could require us to obtain additional or new permits or spend considerable resources in complying with such regulations.

In late 2009, California passed a Low Carbon Fuels Standard ("LCFS"). The California LCFS requires that renewable fuels used in California must accomplish certain reductions in greenhouse gases which is measured using a lifecycle analysis, similar to the RFS. On December 29, 2011, a federal district court in California ruled that the California LCFS was unconstitutional which halted implementation of the California LCFS. However, the California Air Resources Board ("CARB") appealed this court ruling and on September 18, 2013, the federal appellate court reversed the federal district court finding the LCFS constitutional and remanding the case back to federal district court to determine whether the LCFS imposes a burden on interstate commerce that is excessive in light of the local benefits. On June 30, 2014, the United States Supreme Court declined to hear the appeal of the federal appellate court ruling. In addition, a state court in California recently required that CARB take certain corrective actions regarding the approval of the LCFS regulations while allowing the LCFS regulations to remain in effect during this process. If federal and state challenges to the LCFS are ultimately unsuccessful, the LCFS could have a negative impact on demand for corn-based ethanol and result in decreased ethanol prices.

10



The European Union concluded an anti-dumping investigation related to ethanol produced in the United States and exported to Europe. As a result of this investigation, the European Union imposed a tariff on ethanol which is produced in the United States and exported to Europe. This tariff could result in decreased exports of ethanol to Europe which could negatively impact the market price of ethanol in the United States.

Employees

As of October 31, 2014, we had 47 full-time employees and no part time employees.

Financial Information about Geographic Areas

All of our operations are domiciled in the United States. All of the products we sold to our customers for our fiscal years 2014, 2013 and 2012 were produced in the United States and all of our long-lived assets are domiciled in the United States. We have engaged a third-party professional marketer which decides where our products are marketed and we have limited control over the marketing decisions made by our marketer. Our marketer may decide to sell our products in countries other than the United States. However, we anticipate that our products will still primarily be marketed and sold in the United States.

ITEM 1A. RISK FACTORS.

You should carefully read and consider the risks and uncertainties below and the other information contained in this report.  The risks and uncertainties described below are not the only ones we may face.  The following risks, together with additional risks and uncertainties not currently known to us or that we currently deem immaterial could impair our financial condition and results of operation.

Risks Relating to Our Business
 
Our profitability is dependent on a positive spread between the price we receive for our products and the raw material costs required to produce our products. Practically all of our revenue is derived from the sale of our ethanol, distiller grains and corn oil. Our primary raw material costs are related to corn costs and natural gas costs. Our profitability depends on a positive spread between the market price of the ethanol, distiller grains and corn oil we produce and the raw material costs related to these products. While ethanol, distiller grains and corn oil prices typically change in relation to corn prices, this correlation may not always exist. In the event the prices of our products decrease at a time when our raw material costs are increasing, we may not be able to profitably operate the ethanol plant. Further, if the spread between the price we receive for our products and the raw material costs associated with producing those products is negative for an extended period of time, we may fail which could negatively impact the value of our units.

Decreasing gasoline prices may lower ethanol prices which could negatively impact our ability to operate profitably. In recent years, the price of ethanol has been less than the price of gasoline which increased demand for ethanol from fuel blenders. However, recently the price of gasoline has been decreasing significantly which has reduced the spread between the price of gasoline and the price of ethanol. This trend has reduced demand for ethanol and has negatively impacted ethanol prices. These lower ethanol prices have come at a time when corn prices are increasing which has decreased our profit margins. If this trend continues for a significant period of time, it could hurt our ability to profitably operate the ethanol plant which could decrease the value of our units.

We may be forced to reduce production or cease production altogether if we are unable to secure the corn we require to operate the ethanol plant. While the last two corn crops, harvested in the fall of 2013 and 2014, were both record corn crops, and management anticipates that we will not experience difficulty securing the corn we need to operate the ethanol plant at capacity during 2015, it is possible that corn demand may increase such that a shortage could develop. Further, if the corn crop harvested in future years is smaller than we experienced in 2014, it is possible that we could experience corn shortages in the future which could negatively impact our ability to operate the ethanol plant. We may also experience a shortage of corn in our local market which may not increase national corn prices but may require us to increase our corn basis in order to attract corn which can impact our overall corn costs. If we are unable to secure the corn we require to continue to operate the ethanol plant, or we are unable to secure corn at prices that allow us to operate profitably, we may have to reduce production or cease operating altogether which may negatively impact the value of our units.

We engage in hedging transactions which involve risks that could harm our business.  We are exposed to market risk from changes in commodity prices.  Exposure to commodity price risk results from our dependence on corn and natural gas in the

11


ethanol production process, along with sales of ethanol.  We seek to minimize the risks from fluctuations in the prices of corn, natural gas and ethanol through the use of hedging instruments.  The effectiveness of our hedging strategies is dependent on the price of corn, natural gas and ethanol and our ability to sell sufficient products to use all of the corn and natural gas for which we have futures contracts.  Our hedging activities may not successfully reduce the risk caused by price fluctuation which may leave us vulnerable to high corn and natural gas prices or relatively lower ethanol prices. Alternatively, we may choose not to engage in hedging transactions in the future and our operations and financial conditions may be adversely affected during periods in which corn and/or natural gas prices increase or ethanol prices decrease. Further, we may be required to use a significant amount of cash to make margin calls required by our commodities broker as a result of decreases in corn prices and the resulting unrealized and realized losses we may experience on our hedging activities. Utilizing cash for margin calls has an impact on the cash we have available for our operations which could result in liquidity problems during times when corn prices change significantly which can harm our profitability.
 
Our business is not diversified.  Our success depends almost entirely on our ability to profitably operate our ethanol plant. We do not have any other lines of business or other significant sources of revenue if we are unable to operate our ethanol plant and manufacture ethanol, distiller grains and corn oil.  Further, all of our investments are in companies involved in the ethanol industry. If economic or political factors adversely affect the market for ethanol, distiller grains or corn oil, we have no other line of business to fall back on. Our business would also be significantly harmed if the ethanol plant could not operate at full capacity for any extended period of time.

If RPMG, which markets all of our products, fails, it may negatively impact our ability to profitably operate the ethanol plant. All of our ethanol, distiller grains and corn oil is marketed by RPMG. Therefore, nearly all of our revenue is derived from sales that are secured by RPMG. If RPMG is unable to market all of our products, it may negatively impact our ability to profitably operate the ethanol plant. While management believes that we could secure an alternative marketer if RPMG were to fail, switching marketers may negatively impact our cash flow and our ability to continue to operate the ethanol plant. If we are unable to sell all of our ethanol, distiller grains and corn oil at prices that allow us to operate profitably, it may decrease the value of our units.
  
We depend on our management and key employees, and the loss of these relationships could negatively impact our ability to operate profitably. We are highly dependent on our management team to operate our ethanol plant. We may not be able to replace these individuals should they decide to cease their employment with us, or if they become unavailable for any other reason. While we seek to compensate our management and key employees in a manner that will encourage them to continue their employment with us, they may choose to seek other employment. Any loss of these executive officers and key employees may prevent us from operating the ethanol plant profitably which could decrease the value of our units.

We may violate the terms of our credit agreements and financial covenants which could result in our lender demanding immediate repayment of our loans. We have a credit facility with Farm Credit. Our credit agreements with Farm Credit include various financial loan covenants. We are currently in compliance with all of our financial loan covenants. Current management projections indicate that we will be in compliance with our loan covenants for at least the next 12 months. However, unforeseen circumstances may develop which could result in us violating our loan covenants. If we violate the terms of our credit agreements, including our financial loan covenants, Farm Credit could deem us to be in default of our loans and require us to immediately repay the entire outstanding balance of our loans. If we do not have the funds available to repay the loans or we cannot find another source of financing, we may fail which could decrease or eliminate the value of our units.

Our operations may be negatively impacted by natural disasters, severe weather conditions, and other unforeseen plant shutdowns which can negatively impact our operations. Our operations may be negatively impacted by events outside of our control such as natural disasters, severe weather, strikes, train derailments and other unforeseen events which may negatively impact our operations. If we experience any of these unforeseen circumstances which negatively impact our operations, it may affect our cash flow and negatively impact the value of our business.

We may incur casualty losses that are not covered by insurance which could negatively impact the value of our units. We have purchased insurance which we believe adequately covers our losses from foreseeable risks. However, there are risks that we may encounter for which there is no insurance or for which insurance is not available on terms that are acceptable to us. If we experience a loss which materially impairs our ability to operate the ethanol plant which is not covered by insurance, the value of our units could be reduced or eliminated.
 
Risks Related to Ethanol Industry
 
Demand for ethanol may not continue to grow unless ethanol can be blended into gasoline in higher percentage blends for standard vehicles. Currently, ethanol is primarily blended with gasoline for use in standard (non-flex fuel) vehicles to create a blend which is 10% ethanol and 90% gasoline. Estimates indicate that approximately 134 billion gallons of gasoline are sold in

12


the United States each year. Assuming that all gasoline in the United States is blended at a rate of 10% ethanol and 90% gasoline, the maximum demand for ethanol is 13.4 billion gallons. This is commonly referred to as the "blend wall," which represents a theoretical limit where more ethanol cannot be blended into the national gasoline pool. Many in the ethanol industry believe that the ethanol industry has reached this blend wall. In order to expand demand for ethanol, higher percentage blends of ethanol must be utilized in standard vehicles. Such higher percentage blends of ethanol are a contentious issue. Automobile manufacturers and environmental groups have fought against higher percentage ethanol blends. The EPA approved the use of E15 for standard (non-flex fuel) vehicles produced in the model year 2001 and later. The fact that E15 has not been approved for use in all vehicles and the labeling requirements associated with E15 may lead to gasoline retailers refusing to carry E15. Without an increase in the allowable percentage blends of ethanol that can be used in all vehicles, demand for ethanol may not continue to increase which could decrease the selling price of ethanol and could result in our inability to operate the ethanol plant profitably, which could reduce or eliminate the value of our units.

Lack of rail transportation infrastructure and delayed rail shipments could negatively impact our financial performance. The ethanol industry has recently been experiencing difficulty transporting our ethanol which is produced. This difficulty has impacted our operations. Ethanol is typically transported by rail. At times during our 2014 fiscal year, we have been required to reduce production or cease production altogether when we have run out of ethanol storage capacity. Further, our ethanol inventory has increased due to the difficulty we have experienced shipping our ethanol which has impacted 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 locomotives and railroad crews, and poor weather conditions which have slowed rail travel and loading times. Management anticipates that these slower rail shipments will continue until the rail transportation capacity in the United States increases. These delays in shipping our products have resulted in decreased revenue and have required us to reduce the amount of ethanol we produce which has a negative impact on our financial performance. If these rail shipment challenges continue, they may negatively impact our ability to operate the ethanol plant profitably which could reduce the value of our units.

If China's effective ban on imports of U.S. distiller grains continues, exports of distiller grain could be dramatically reduced which could have a negative effect on the price of distiller grains in the U.S. and affect our profitability. China, the largest buyer of distiller grains in the world, announced in June 2014 that it would stop issuing import permits for U.S. distiller grains due to the presence of a genetically modified corn trait not approved by China for import. This announcement was followed in July 2014 by a new requirement by China of a certification by the U.S. government that distiller grains shipments to China are free of the genetically modified corn trait. Officials from the U.S and China have been unable to agree on testing procedures for distiller grains exported to China. If the certification requirements continue and U.S. producers can not satisfy those requirements, export demand of distiller grains could be significantly reduced as a result. If export demand of distiller grains is significantly reduced, the price of distiller grains in the U.S. would likely continue to decline which would have a negative effect on our revenue and could impact our ability to profitably operate which could in turn reduce the value of our units.

Technology advances in the commercialization of cellulosic ethanol may decrease demand for corn-based ethanol which may negatively affect our profitability. The current trend in ethanol production research is to develop an efficient method of producing ethanol from cellulose-based biomass, such as agricultural waste, forest residue, municipal solid waste, and energy crops. This trend is driven by the fact that cellulose-based biomass is generally cheaper than corn, and producing ethanol from cellulose-based biomass would create opportunities to produce ethanol in areas which are unable to grow corn. The Energy Independence and Security Act of 2007 and the 2008 Farm Bill offer a very strong incentive to develop commercial scale cellulosic ethanol. The statutory volume requirement in the RFS requires that 16 billion gallons per year of advanced bio-fuels be consumed in the United States by 2022. Additionally, state and federal grants have been awarded to several companies which are seeking to develop commercial-scale cellulosic ethanol plants. As a result, at least three companies have reportedly already begun producing cellulosic ethanol on a commercial scale and a handful of other companies have begun construction on commercial scale cellulosic ethanol plants, some of which are expected to be completed by the end of 2014. If an efficient method of producing ethanol from cellulose-based biomass is developed, we may not be able to compete effectively. If we are unable to produce ethanol as cost-effectively as cellulose-based producers, our ability to generate revenue and our financial condition will be negatively impacted.

Changes and advances in ethanol production technology could require us to incur costs to update our plant or could otherwise hinder our ability to compete in the ethanol industry or operate profitably.  Advances and changes in the technology of ethanol production are expected to occur.  Such advances and changes may make the ethanol production technology installed in our plant less desirable or obsolete.  These advances could also allow our competitors to produce ethanol at a lower cost than we are able.  If we are unable to adopt or incorporate technological advances, our ethanol production methods and processes could be less efficient than our competitors, which could cause our plant to become uncompetitive or completely obsolete.  If our competitors develop, obtain or license technology that is superior to ours or that makes our technology obsolete, we may be required to incur significant costs to enhance or acquire new technology so that our ethanol production remains competitive.  Alternatively, we may be required to seek third-party licenses, which could also result in significant expenditures.  These third-

13


party licenses may not be available or, once obtained, they may not continue to be available on commercially reasonable terms.  These costs could negatively impact our financial performance by increasing our operating costs and reducing our net income.

New plants under construction or decreases in ethanol demand may result in excess production capacity in our industry which could negatively impact our profitability. The supply of domestically produced ethanol is at an all-time high. According to the Renewable Fuels Association, as of December 11, 2014, there are 213 ethanol plants in the United States with capacity to produce approximately 15.1 billion gallons of ethanol per year. In addition, there are 3 new ethanol plants under construction or expanding which together are estimated to increase ethanol production capacity by 100 million gallons per year. Excess ethanol production capacity may have an adverse impact on our results of operations, cash flows and general financial condition. According to the Renewable Fuels Association, approximately 3% of the ethanol production capacity in the United States was idled as of December 11, 2014. Further, ethanol demand may not increase past approximately 13.4 billion gallons of ethanol due to the blend wall unless higher percentage blends of ethanol are approved by the EPA for use in all standard (non-flex fuel) vehicles, not just vehicles produced in the model year 2001 and later. While the United States is currently exporting some ethanol which has resulted in increased ethanol demand, these ethanol exports may not continue. If ethanol demand does not grow at the same pace as increases in supply, we expect the selling price of ethanol to decline. If excess capacity in the ethanol industry continues to occur, the market price of ethanol may decline to a level that is inadequate to generate sufficient cash flow to cover our costs, which could negatively affect our profitability.

We operate in an intensely competitive industry and compete with larger, better financed companies which could impact our ability to operate profitably.  There is significant competition among ethanol producers. There are numerous producer-owned and privately-owned ethanol plants planned and operating throughout the Midwest and elsewhere in the United States.  We also face competition from ethanol producers located outside of the United States. The largest ethanol producers include Archer Daniels Midland, Flint Hills Resources, Green Plains Renewable Energy, POET, and Valero Renewable Fuels, each of which are capable of producing significantly more ethanol than we produce. Further, many believe that there will be further consolidation occurring in the ethanol industry which will likely lead to a few companies which control a significant portion of the United States ethanol production market. We may not be able to compete with these larger producers. These larger ethanol producers may be able to affect the ethanol market in ways that are not beneficial to us which could negatively impact our financial performance and the value of our units. 
 
Competition from the advancement of alternative fuels may lessen demand for ethanol. Alternative fuels, gasoline oxygenates and ethanol production methods are continually under development. A number of automotive, industrial and power generation manufacturers are developing alternative clean power systems using fuel cells, plug-in hybrids, and electric cars or clean burning gaseous fuels. Like ethanol, these emerging technologies offer an option to address worldwide energy costs, the long-term availability of petroleum reserves and environmental concerns. If these alternative technologies continue to expand and gain broad acceptance and become readily available to consumers for motor vehicle use, we may not be able to compete effectively. This additional competition could reduce the demand for ethanol, resulting in lower ethanol prices that might adversely affect our results of operations and financial condition.

If exports of ethanol are reduced, including as a result of the imposition by the European Union of a tariff on U.S. ethanol, ethanol prices may be negatively impacted. The United States ethanol industry was supported during our 2014 fiscal year with exports of ethanol which increased demand for our ethanol. Management believes these additional exports of ethanol were due to lower market ethanol prices in the United States and increased global demand for ethanol. However, these ethanol exports may not continue. In 2012, the European Union concluded an anti-dumping investigation related to ethanol produced in the United States and exported to Europe. As a result of this investigation, the European Union has imposed a tariff on ethanol which is produced in the United States and exported to Europe. While we continue to experience some ethanol exports to Europe, as a result of this tariff, if ethanol prices increase, these exports to the European Union may cease. Further, ethanol exports could potentially be higher without the European Union tariff. In addition, other importers of United States ethanol could reduce their imports which could negatively impact ethanol prices in the United States and could result in an imbalance between ethanol supply and ethanol demand. Any decrease in ethanol prices or demand may negatively impact our ability to profitably operate the ethanol plant.

Consumer resistance to the use of ethanol based on the belief that ethanol is expensive, adds to air pollution, harms engines and/or takes more energy to produce than it contributes or based on perceived issues related to the use of corn as the feedstock to produce ethanol may affect demand for ethanol.  Certain individuals believe that the use of ethanol will have a negative impact on gasoline prices at the pump. Some also believe that ethanol adds to air pollution and harms car and truck engines. Still other consumers believe that the process of producing ethanol actually uses more fossil energy, such as oil and natural gas, than the amount of energy that is produced. Further, some consumers object to the fact that ethanol is produced using corn as the feedstock which these consumers perceive as negatively impacting food prices. These consumer beliefs could potentially be wide-spread and may be increasing as a result of efforts to increase the allowable percentage of ethanol that may be blended

14


for use in vehicles. If consumers choose not to buy ethanol based on these beliefs, it would affect demand for the ethanol we produce which could negatively affect our profitability and financial condition.

Risks Related to Regulation and Governmental Action

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. However, 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.

The Secondary Tariff on Imported Ethanol expired on December 31, 2011, and its absence could negatively impact our profitabilityThe secondary tariff on imported ethanol was allowed to expire on December 31, 2011. This secondary tariff on imported ethanol was a 54 cent per gallon tariff on ethanol produced in certain foreign countries. Following the expiration of this tariff, the price of ethanol in the United States increased significantly, due in part to higher corn prices. This made the United States a favorable market for foreign ethanol producers to export ethanol, especially in areas of the United States which are served by international shipping ports. This increase in ethanol imports resulted in lower demand for domestically produced ethanol. Management believes that the increase in ethanol imports may have resulted in less favorable operating margins during 2012 which negatively impacted our operations. While ethanol imports were lower during 2013 and 2014 due to a number of factors, these imports could come back in the future which could decrease our ability to profitably operate the ethanol plant and may reduce the value of our units.

The California Low Carbon Fuel Standard may decrease demand for corn based ethanol which could negatively impact our profitability. California passed a Low Carbon Fuels Standard ("LCFS") which requires that renewable fuels used in California must accomplish certain reductions in greenhouse gases which reductions are measured using a lifecycle analysis. Management believes that these regulations could preclude corn based ethanol produced in the Midwest from being used in California. California represents a significant ethanol demand market. If the ethanol industry is unable to supply corn based ethanol to California, it could significantly reduce demand for the ethanol we produce. This could result in a reduction of our revenues and negatively impact our ability to profitably operate the ethanol plant.

Changes in environmental regulations or violations of these regulations could be expensive and reduce our profitability.  We are subject to extensive air, water and other environmental laws and regulations.  In addition, some of these laws require our plant to operate under a number of environmental permits. These laws, regulations and permits can often require expensive pollution control equipment or operational changes to limit actual or potential impacts to the environment.  A violation of these laws and regulations or permit conditions can result in substantial fines, damages, criminal sanctions, permit revocations and/or plant shutdowns.  In the future, we may be subject to legal actions brought by environmental advocacy groups and other parties for actual or alleged violations of environmental laws or our permits.  Additionally, any changes in environmental laws and regulations, both at the federal and state level, could require us to spend considerable resources in order to comply with future environmental regulations. The expense of compliance could be significant enough to reduce our profitability and negatively affect our financial condition.

Carbon dioxide may be regulated in the future by the EPA as an air pollutant requiring us to obtain additional permits and install additional environmental mitigation equipment, which could adversely affect our financial performance. In 2007, the Supreme Court decided a case in which it ruled that carbon dioxide is an air pollutant under the Clean Air Act for motor vehicle emissions. In 2011 the EPA issued a tailoring rule that deferred greenhouse gas regulations for ethanol plants until July of 2014. However, in July of 2013 the D.C. Circuit issued an opinion vacating the EPA's deferral of those regulations for biogenic sources, including ethanol plants. On June 23, 2014 the U.S. Supreme Court affirmed in part and reversed in part the D.C. Circuit’s decision. For plants that already hold PSD permits the court generally affirmed the EPA's ability to regulate greenhouse gas regulations. Our plant produces a significant amount of carbon dioxide. While there are currently no regulations restricting carbon dioxide emissions, if the EPA or the State of Iowa were to regulate carbon dioxide emissions by plants such as ours, we may have to apply

15


for additional permits or we may be required to install carbon dioxide mitigation equipment or take other as yet unknown steps to comply with these potential regulations. Compliance with any future regulation of carbon dioxide, if it occurs, could be costly and may prevent us from operating the ethanol plant profitably which could decrease or eliminate the value of our units.

ITEM 2.    PROPERTIES

Our ethanol plant is located on an approximately 124-acre site in north-central Iowa. The plant's address is 1822 43rd Street SW, Mason City, Iowa. We produce all of our ethanol, distiller grains and corn oil at this site. The ethanol plant has capacity to produce more than 110 million gallons of ethanol per year. Following the end of our 2014 fiscal year, we purchased an additional approximately 30 acres of land adjacent to our ethanol plant which will be used for the natural gas co-generation project and for other plant upgrade projects we may undertake in the future.

All of our tangible and intangible property serves as collateral for our senior credit facility with Farm Credit. Our senior credit facility is discussed in more detail under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Short-Term and Long-Term Debt Sources."

ITEM 3.    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 legal proceedings.

ITEM 4.    MINE SAFETY DISCLOSURES

None.
PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

There is no public trading market for our Class A or Class B membership units. We have created a qualified online matching service ("QMS") in order to facilitate trading of our units. The QMS consists of an electronic bulletin board that provides information to prospective sellers and buyers of our units. We do not receive any compensation for creating or maintaining the QMS. We do not become involved in any purchase or sale negotiations arising from the QMS. In advertising the QMS, we do not characterize the Company as being a broker or dealer or an exchange. We do not give advice regarding the merits or shortcomings of any particular transaction. We do not receive, transfer or hold funds or securities as an incident of operating the QMS. We do not use the QMS to offer to buy or sell securities other than in compliance with the securities laws, including any applicable registration requirements. We have no role in effecting the transactions beyond approval, as required under our operating agreement, and the issuance of new certificates. So long as we remain a publicly reporting company, information about the Company will be publicly available through the SEC's filing system. However, if at any time we cease to be a publicly reporting company, we anticipate continuing to make information about the Company publicly available on our website in order to continue operating the QMS.

As of December 22, 2014, there were approximately 958 holders of record of our Class A and Class B units.

The following table contains historical information by quarter for the past two years regarding the actual unit transactions that were completed by our unit-holders during the periods specified. We believe this most accurately represents the current trading value of our units. The information was compiled by reviewing the completed unit transfers that occurred on the QMS bulletin board or through private transfers during the quarters indicated.


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Quarter
 
Low Price
 
High Price
 
Average Price
 
Number of Units Traded
2013 1st 
 
3.00

 
3.05

 
3.03

 
105,000

2013 2nd 
 

 

 

 
None

2013 3rd
 

 

 

 
None

2013 4th 
 
3.00

 
3.70

 
3.31

 
100,000

2014 1st 
 
3.34

 
3.50

 
3.46

 
65,000

2014 2nd 
 
3.50

 
4.50

 
4.17

 
104,390

2014 3rd 
 
4.50

 
4.50

 
4.50

 
84,000

2014 4th 
 
2.20

 
6.25

 
4.96

 
210,000

 
The following tables contain the bid and asked prices that were posted on the QMS bulletin board and includes some transactions that were not completed. We believe the table above more accurately describes the trading value of our units as the bid and asked prices below include some offers that never resulted in completed transactions. The information was compiled by reviewing postings that were made on the QMS bulletin board.

Seller's Quarter
 
Low Price
 
High Price
 
Average Price
 
Number of Units Traded
2013 1st 
 
3.00

 
3.00

 
3.00

 
20,000

2013 2nd 
 
3.50

 
4.50

 
4.15

 
115,000

2013 3rd 
 
3.50

 
3.50

 
3.50

 
40,000

2013 4th 
 
3.50

 
3.50

 
3.50

 
40,000

2014 1st 
 
3.50

 
3.75

 
3.63

 
65,000

2014 2nd 
 
4.25

 
4.50

 
4.38

 
60,000

2014 3rd 
 

 

 

 
None

2014 4th 
 

 

 

 
None


Buyer's Quarter
 
Low Price
 
High Price
 
Average Price
 
Number of Units Traded
2013 1st
 

 

 

 
None

2013 2nd 
 

 

 

 
None

2013 3rd 
 
2.75

 
3.10

 
2.81

 
60,000

2013 4th 
 

 

 

 
None

2014 1st 
 
3.10

 
3.50

 
3.28

 
30,000

2014 2nd 
 
3.70

 
4.25

 
4.06

 
63,000

2014 3rd 
 
4.30

 
4.60

 
4.47

 
129,000

2014 4th 
 
4.70

 
6.00

 
5.39

 
61,000


As a limited liability company, we are required to restrict the transfers of our membership units in order to preserve our partnership tax status.  Our membership units may not be traded on any established securities market or readily traded on a secondary market (or the substantial equivalent thereof).  All transfers are subject to a determination that the transfer will not cause us to be deemed a publicly traded partnership.


17


ISSUER REPURCHASES OF EQUITY SECURITIES

During our fourth quarter of 2014, we made the following repurchase of our membership units.
Period
 
Total number of units purchased
 
Average price paid per unit
 
Total number of units purchased as part of publicly announced plans or programs
 
Maximum number of units that may yet be purchased under the plans or programs
August 2014
 

 
$

 

 

September 2014
 
10,000

 
5.00

 

 

October 2014
 

 

 

 

Total
 
10,000

 
$
5.00

 

 


DISTRIBUTIONS

Distributions are paid to our unit holders in proportion to the number of units held by each unit holder, regardless of class. A unit holder's distribution is determined by dividing the number of units owned by the unit holder by the total number of units outstanding, regardless of class. Our board of directors has complete discretion over the timing and amount of distributions to our unit holders subject to certain restrictions in our credit agreements and our operating agreement. Our operating agreement requires the board of directors to try to make cash distributions at such times and in such amounts as will permit our unit holders to satisfy their income tax liability related to owning our units in a timely fashion. Our expectations with respect to our ability to make future distributions are discussed further in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." Distributions are restricted by certain loan covenants in our credit agreements with Farm Credit. We may only make distributions to our members in an amount that does not exceed 75% of our net income for the prior fiscal year provided that we are not in default of our credit agreements and the payment of the distribution would not cause us to default on our credit agreements. During our 2013 fiscal year, we made one distribution to our members of $0.10 per unit for members of record as of August 19, 2013 which was paid in September 2013. During our 2014 fiscal year, we made two distributions to our members for a total of $0.90 per membership unit for a total distribution of $17,894,700. Subsequent to the end of our 2014 fiscal year, on November 17, 2014, our board of directors declared a distribution of $2.60 per membership unit for a total of $51,695,800 to be paid to members of record as of November 17, 2014. The distribution was paid in December 2014.

PERFORMANCE GRAPH

The following graph shows a comparison of cumulative total member return since November 1, 2009, calculated on a dividend reinvested basis, for the Company, the NASDAQ Composite Index (the "NASDAQ Market Index") and an index of other companies that have the same SIC code as the Company (the "SIC Code Index"). The graph assumes $100 was invested in each of our units, the NASDAQ Market Index, and the SIC Code Index on November 1, 2009. Data points on the graph are annual. Note that historic unit price performance is not necessarily indicative of future unit price performance.

18



Pursuant to the rules and regulations of the Securities and Exchange Commission, the performance graph and the information set forth therein shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, and shall not be deemed to be incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.

ITEM 6.    SELECTED FINANCIAL DATA

The following table presents selected consolidated financial and operating data as of the dates and for the periods indicated. The selected balance sheet financial data as of October 31, 2012, 2011 and 2010 and the selected income statement data and other financial data for the years ended October 31, 2011 and 2010 have been derived from our audited consolidated financial statements that are not included in this Form 10-K. The selected balance sheet financial data as of October 31, 2014 and 2013 and the selected income statement data and other financial data for each of the years in the three year period ended October 31, 2014 have been derived from the audited Financial Statements included elsewhere in this Form 10-K. You should read the following table in conjunction with "Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and the accompanying notes included elsewhere in this Form 10-K. Among other things, those financial statements include more detailed information regarding the basis of presentation for the following consolidated financial data.

Statement of Operations Data:
 
2014
 
2013
 
2012
 
2011
 
2010
Revenues
 
$
289,152,549

 
$
350,721,175

 
$
327,830,377

 
$
324,927,805

 
$
208,461,685

Cost Goods Sold
 
225,335,539

 
338,014,664

 
322,740,236

 
301,052,197

 
190,653,662

Gross Profit
 
63,817,010

 
12,706,511

 
5,090,141

 
23,875,608

 
17,808,023

Operating Expenses
 
3,569,152

 
2,550,236

 
2,207,634

 
2,524,830

 
2,223,716

Operating Income
 
60,247,858

 
10,156,275

 
2,882,507

 
21,350,778

 
15,584,307

Other Income (Expense)
 
19,031,679

 
4,026,753

 
3,706,912

 
5,474,218

 
1,336,652

Net Income
 
$
79,279,537

 
$
14,183,028

 
$
6,589,419

 
$
26,824,996

 
$
16,920,959

Weighted Average Units Outstanding
 
19,881,333

 
20,645,833

 
24,460,000

 
24,460,000

 
27,326,667

Net Income Per Unit
 
$
3.99

 
$
0.69

 
$
0.27

 
$
1.10

 
$
0.62

Cash Distributions per Unit
 
$
0.90

 
$
0.10

 
$
0.65

 
$
0.25

 
$



19


Balance Sheet Data:
 
2014
 
2013
 
2012
 
2011
 
2010
Current Assets
 
$
70,279,557

 
$
14,051,401

 
$
19,215,366

 
$
23,461,588

 
$
21,934,185

Net Property and Equipment
 
59,644,340

 
66,114,201

 
71,121,448

 
72,557,819

 
80,314,240

Other Assets
 
37,633,918

 
29,332,147

 
25,110,250

 
24,096,284

 
20,460,582

Total Assets
 
167,557,815

 
109,497,749

 
115,447,064

 
120,115,691

 
122,709,007

Current Liabilities
 
7,791,972

 
8,323,526

 
8,466,689

 
6,450,820

 
9,216,092

Long-Term Liabilities
 
542,282

 
3,285,499

 
4,286,379

 
2,069,240

 
22,607,280

Members' Equity
 
159,223,561

 
97,888,724

 
102,693,996

 
111,595,631

 
90,885,635

Book Value Per Unit
 
$
8.01

 
$
4.92

 
$
4.20

 
$
4.56

 
$
3.72


* See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for further discussion of our financial results.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Results of Operations

Comparison of the Fiscal Years Ended October 31, 2014 and 2013
 
The following table shows the results of our operations and the percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our statement of operations for the fiscal years ended October 31, 2014 and 2013:

 
2014
 
2013
Income Statement Data
Amount
 
%
 
Amount
 
%
Revenue
$
289,152,549

 
100.0
 
$
350,721,175

 
100.0
Cost of Goods Sold
225,335,539

 
77.9
 
338,014,664

 
96.4
Gross Profit
63,817,010

 
22.1
 
12,706,511

 
3.6
Operating Expenses
3,569,152

 
1.2
 
2,550,236

 
0.7
Operating Income
60,247,858

 
20.8
 
10,156,275

 
2.9
Other Income
19,031,679

 
6.6
 
4,026,753

 
1.1
Net Income
$
79,279,537

 
27.4
 
$
14,183,028

 
4.0

Revenues. Our total revenue was significantly lower for our 2014 fiscal year compared to the same period of 2013, primarily due to decreased average prices for each of our products. In addition to the decrease in the average prices we received for our products, we produced less of our products during our 2014 fiscal year compared to the same period of 2013. For our 2014 fiscal year, ethanol sales accounted for approximately 81% of our total revenue, distiller grains sales accounted for approximately 16% of our total revenue, and corn oil sales accounted for approximately 3% of our total revenue. For our 2013 fiscal year, ethanol sales accounted for approximately 76% of our total revenue, distiller grains sales accounted for approximately 21% of our total revenue, and corn oil sales accounted for approximately 3% of our total revenue.
    
The average price we received per gallon of ethanol we sold was approximately 7% lower for our 2014 fiscal year compared to the same period of 2013. Management attributes this decrease in ethanol prices with decreased corn and gasoline prices which both impact the market price of ethanol. In addition, uncertainty existed throughout our 2014 fiscal year related to whether the EPA would reduce the ethanol use requirement in the Renewable Fuels Standard (RFS) for 2014. The EPA proposed reducing the amount of corn-based ethanol which was required to be used in 2014 to levels which were below the 2013 requirement. Management believes this uncertainty caused fuel blenders to reduce ethanol demand which negatively impacted ethanol prices. However, ethanol prices were supported during our 2014 fiscal year as a result of increased ethanol exports and domestic ethanol supply shortages which resulted from slower rail shipments, especially during our second quarter of 2014. Management attributes the increase in ethanol exports to the lower ethanol prices which made United States ethanol more cost competitive in the world market.

We experienced delays in shipping our products during our 2014 fiscal year which at times required us to decrease or cease operations while we waited for our ethanol to be shipped by rail. We only have a limited amount of ethanol storage at our

20


ethanol plant, and if our ethanol storage is full, we must cease operations until ethanol is shipped from our plant. These rail shipment delays were reduced during the summer months when weather conditions improved. However, management anticipates that rail shipping delays may reoccur during the winter months of our 2015 fiscal year, especially during poor weather. Management believes that the railroads do not have the necessary infrastructure, both physical infrastructure and employees, necessary to meet rail shipping demand. In recent years with the increase in the size of corn crops and increased rail shipments of crude oil from the Bakken in North Dakota, rail shipping demand has increased significantly. Management anticipates that it will take several years for the railroads to increase capacity to meet this increase in demand. While management believes the delayed rail shipments restricted the supply of ethanol in the market which positively impacted prices, it also had the effect of reducing our production at times during the year which decreased our total revenue.

Recently, the EPA has announced that it will delay making a decision on whether to change the RFS requirements for using ethanol into next year. Both the ethanol industry and the petroleum industry are claiming victory as a result of this delay, however, it is uncertain whether the delay signals a more significant change that may be coming with respect to the RFS. As a result of this delay, the ethanol industry will continue to deal with the uncertainty related to the RFS. Management anticipates that ethanol prices will remain lower during our 2015 fiscal year as a result of lower corn prices, lower oil prices and uncertainty regarding the RFS. However, management anticipates that the lower ethanol prices will continue to result in ethanol exports which may support prices. Management anticipates that, provided corn prices remain low, operating margins during our 2015 fiscal year should be favorable. However, any change in the RFS that occurs during 2015 may be magnified if the change impacts prior year ethanol use requirements or otherwise significantly reduces ethanol demand.

We sold approximately 3% fewer gallons of ethanol during our 2014 fiscal year, compared to the same period of 2013. This decrease in ethanol sales was mainly due to logistics issues which required us to reduce or cease operations when we were unable to transport ethanol from our plant, particularly during the end of our first quarter and during our second quarter of our 2014 fiscal year. These logistics issues were reduced during our third and fourth quarters of 2014 which allowed us to increase production. Management anticipates that ethanol production will be comparable during our 2015 fiscal year to our 2014 fiscal year. However, if the rail shipping logistics issues during our 2015 fiscal year are worse than during our 2014 fiscal year, our production could be negatively impacted which could reduce our revenue. During our 2014 fiscal year, the rail shipping logistics reduced the total supply of ethanol in the market which improved our operating margins. Management anticipates that any rail shipping problems that occur during our 2015 fiscal year might have a comparable impact on our operating margins by increasing ethanol prices.

During our 2014 fiscal year, we experienced combined realized and unrealized losses on our ethanol derivatives of approximately $4.0 million which decreased our revenue. By comparison, we experienced combined realized and unrealized losses on our ethanol derivative instruments of approximately $2.0 million during our 2013 fiscal year which decreased our revenue.

The average price per ton we received for our dried distillers grains was approximately 27% less for our 2014 fiscal year compared to the same period of 2013, and the average price per ton we received for our modified/wet distillers grains was approximately 41% less for our 2014 fiscal year compared to the same period of 2013. Management attributes these price decreases with significantly lower corn and soybean prices and increased corn and soybean supplies during the 2014 period. Since distiller grains are primarily used as a feed substitute for corn and soybean meal, when corn and soybean prices decrease and the supply of these competing products increase, it negatively impacts distiller grains demand and prices. In prior years we experienced higher corn prices and reduced corn supplies and as a result, the price of distiller grains relative to the market price of corn reached record highs. However, this trend was no longer in effect starting with the corn harvest in the fall of 2013 and continuing to date. Management anticipates that corn prices and demand will remain low during our 2015 fiscal year due to the size of the 2014 corn harvest and relatively stable corn demand. As a result, management anticipates distiller grains prices will remain lower during our 2015 fiscal year.

Distiller grains prices were negatively impacted during our 2014 fiscal year as a result of Chinese trade policies which impacted both corn and distiller grains. The Chinese imposed a virtual ban on distiller grains imports from the United States and significantly reduced corn imports, by taking steps to terminate any imports of corn or distiller grains which contain a corn hybrid trait which is not approved in China. This Chinese trade policy has directly hurt distiller grains prices as it virtually eliminated the largest export market for distiller grains and it also resulted in increased corn supplies in the United States which increased competition in the feed market. Management believes that the Chinese trade policy is designed to help Chinese corn producers who experienced an unfavorable corn harvest which resulted in Chinese corn prices which are not competitive with United States corn prices.

We sold approximately 10% less total tons of distiller grains during our 2014 fiscal year compared to the same period of 2013 due to reduced production at the ethanol plant and increased efficiencies of converting corn into ethanol which leads to less co-products such as distiller grains. Since distiller grains are a co-product of the ethanol production process, when we reduce

21


production of ethanol it has a corresponding impact on distiller grains production. Management anticipates relatively stable distiller grains production during our 2015 fiscal year as we anticipate a comparable amount of ethanol production during our 2015 fiscal year.

The average price we received for our corn oil was approximately 12% less during our 2014 fiscal year compared to the same period of 2013 due to an increase in corn oil supplies and relatively lower corn oil demand. Corn oil is used primarily as animal feed, for certain industrial uses and for biodiesel production. We experienced decreased corn oil demand during our 2014 fiscal year as a result of lower biodiesel production. In addition, soybean oil prices were lower during 2014 which resulted in biodiesel producers using soybean oil to produce biodiesel instead of corn oil.

We sold approximately 17% less pounds of corn oil during our 2014 fiscal year compared to the same period of 2013 primarily due to decreased total production at the ethanol plant along with a decrease in the amount of corn oil we separated from each pound of distiller grains during the 2014 period. The corn we used during our 2014 fiscal year did not contain as much corn oil as the corn we used during our 2013 fiscal year. As a result, the amount of corn oil that was available to be removed from the distiller grains we produced was lower during our 2014 fiscal year compared to the same period of 2013.

Management attributes the decline in corn oil prices with increased market corn oil supply which was not met by corresponding increases in corn oil demand. Management anticipates continued lower corn oil prices due to higher corn oil supplies and relatively lower corn oil demand. Without a significant increase in biodiesel production, corn oil demand may not increase significantly which could result in continued lower corn oil prices. Several ethanol producers who also produce corn oil are considering building biodiesel production facilities that will be adjacent to their ethanol plants. If this were to occur, it may result in an increase in corn oil demand which could benefit corn oil prices.

Cost of Goods Sold. Our cost of goods sold was significantly lower for our 2014 fiscal year compared to the same period of 2013 due to significantly lower market corn prices and decreased corn consumption partially offset by increased natural gas costs. Our average cost per bushel of corn was approximately 37% less during our 2014 fiscal year compared to the same period of 2013. This decrease in our cost per bushel of corn was primarily related to lower market corn prices due to increased market corn supplies and relatively lower corn demand due to reduced corn exports to China and reduced ethanol production. Corn prices have remained lower following the end of our 2014 fiscal year due to a large corn crop which was harvested in the fall of 2014. Management anticipates that corn supplies will remain favorable during our 2015 fiscal year which should result in relatively stable corn prices. Further, if the ethanol use requirement in the RFS is reduced during our 2015 fiscal year it could result in even lower corn prices. These lower corn prices could impact the amount of corn which is planted during 2015 which could result in higher corn prices later in our 2015 fiscal year. However, since other commodity prices are lower, the lower corn prices may not significantly impact farmer planting decisions.

We consumed approximately 4% fewer bushels of corn during our 2014 fiscal year compared to 2013 due primarily to reduced ethanol production, partially offset by increased ethanol produced per bushel of corn during the 2014 period. We were able to improve our corn conversion efficiency by 1% during our 2014 fiscal year compared to 2013 which allowed us to produce more ethanol per bushel of corn. Management anticipates consistent corn consumption during our 2015 fiscal year compared to our 2014 fiscal year provided that we can maintain positive operating margins that allow us to continue to operate the ethanol plant at capacity.

Our natural gas costs increased by approximately 37% during our 2014 fiscal year compared to the same period of 2013 primarily due to significantly higher natural gas costs during our first and second quarters of 2014. The average price we paid per MMBtu of natural gas was approximately 46% greater during our 2014 fiscal year compared to the same period of 2013. Management attributes this increase in natural gas prices with a longer and colder winter and an explosion at a Canadian natural gas facility which reduced supply and increased demand for natural gas and in turn increased our natural gas costs during that time period. These higher prices continued after the end of the winter in 2014. Natural gas prices decreased during the summer months as natural gas demand is typically lower and market natural gas supplies returned to more normal levels during the summer months of 2014 which also resulted in lower natural gas prices. Management anticipates that natural gas prices will increase again during the winter months of our 2015 fiscal year. However, unless we experience another exceptionally cold and long winter during our 2015 fiscal year, management does not anticipate the same increase in natural gas prices that we experienced during our 2014 fiscal year.

Our natural gas consumption during our 2014 fiscal year was approximately 6% lower compared to our 2013 fiscal year. Management attributes this decrease in our natural gas consumption with improved production efficiency at the plant and decreased total production during the 2014 period.


22


We experienced approximately $4.6 million of combined realized and unrealized gains for our 2014 fiscal year related to our corn and natural gas derivative instruments which decreased our cost of goods sold. By comparison, we experienced approximately $48,000 of combined realized and unrealized losses for our 2013 fiscal year related to our corn and natural gas derivative instruments which increased our cost of goods sold. We recognize the gains or losses that result from the changes in the value of our derivative instruments from corn and natural gas in cost of goods sold as the changes occur.  As corn and natural gas prices fluctuate, the value of our derivative instruments are impacted, which affects our financial performance.

Operating Expenses. Our operating expenses were significantly higher during our 2014 fiscal year compared to the same period of 2013 primarily due to increases in our bonuses, dues and subscriptions, and an increase in our property taxes. We had more accrued bonuses for administrative personnel due to our significantly increased net income during the 2014 period compared to the 2013 period. Management anticipates that our operating expenses will be comparable during our 2015 fiscal year to our 2014 fiscal year, however, the impact that our management bonuses have on operating expenses will depend on the amount of net income we generate during the 2015 fiscal year which is difficult to predict with any certainty at this time.

Other Income (Expense). Other income was significantly greater for our 2014 fiscal year compared to the same period of 2013 due to an increase in our portion of the net income generated by our investments. Our investments are in companies involved in the ethanol industry. Favorable operating margins during our 2014 fiscal year in the ethanol industry resulted in a significant increase in the net income generated by our investments. We had significantly less interest expense during our 2014 fiscal year compared to the same period of 2013 due to having less borrowing during the 2014 period. During our 2013 fiscal year we were making debt payments related to our membership unit repurchase which was completed during the first quarter of our 2013 fiscal year.
 
Comparison of the Fiscal Years Ended October 31, 2013 and 2012
 
The following table shows the results of our operations and the percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our statement of operations for the fiscal years ended October 31, 2013 and 2012:

 
2013
 
2012
Income Statement Data
Amount
 
%
 
Amount
 
%
Revenue
$
350,721,175

 
100.0
 
$
327,830,377

 
100.0
Cost of Goods Sold
338,014,664

 
96.4
 
322,740,236

 
98.4
Gross Profit
12,706,511

 
3.6
 
5,090,141

 
1.6
Operating Expenses
2,550,236

 
0.7
 
2,207,634

 
0.7
Operating Income
10,156,275

 
2.9
 
2,882,507

 
0.9
Other Income
4,026,753

 
1.1
 
3,706,912

 
1.1
Net Income
$
14,183,028

 
4.0
 
$
6,589,419

 
2.0

Revenues. Our total revenue was higher for our 2013 fiscal year compared to the same period of 2012, primarily due to increased ethanol and distiller grains revenue. For our 2013 fiscal year, ethanol sales accounted for approximately 76% of our total revenue, distiller grains sales accounted for approximately 21% of our total revenue, and corn oil sales accounted for approximately 3% of our total revenue. For our 2012 fiscal year, ethanol sales accounted for approximately 77% of our total revenue, distiller grains sales accounted for approximately 20% of our total revenue, and corn oil sales accounted for approximately 3% of our total revenue.
    
The average price per gallon we received for our ethanol was approximately 4% higher for our 2013 fiscal year compared to the same period of 2012. Management attributes this increase in ethanol prices with increased commodity prices, particularly during our first three quarters of 2013, along with lower ethanol imports from Brazil compared to 2012. In May 2013, Brazil increased the percentage of ethanol that is required to be used in its domestic fuel market which decreased the amount of ethanol that was available for export. This resulted in increased demand for ethanol produced in the United States.

We sold approximately 2% more gallons of ethanol during our 2013 fiscal year, compared to the same period of 2012. This increase in ethanol sales was mainly due to having more ethanol inventory on hand at the end of our 2012 fiscal year which was then sold during our 2013 fiscal year.


23


During our 2013 fiscal year, we experienced combined realized and unrealized losses on our ethanol derivatives of approximately $2.0 million which decreased our revenue. By comparison, we experienced combined realized and unrealized gains on our ethanol derivative instruments of approximately $1.8 million during our 2012 fiscal year which increased our revenue.

The average price per ton we received for our dried distiller grains was approximately 9% greater for our 2013 fiscal year compared to the same period of 2012. In addition, the average price per ton we received for our modified/wet distiller grains was approximately 38% greater for our 2013 fiscal year compared to the same period of 2012. Management attributes these price increases with higher corn prices and lower corn supplies during the 2013 period which positively impacted the market price of distiller grains. Distiller grains typically trade at a discount compared to the price of corn. During our 2013 fiscal year, the discount between the price of distiller grains and corn was smaller and in some cases distiller grains were trading at a premium compared to corn due to higher corn prices and lower corn availability.

Our distiller grains production was slightly less during our 2013 fiscal year compared to the same period of 2012 due to increased corn oil production. As we extract more corn oil from our distiller grains, it results in less total tons of distiller grains produced.

We sold approximately 15% more pounds of corn oil during our 2013 fiscal year compared to the same period of 2012. Management attributes this increase in corn oil sales with better corn oil separation yields during 2013 compared to 2012. The average price per pound we received for our corn oil was approximately 10% less for our 2013 fiscal year compared to the same period of 2012. Management attributes this decline in corn oil prices with increased corn oil supply which was not met by corresponding increases in corn oil demand.

Cost of Goods Sold. Our cost of goods sold was higher for our 2013 fiscal year compared to the same period of 2012 due primarily to higher corn costs along with higher natural gas costs. Our average cost per bushel of corn was approximately 3% higher during our 2013 fiscal year compared to the same period of 2012. This increase in our cost per bushel of corn was primarily related to increased market corn prices, especially during the first three quarters of our 2013 fiscal year. The amount of corn harvested in the fall of 2012 was lower due to drought conditions which impacted corn yields. Corn prices were higher during our 2013 fiscal year as the corn market tried to ration corn demand through higher corn prices, we also at times had to pay higher basis prices than we paid in prior years in order to attract the corn we needed to operate. However, due to improved conditions during the 2013 growing season and a record corn crop that was harvested in the fall of 2013, our corn costs were lower during our fourth quarter of 2013.

We consumed approximately the same amount of corn during our 2013 fiscal year compared to our 2012 fiscal year. We were able to improve our corn conversion efficiency by 1% during our 2013 fiscal year compared to 2012 which allowed us to produce more of our products per bushel of corn.

Our natural gas costs increased by approximately 29% during our 2013 fiscal year compared to the same period of 2012. The average price we paid per MMBtu of natural gas was approximately 30% greater during our 2013 fiscal year compared to the same period of 2012. Management attributes this increase in natural gas prices with higher commodity prices generally. Our natural gas consumption during our 2013 fiscal year was approximately 1% lower compared to our 2012 fiscal year. Management attributes this decrease in our natural gas consumption with improved production efficiency at the plant.

We experienced approximately $48,000 of combined realized and unrealized losses for our 2013 fiscal year related to our corn and natural gas derivative instruments which increased our cost of goods sold. By comparison, we experienced approximately $4.8 million of combined realized and unrealized losses for our 2012 fiscal year related to our corn and natural gas derivative instruments which increased our cost of goods sold.

Operating Expenses. Our operating expenses were higher during our 2013 fiscal year compared to the same period of 2012 primarily due to ethanol promotion costs related to various industry groups which we support. We also had more accruals for executive compensation due to our increased net income during the 2013 period. Management anticipates that our operating expenses will be comparable during our 2014 fiscal year to our 2013 fiscal year.

Other Income (Expense). Other income was greater for our 2013 fiscal year compared to the same period of 2012 due to an increase in our portion of the net income generated by our investments. We had more interest expense during our 2013 fiscal year compared to the same period of 2012 due to borrowing we had outstanding on our revolving loan from the membership unit repurchase we completed during our 2013 fiscal year.

24



Changes in Financial Condition for the Fiscal Years Ended October 31, 2014 and 2013

Current Assets. We had more than $50 million in cash and equivalents at October 31, 2014 compared to no cash and equivalents at October 31, 2013. During our 2013 fiscal year we were using all available cash to repay our long-term debt. In addition, at October 31, 2014 we had more than $5 million in marketable securities associated with short-term investments we purchased during our 2014 fiscal year. We had more accounts receivable at October 31, 2014 compared to October 31, 2013 due to timing of train shipments and payments received from our marketer. The value of our inventory was lower at October 31, 2014 compared to October 31, 2013 due to lower corn and ethanol prices which impact the value of our inventory as well as fewer gallons of ethanol in ending inventory.

Property and Equipment. The net value of our property and equipment was lower at October 31, 2014 compared to October 31, 2013 due to depreciation. The value of our plant and process equipment was higher at October 31, 2014 compared to October 31, 2013 due to plant improvements to the syrup load out system, railroad expansion projects and the rebuild of our thermal oxidizer project which increased the value of our plant and process equipment.

Other Assets. Our other assets were higher at October 31, 2014 compared to October 31, 2013 due mainly to the increase in value of our various investments during the 2014 fiscal year.

Current Liabilities. We had no checks outstanding in excess of our bank balances at October 31, 2014 compared to approximately $564,000 at October 31, 2013. When these checks are presented for payment, they are paid from our revolving loan provided we do not have cash on hand. Our accounts payable balance was lower at October 31, 2014 compared to October 31, 2013 due primarily to lower corn prices at October 31, 2014 which reduced the amount of our corn payable. Our accrued expenses were higher at October 31, 2014 compared to October 31, 2013 due to higher levels of accrued bonuses for employees and management.

Long-term Liabilities. Our deferred compensation was lower at October 31, 2014 compared to October 31, 2013 due to a reclassification of a portion of the deferred compensation into current liabilities during our 2014 fiscal year. In addition, our long-term debt was lower at October 31, 2014 compared to October 31, 2013 due to loan repayments we made during our 2014 fiscal year. We had less deferred revenue at October 31, 2014 compared to October 31, 2013 due to the net effect of continuing amortization of our county economic development grant revenue offset by decreased deferred revenue related to a contractual relationship.

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 at capacity for the next 12 months and beyond. As of October 31, 2014, we had $27.5 million available pursuant to our revolving term loan. In addition, we had approximately $50 million in cash and equivalents and more than $5 million in short-term marketable securities at October 31, 2014. Following the end of our 2014 fiscal year, we issued a distribution to our members in the amount of $51,669,800 which used cash after the end of our 2014 fiscal year.

We do not anticipate securing any additional equity or debt financing for working capital or other purposes in the next 12 months. However, should we experience unfavorable operating conditions in the future, we may have to secure additional sources of capital.

We do not currently anticipate any significant purchases of property and equipment, that would require us to secure additional capital in the next 12 months. However, management continues to evaluate conditions in the ethanol industry and explore opportunities to improve the efficiency and profitability of our operations which may require capital expenditures.

The following table shows our cash flows for the fiscal years ended October 31, 2014 and 2013:

 
Fiscal Year Ended October 31
 
2014
 
2013
Net cash provided by operating activities
$
79,230,916

 
$
24,327,715

Net cash (used in) investing activities
(12,143,716
)
 
(4,867,493
)
Net cash (used in) financing activities
(19,642,634
)
 
(19,460,222
)

25



Cash Flow From Operations 

Our cash flows from operations for our 2014 fiscal year were higher compared to our 2013 fiscal year due primarily to higher net income during the 2014 period. Due to improved operating margins, we generated significantly more cash from our operations compared to our 2013 fiscal year.
 
Cash Flow From Investing Activities 

We used more cash for investing activities during our 2014 fiscal year compared to the same period of 2013 primarily due to the net effect of having less capital expenditures and more investments during the 2014 period. We purchased marketable securities with our excess cash during our 2014 fiscal year and we made a small investment in a blending terminal during our 2014 fiscal year. Our capital expenditures during our 2014 fiscal year were primarily for plant improvements to the syrup load out system, railroad expansion projects and the rebuild of our thermal oxidizer. During our 2013 fiscal year, we used cash primarily for improvements to our grain handling system and final construction costs on a new corn storage bin.

Cash Flow From Financing Activities.

We used a comparable amount of cash for financing activities during our 2014 fiscal year and our 2013 fiscal year, however, we had significant different uses for the cash during the two periods. During our 2014 fiscal year, we primarily used cash for distributions to our members. During our 2013 fiscal year we used cash for financing activities related to repurchasing membership units for $17 million, payments on our long-term debt related to our membership unit repurchase and a smaller distribution we paid to our members.

The following table shows our cash flows for the fiscal years ended October 31, 2013 and 2012:

 
Fiscal Year Ended October 31
 
2013
 
2012
Net cash provided by operating activities
$
24,327,715

 
$
18,581,908

Net cash (used in) investing activities
(4,867,493
)
 
(6,728,362
)
Net cash (used in) financing activities
(19,460,222
)
 
(12,338,634
)

Cash Flow From Operations 

Our cash flows from operations for our 2013 fiscal year were higher compared to our 2012 fiscal year due primarily to higher net income during the 2013 period. Due to improved operating margins, we generated more cash from our operations compared to our 2012 fiscal year.

Cash Flow From Investing Activities 

We used less cash for investing activities during our 2013 fiscal year compared to the same period of 2012 primarily due to fewer capital expenditure projects during our 2013 fiscal year. During our 2012 fiscal year, we used cash primarily for our fermenter and grain handling upgrade and expansion projects.

Cash Flow From Financing Activities.

During our 2013 fiscal year, we primarily used cash for financing activities related to repurchasing membership units for $17 million, payments on our long-term debt related to our membership unit repurchase and a distribution we paid to our members. During our 2012 fiscal year, we used significantly more cash for distributions that we paid to our members.

Short-Term and Long-Term Debt Sources

We have a $35 million credit facility with Farm Credit. The amount available for us to borrow reduces by $2.5 million semi-annually. In exchange for this credit facility, we executed a mortgage in favor of Farm Credit covering all of our real property and granted Farm Credit a security interest in all of our equipment and other assets. In the event we default on our loans with Farm Credit, Farm Credit may foreclose on our assets, including both our real property and our machinery and equipment. We increased

26


the amount available to us pursuant to our Farm Credit loans during our 2013 fiscal year in order to complete a repurchase of membership units in exchange for $17 million that closed in December 2012.
 
Variable Line of Credit

We have a long-term revolving line of credit. Interest on this loan accrues at 3.15% above the One-Month London Interbank Offered Rate (LIBOR). The interest rate is subject to weekly adjustment. We may elect to enter into a fixed interest rate on this loan at various times throughout the term of the loan as provided in the loan agreements. The maximum principal amount of this loan decreases by $2.5 million semi-annually starting on August 1, 2013 and continuing until February 1, 2019. After February 1, 2019, we will have $5 million available pursuant to this long-term revolving line of credit until it matures on February 1, 2020. In the event any amount is outstanding on this loan in excess of the new credit limit after these periodic reductions, we agreed to repay principal on the loan until we reach the new credit limit. We agreed to pay an annual fee of 0.6% of the unused portion of this loan. As of October 31, 2014, we had $0 outstanding on this loan with an accrued interest rate of 3.31% per year. As of October 31, 2014, we had $27.5 million available to be drawn on this loan.

Administrative Agency Agreement

As part of the Farm Credit loan closing, we entered into an Administrative Agency Agreement with CoBank, ACP ("CoBank"). CoBank purchased a participation interest in the Farm Credit loans and was appointed the administrative agent for the purpose of servicing the loans. As a result, CoBank will act as the agent for Farm Credit with respect to our loans. We agreed to pay CoBank an annual fee of $5,000 as the agent for Farm Credit.

Covenants

Our credit agreements with Farm Credit are subject to numerous covenants requiring us to maintain various financial ratios. As of October 31, 2014, we were in compliance with all of our loan covenants with Farm Credit. Based on current management projections, we anticipate that we will be in compliance with our loan covenants for the next 12 months and beyond. Due to the size of the distribution we issued after the end of our 2014 fiscal year, we received a verbal waiver of our loan covenant which restricts the amount of distributions we can make to our members.

Grants and Government Programs

In December 2006, we received the first payment from our semi-annual economic development grants equal to the amount of the tax assessments imposed on our ethanol plant by Cerro Gordo County, the county in which our ethanol plant is located. Based on our 2009 assessment, the total amount of these grants is expected to be approximately $9 million, which will be paid semi-annually over a 10-year period with the final payment being made in 2019.

Contractual Cash Obligations

In addition to our long-term debt obligations, we have certain other contractual cash obligations and commitments. The following table provides information regarding our consolidated contractual obligations and approximate commitments as of October 31, 2014:
 
 
Payment Due By Period
Contractual Cash Obligations
 
Total
 
Less than One Year
 
One to Three Years
 
Three to Five Years
 
After Five Years
Operating Lease Obligations
 
$
3,693,000

 
$
1,514,000

 
$
2,115,000

 
$
64,000

 
$

Purchase Obligations
 
23,892,000

 
23,892,000

 
 
 

 

Total Contractual Cash Obligations
 
$
27,585,000

 
$
25,406,000

 
$
2,115,000

 
$
64,000

 
$

 
Critical Accounting Policies

Management uses estimates and assumptions in preparing our financial statements in accordance with U.S. generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Of the significant accounting policies described in the notes to our financial statements, we believe that the following are the most critical:


27


Revenue Recognition

Revenue from the sale of our products is recognized at the time title to the goods and all risks of ownership transfer to the customers.  The time of transfer is defined in the specific sales agreement; however, it generally occurs upon shipment, loading of the goods or when the customer picks up the goods. Collectability of revenue is reasonably assured based on historical evidence of collectability between us and our customers. Interest income is recognized as earned.

Shipping costs incurred by us in the sale of ethanol and corn oil are not specifically identifiable and as a result, revenue from the sale of ethanol and corn oil are recorded based on the net selling price reported to us from our marketer. Shipping costs incurred by us in the sale of distiller grain products are included in cost of goods sold.

Investment in Commodities Contracts, Derivative Instruments and Hedging Activities

We evaluate contracts to determine whether the contracts are derivative instruments. Certain contracts that meet the definition of a derivative may be exempted from derivative accounting and treated as normal purchases or normal sales if documented as such. 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.
 
We enter into short-term cash, option and futures contracts as a means of securing corn and natural gas for the ethanol plant and managing exposure to changes in commodity and energy prices. We occasionally also enter into derivative contracts to hedge our exposure to price risk as it relates to ethanol sales. As part of our risk management process, we use futures and option contracts through regulated commodity exchanges or through the over-the-counter market to manage our risk related to pricing of inventories. All of our derivatives, other than those excluded under the normal purchases and sales exclusion, are designated as non-hedge derivatives, with changes in fair value recognized in net income. Although the contracts are economic hedges of specified risks, they are not designated or accounted for as hedging instruments.
 
Realized and unrealized gains and losses related to derivative contracts related to corn and natural gas are included as a component of cost of goods sold and derivative contracts related to ethanol are included as a component of revenues in the accompanying financial statements. The fair values of contracts are presented on the accompanying balance sheet as derivative instruments.

Investments

We have less than a 20% investment interest in four companies in related industries. These investments are being accounted for by the equity method of accounting under which our share of net income is recognized as income in our income statement and added to the investment account. Distributions or dividends received from the investments are treated as a reduction of the investment account. The investments are evaluated for indications of impairment on a regular basis, a loss would be recognized when the fair value is determined to be less than the carrying value.

Off-Balance Sheet Arrangements.
 
We currently have no off-balance sheet arrangements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We are exposed to the impact of market fluctuations associated with commodity prices as discussed below. We have no exposure to interest rate risk as we had no amount outstanding on our variable interest loan at the end of our 2014 fiscal year and 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, natural gas 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.

Commodity Price Risk

We seek to minimize the risks from fluctuations in the prices of raw material inputs, such as corn and natural gas, and finished products, such as ethanol and distiller grains, through the use of hedging instruments. In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate. Although we believe our hedge positions accomplish an economic hedge against our future purchases and sales, management has chosen not to use hedge accounting, which would match

28


the 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 our cost of goods sold or as an offset to revenues. 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 of October 31, 2014, we had price protection in place for approximately 8% of our anticipated corn needs, approximately 23% of our natural gas needs and 0% of our ethanol sales for the next 12 months.

A sensitivity analysis has been prepared to estimate our exposure to ethanol, corn and natural gas price risk. Market risk related to these factors is estimated as the potential change in income resulting from a hypothetical 10% adverse change in the average cost of our corn and natural gas prices and average ethanol price as of October 31, 2014, net of the forward and future contracts used to hedge our market risk for corn and natural gas usage requirements. The volumes are based on our expected use and sale of these commodities for a one year period from October 31, 2014. The results of this analysis, which may differ from actual results, are as follows:
 
 
Estimated Volume Requirements for the next 12 months (net of forward and futures contracts)
 
Unit of Measure
 
Hypothetical Adverse Change in Price
 
Approximate Adverse Change to Income
Natural Gas
 
2,468,000

 
MMBTU
 
10%
 
$
993,000

Ethanol
 
114,665,000

 
Gallons
 
10%
 
18,851,000

Corn
 
37,155,000

 
Bushels
 
10%
 
16,304,000


For comparison purposes, our sensitivity analysis for our 2013 fiscal year is set forth below.

 
 
Estimated Volume Requirements for the next 12 months (net of forward and futures contracts)
 
Unit of Measure
 
Hypothetical Adverse Change in Price
 
Approximate Adverse Change to Income
Natural Gas
 
3,275,000

 
MMBTU
 
10%
 
$
1,262,000

Ethanol
 
105,928,000

 
Gallons
 
10%
 
20,253,000

Corn
 
33,376,000

 
Bushels
 
10%
 
16,628,000


Liability Risk

We participate, along with other plants in the industry, in a group captive insurance company (Captive). The Captive insures losses related to workman's compensation, commercial property and general liability. The Captive reinsures catastrophic losses for all participants, including the Company, in excess of predetermined amounts. Our premiums are accrued by a charge to income for the period to which the premium relates and is remitted by our insurer to the captive reinsurer. These premiums are structured such that we have made a prepaid collateral deposit estimated for losses related to the above coverage. The Captive insurer has estimated and collected an amount in excess of the estimated losses but less than the catastrophic loss limit insured by the Captive. We cannot be assessed over the amount in the collateral fund.




29


ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



                            


Report of Independent Registered Public Accounting Firm


To the Board of Directors and Members
Golden Grain Energy, LLC


We have audited the accompanying balance sheets of Golden Grain Energy, LLC as of October 31, 2014 and 2013, and the related statements of operations, changes in members’ equity, and cash flows for each of the three years in the period ended October 31, 2014. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Golden Grain Energy, LLC as of October 31, 2014 and 2013, and the results of its operations and its cash flows for each of the three years in the period ended October 31, 2014, in conformity with U.S. generally accepted accounting principles.



Des Moines, Iowa
December 22, 2014




30


GOLDEN GRAIN ENERGY, LLC
Balance Sheets

 ASSETS
 
October 31, 2014
 
October 31, 2013

 

 

Current Assets
 

 

Cash and equivalents
 
$
47,444,566

 
$

Marketable securities
 
8,262,637

 

Accounts receivable
 
7,586,542

 
4,297,920

Other receivables
 
752,305

 
596,166

Derivative instruments
 
385,815

 
675,631

Inventory
 
4,860,052

 
6,974,314

Prepaid expenses and other
 
987,640

 
1,507,370

Total current assets
 
70,279,557

 
14,051,401


 

 

Property and Equipment
 

 

Land and land improvements
 
11,666,479

 
11,666,479

Building and grounds
 
25,761,752

 
25,761,752

Grain handling equipment
 
13,519,305

 
13,457,627

Office equipment
 
197,308

 
320,345

Plant and process equipment
 
81,520,875

 
79,854,167

Construction in progress
 
2,252,148

 
1,270,164


 
134,917,867

 
132,330,534

Less accumulated depreciation
 
75,273,527

 
66,216,333

Net property and equipment
 
59,644,340

 
66,114,201


 

 

Other Assets
 

 

Investments
 
36,788,435

 
28,059,657

Other assets
 
845,483

 
1,272,490

Total other assets
 
37,633,918

 
29,332,147


 

 

Total Assets
 
$
167,557,815

 
$
109,497,749

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Notes to Financial Statements are an integral part of this Statement.

31


GOLDEN GRAIN ENERGY, LLC
Balance Sheets

LIABILITIES AND MEMBERS' EQUITY
 
October 31, 2014
 
October 31, 2013

 

 

Current Liabilities
 

 

Outstanding checks in excess of bank balance
 
$

 
$
563,531

Current portion long-term debt
 
13,114

 
37,314

Accounts payable
 
5,575,194

 
6,138,295

Accrued expenses
 
1,908,324

 
1,140,979

Other current liabilities
 
295,340

 
443,407

Total current liabilities
 
7,791,972

 
8,323,526


 

 

Long-term Liabilities
 

 

Deferred compensation
 
235,421

 
190,762

Long-term debt, net of current maturities
 

 
1,583,889

Other long-term liabilities
 
306,861

 
1,510,848

Total long-term liabilities
 
542,282

 
3,285,499


 

 

Commitments and Contingencies
 

 


 

 

Members' Equity (19,873,000 and 19,883,000 units issued and outstanding as of October 31, 2014 and 2013, respectively)
 
159,223,561

 
97,888,724


 

 

Total Liabilities and Members’ Equity
 
$
167,557,815

 
$
109,497,749

 
 
 
 
 
 
 
 
 
 

Notes to Financial Statements are an integral part of this Statement.

32


GOLDEN GRAIN ENERGY, LLC
Statements of Operations


Year Ended
 
Year Ended
 
Year Ended

October 31, 2014
 
October 31, 2013
 
October 31, 2012


 

 

Revenues
$
289,152,549

 
$
350,721,175

 
$
327,830,377



 

 

Cost of Goods Sold
225,335,539

 
338,014,664

 
322,740,236



 

 

Gross Profit
63,817,010

 
12,706,511

 
5,090,141



 

 

Operating Expenses
3,569,152

 
2,550,236

 
2,207,634



 

 

Operating Income
60,247,858

 
10,156,275

 
2,882,507



 

 

Other Income (Expense)

 

 

Other income (expense)
913,661

 
(527,893
)
 
163,077

Interest expense
(196,236
)
 
(500,872
)
 
(217,949
)
Equity in net income of investments
18,314,254

 
5,055,518

 
3,761,784

Total Other Income (Expense)
19,031,679

 
4,026,753

 
3,706,912



 

 

Net Income
$
79,279,537

 
$
14,183,028

 
$
6,589,419

 
 
 

 

Basic & diluted net income per unit
$
3.99

 
$
0.69

 
$
0.27

Weighted average units outstanding for the calculation of basic & diluted net income per unit
19,881,333

 
20,645,833

 
24,460,000

Distributions Per Unit
$
0.90

 
$
0.10

 
$
0.65

 
 
 
 
 
 

Notes to Financial Statements are an integral part of this Statement.

33


GOLDEN GRAIN ENERGY, LLC
Statements of Cash Flows

Year Ended
 
Year Ended
 
Year Ended

October 31, 2014
 
October 31, 2013
 
October 31, 2012
Cash Flows from Operating Activities

 

 
 
Net income
$
79,279,537

 
$
14,183,028

 
$
6,589,419

Adjustments to reconcile net income to net cash provided by operating activities:

 

 
 
Depreciation and amortization
9,610,066

 
9,610,490

 
9,101,039

Unrealized loss (gain) on risk management & investing activities
27,179

 
(260,985
)
 
(310,697
)
Amortization of deferred revenue
(452,054
)
 
(512,930
)
 
(487,579
)
Change in accretion amounts of interest on grant receivable
(58,167
)
 
(5,856
)
 
(82,530
)
Earnings in excess of distributions from investments
(8,163,778
)
 
(4,457,139
)
 
(1,219,065
)
Deferred compensation expense
38,299

 
15,531

 
64,075

Change in assets and liabilities

 

 
 
Accounts receivable
(3,288,622
)
 
2,435,791

 
8,177,073

Inventory
2,114,262

 
2,919,644

 
(4,008,220
)
Prepaid expenses and other
363,590

 
69,515

 
10,309

Accounts payable
(1,013,101
)
 
208,664

 
1,008,026

Accrued expenses
773,705

 
189,853

 
(101,199
)
Deferred compensation payable

 
(67,891
)
 
(158,743
)
Net cash provided by operating activities
79,230,916

 
24,327,715

 
18,581,908



 

 
 
Cash Flows from Investing Activities

 

 
 
Capital expenditures
(3,578,716
)
 
(4,867,493
)
 
(6,728,362
)
Proceeds from sale of equipment

 

 

Purchase of marketable securities
(28,000,000
)
 

 

Sale of marketable securities
20,000,000

 

 

Purchase of investments
(565,000
)
 

 

   Net cash (used in) investing activities
(12,143,716
)
 
(4,867,493
)
 
(6,728,362
)


 

 
 
Cash Flows from Financing Activities

 

 
 
Increase (decrease) in outstanding checks in excess of bank balance
(563,531
)
 
203,193

 
360,338

Proceeds from long-term debt

 
17,000,000

 
2,692,315

Payments for long-term debt
(1,608,089
)
 
(18,155,995
)
 
(68,693
)
Payments for debt issuance costs

 
(22,500
)
 

Redemption of membership units
(50,000
)
 
(17,000,000
)
 

Distributions to members
(17,894,700
)
 
(1,988,300
)
 
(15,899,000
)
Payment received on deferred contract

 
251,328

 

Payments received on grant receivable
473,686

 
252,052

 
576,406

Net cash (used in) financing activities
(19,642,634
)
 
(19,460,222
)
 
(12,338,634
)


 

 
 
Net Increase (Decrease) in Cash and Equivalents
47,444,566

 

 
(485,088
)


 

 
 
Cash and Equivalents – Beginning of Period

 

 
485,088



 

 
 
Cash and Equivalents – End of Period
$
47,444,566

 
$

 
$

 
 
 
 
 
 
Supplemental Cash Flow Information

 

 
 
Interest paid net of capitalized interest (2014 $0; 2013 $50,878; 2012 $25,800)
$
213,765

 
$
556,855

 
$
203,381

 
 
 
 
 
 
Supplemental Disclosure of Noncash Operating, Investing & Financing Activities
 
 
 
 
 
Accounts Payable related to construction in process
$

 
$

 
$
775,796

Equity adjustment in investee

 

 
407,946

Notes to Financial Statements are an integral part of this Statement.

34


GOLDEN GRAIN ENERGY, LLC
Consolidated Statements of Changes in Members' Equity
For the years ended October 31, 2014, 2013 and 2012


Balance - October 31, 2011
$
111,595,631

Distribution for 24,460,000 Class A and Class B units, December 2011, $0.65 per unit
(15,899,000
)
Equity adjustment in investee
407,946

Net income
6,589,419

Balance - October 31, 2012
102,693,996

Redemption of 4,577,000 membership units
(17,000,000
)
Distribution for 19,883,000 Class A and Class B units, August 2013, $0.10 per unit
(1,988,300
)
Net Income
14,183,028

Balance - October 31, 2013
97,888,724

Redemption of 10,000 membership units
(50,000
)
Distribution for 19,883,000 Class A and Class B units, March & May 2014, $0.90 per unit
(17,894,700
)
Net Income
79,279,537

Balance - October 31, 2014
$
159,223,561


Notes to Financial Statements are an integral part of this Statement.


35

GOLDEN GRAIN ENERGY, LLC
Notes to Financial Statements



1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business
Golden Grain Energy, LLC (Golden Grain Energy) is approximately a 110 million gallon annual production ethanol plant near Mason City, Iowa. The Company sells its production of ethanol, distiller grains with solubles and corn oil primarily in the continental United States. The Company also holds several investments in various companies that focus on ethanol production, marketing and/or logistics.

Organization
Golden Grain Energy is organized as an Iowa limited liability company.  The members' liability is limited as specified in Golden Grain Energy's operating agreement and pursuant to the Iowa Revised Uniform Limited Liability Company Act. 

Accounting Estimates
Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles.  Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates.

Cash and Equivalents
The Company's cash balances are maintained in bank depositories and periodically exceed federally insured limits during the period. The Company has not experienced any losses in connection with these balances. Also included in cash and equivalents are highly liquid investments that are readily convertible into known amounts of cash which are subject to an insignificant risk of change in value due to interest rate, quoted price or penalty on withdrawal and have a maturity of three months or less.
Marketable Securities
Marketable securities consist of certificates of deposits with original maturities of greater than three months and mutual funds. Certificates of deposit are considered held to maturity securities, which are measured at cost. Mutual funds are considered trading securities which are measured at fair value using prices obtained from pricing services. Any unrealized or realized gains and losses on the trading securities are recorded as part of other income (expense).
At October 31, 2014, marketable securities consisted of mutual funds invested in intermediate-term municipal and government bonds with an approximate cost and fair market value of $5,211,000 and $5,264,000, respectively, and certificates of deposit all with maturities of less than one year and an approximate value of $3,000,000. For the year ended October 31, 2014 the Company recorded a net realized and unrealized gain of approximately $110,000 and $53,000 from these investments as part of other income (expense). There were no marketable securities as of October 31, 2013.
Receivables
Credit sales are made primarily to one customer and no collateral is required. The Company carries these accounts receivable at original invoice amount with no allowance for doubtful accounts due to the historical collection rates on these accounts.

Investments
The Company has less than a 20% investment interest in four companies in related industries. These investments are being accounted for by the equity method of accounting under which the Company's share of net income is recognized as income in the Company's income statement and added to the investment account. Distributions or dividends received from the investments are treated as a reduction of the investment account. The investments are evaluated for indications of impairment on a regular basis. A loss would be recognized when the fair value is determined to be less than the carrying value.

The fiscal years of Renewable Products Marketing Group, LLC (RPMG) and Guardian Energy Janesville, LLC end on September 30 and the fiscal years of Absolute Energy, LLC and Homeland Energy Solutions, LLC end on December 31. The Company consistently follows the practice of recognizing the net income based on the most recent reliable data. Therefore, the net income which is reported in the Company's income statement for the year ended October 31, 2014 for all companies is based on the investee's results for the twelve month period ended September 30, 2014.

Revenue and Cost Recognition
Revenue from the sale of the Company's products is recognized at the time title to the goods and all risks of ownership transfer to the customers.  This generally occurs upon shipment, loading of the goods or when the customer picks up the goods. Collectability

36

GOLDEN GRAIN ENERGY, LLC
Notes to Financial Statements



of revenue is reasonably assured based on historical evidence of collectability between the Company and its customer. Interest income is recognized as earned.

Shipping costs incurred by the Company in the sale of ethanol, distiller grains and corn oil are not specifically identifiable and as a result, revenue from the sale of ethanol, distiller grains and corn oil are recorded based on the net selling price reported to the Company from its marketer. Railcar lease costs incurred by the Company in the sale and shipment of distiller grain products are included in cost of goods sold.

Inventory
Inventories are generally valued at the lower of weighted average cost or market.  In the valuation of inventories and purchase commitments, market is based on current replacement values except that it does not exceed net realizable values and is not less than net realizable values reduced by allowances for approximate normal profit margin.

Property & Equipment
The Company incurred site selection and plan development costs on the proposed site that were capitalized. Significant additions, betterments and costs to acquire land options are capitalized, while expenditures for maintenance and repairs are charged to operations when incurred. Property and equipment are stated at costs. The Company uses the straight-line method of computing depreciation over the estimated useful lives between 3 and 40 years.

The Company reviews its property and equipment for impairment whenever events indicate that the carrying amount of the assets may not be recoverable. If circumstances require a long-lived asset to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.

Income Taxes
The Company was formed under sections of the federal and state income tax laws which provide that, in lieu of corporate income taxes, the members separately account for their pro rata share of the Company’s items of income, deductions, losses and credits. As a result of this election, no income taxes have been recognized in the accompanying financial statements.

Investment in commodities contracts, derivative instruments and hedging activities
The Company evaluates its contracts to determine whether the contracts are derivative instruments. Certain contracts that meet the definition of a derivative may be exempted from derivative accounting and treated as normal purchases or normal sales if documented as such. 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.

The Company enters into short-term cash, option and futures contracts as a means of securing corn and natural gas for the ethanol plant and managing exposure to changes in commodity and energy prices. The Company occasionally also enters into derivative contracts to hedge our exposure to price risk as it relates to ethanol sales. As part of its risk management process, the Company uses futures and option contracts through regulated commodity exchanges or through the over-the-counter market to manage its risk related to commodity prices. All of the Company's derivatives, other than those excluded under the normal purchases and sales exclusion, are designated as non-hedge derivatives, with changes in fair value recognized in net income. Although the contracts are economic hedges of specified risks, they are not designated or accounted for as hedging instruments.
 
Realized and unrealized gains and losses related to derivative contracts related to corn and natural gas are included as a component of cost of goods sold and derivative contracts related to ethanol are included as a component of revenues in the accompanying financial statements. The fair values of contracts are presented on the accompanying balance sheet as derivative instruments net of cash due from/to broker.

Net income per unit
Basic and diluted earnings per unit are computed using the weighted-average number of Class A and B units outstanding during the period.


37

GOLDEN GRAIN ENERGY, LLC
Notes to Financial Statements



Environmental liabilities
The Company's operations are subject to environmental laws and regulations adopted by various governmental authorities in the jurisdiction in which it operates. These laws require the Company to investigate and remediate the effects of the release or disposal of materials at its locations. Accordingly, the Company has adopted policies, practices and procedures in the areas of pollution control, occupational health and the production, handling, storage and use of hazardous materials to prevent material environmental or other damage, and to limit the financial liability which could result from such events. Environmental liabilities are recorded when the Company's liability is probable and the costs can be reasonably estimated. No expense or liability has been recorded as of October 31, 2014, 2013 or 2012 for environmental liabilities.

Deferred Compensation Plan
The Company has a deferred compensation plan for certain employees equal to 1% of net income. One-third of the amount is paid in cash immediately and the other two-thirds has a vesting schedule of the lesser of five years from the grant date or seven years of continuous employment with the Company. Considering the portion subject to vesting, the amount to be recognized in future years as compensation expense is estimated based on the greater of fair market value or book value of the Company's membership units as of October 31, 2014 and 2013, respectively. Fair value is determined by recent trading activity of the Company's membership units.

Fair Value
Financial instruments include cash and equivalents, certificates of deposit, marketable securities, receivables, accounts payable, accrued expenses, long-term debt and derivative instruments. The fair value of marketable securities and derivative financial instruments is based on quoted market prices. The fair value of the long-term debt is estimated based on level 3 inputs based on the current anticipated interest rate which management believes would currently be available to the Company for similar issues of debt, taking into account the current credit risk of the Company and the other market factors. The fair value of other current financial instruments is estimated to approximate carrying value due to the short-term nature of these instruments (see Note 8).

Risks and Uncertainties
The Company has certain risks and uncertainties that it will experience 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 distiller 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. For the 2014 fiscal year, ethanol sales accounted for approximately 81% of total revenue, distiller grains sales accounted for approximately 16% of total revenue and corn oil sales accounted for approximately 3% of total revenue while corn costs averaged approximately 76% of cost of goods sold.

The Company's operating and financial performance is largely driven by the prices at which ethanol is sold and the net expense of corn. The price of ethanol is influenced by factors such as supply and demand, weather, government policies and programs, and unleaded gasoline and the petroleum markets with ethanol selling, in general, 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.

Reclassification
Certain items in the prior years balance sheet and cash flow statements for the year ended October 31, 2013 have been reclassified to conform to the 2014 classifications. The changes do not affect net liabilities or net cash flow but were changed to agree with the classifications used in the October 31, 2014 financial statements.


38

GOLDEN GRAIN ENERGY, LLC
Notes to Financial Statements



2.    INVENTORY

Inventory consisted of the following as of October 31, 2014 and October 31, 2013:

 
 
October 31, 2014

 
October 31, 2013

Raw Materials
 
$
3,150,725

 
$
4,341,444

Work in Process
 
1,193,582

 
1,550,697

Finished Goods
 
515,745

 
1,082,173

Totals
 
$
4,860,052

 
$
6,974,314


3.    BANK FINANCING

The Company has entered into a master loan agreement with Farm Credit Services of America (FLCA) which includes a revolving term loan with original maximum borrowings of $30,000,000 and $5,000,000 and mature on February 1, 2019 and February 1, 2020, respectively. Interest on the term loan is payable monthly at 3.15% above the one-month LIBOR (3.31% as of October 31, 2014). The borrowings are secured by substantially all the assets of the Company. The revolving term loan maximum borrowings are reduced by $2,500,000 on a semi-annual basis starting in August 2013.
 
In addition, the Company is subject to certain financial covenants including but not limited to minimum working capital and net worth requirements and limitations on distributions. Failure to comply with the protective loan covenants or maintain the required financial ratios may cause acceleration of the outstanding principal balances on the loans and/or imposition of fees or penalties. As of October 31, 2014, the Company had no outstanding borrowings and $27.5 million additional available to borrow under the credit agreement. As of October 31, 2013 the Company has approximately $1.6 million outstanding.
 
The Company has other notes payable of approximately $13,000 and $50,000 outstanding as of October 31, 2014 and October 31, 2013, respectively.

4.    RELATED PARTY TRANSACTIONS

The Company purchased corn and materials from members of its Board of Directors or Risk Management Committee that own or manage elevators. Purchases during the fiscal years ended October 31, 2014, 2013 and 2012 totaled approximately $66,507,000, $65,573,000 and $109,059,000, respectively. As of October 31, 2014 and 2013 the amount we owed to related parties was approximately $456,000 and $778,000, respectively.

Previously, the Company had a management services agreement with Homeland Energy Solutions, LLC to share the compensation costs associated with each management position covered under the agreement partially in an effort to reduce the costs of administrative overhead. This agreement was terminated on May 16, 2014. The Company recorded a reduction in expenses related to these shared costs during the fiscal years ended October 31, 2014, 2013 and 2012 of approximately $118,000, $169,000 and $166,000, respectively.

5.    EMPLOYEE BENEFIT PLANS

The Company has a deferred phantom unit compensation plan for certain employees equal to 1% of net income. One-third of the amount is paid in cash immediately and the other two-thirds have a vesting schedule of the lesser of five years from the grant date or seven years of continuous employment. During the fiscal years ended October 31, 2014, 2013 and 2012 the Company recorded compensation expense related to this plan of approximately $38,000, $16,000 and $64,000, respectively. As of October 31, 2014 and 2013, the Company had a liability of approximately $361,000 and $191,000 outstanding as deferred compensation, respectively and has approximately $189,000 to be recognized as future compensation expense. Two of the employees covered under this plan are fully vested and another employee has approximately three years left to vest. The amount to be recognized in future years as compensation expense is estimated based on the greater of fair market value or book value of the Company's membership units as of October 31, 2014. Fair value is determined by recent trading activity of the Company's membership units. The Company had approximately 26,000 unvested equivalent phantom units outstanding under this plan as of October 31, 2014.


39

GOLDEN GRAIN ENERGY, LLC
Notes to Financial Statements



The Company has adopted a Simple IRA Adoption Agreement which provides retirement savings options for all eligible employees. Employees meeting certain eligibility requirements can participate in the plan. The Company makes a matching contribution based on the participants' eligible wages. The Company made matching contributions of approximately $93,000, $89,000 and $91,000 during the years ended October 31, 2014, 2013 and 2012, respectively


6.    COMMITMENTS, CONTINGENCIES AND AGREEMENTS

Ethanol, Distiller Grains and Corn Oil marketing agreements and major customers
The Company has entered into marketing agreements with a marketing company, in which the Company has an investment, for the exclusive rights to market, sell and distribute the entire ethanol, distiller grains and corn oil inventory produced by the Company. The marketing fees are presented net in revenues.

Approximate sales and marketing fees related to the agreements in place are as follows:

 
2014
 
2013
 
2012
Sales ethanol, distiller grains & corn oil
$
293,550,000

 
$
353,289,000

 
$
326,671,000

Marketing fees
430,000

 
584,000

 
618,000

 
 
 
 
 
 
As of
October 31, 2014
 
October 31, 2013
 
 
Amount due from marketer of ethanol, distiller grains & corn oil
$
7,587,000

 
$
4,276,000

 
 

7.    RISK MANAGEMENT

The Company's activities expose it to a variety of market risks, including the effects of changes in commodity prices. These financial exposures are monitored and managed by the Company as an integral part of its overall risk-management program. The Company's risk management program focuses on the unpredictability of financial and commodities markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on its operating results.

To reduce price risk caused by market fluctuations, the Company generally follows a policy of using exchange traded futures contracts to reduce its net position of merchandisable agricultural commodity inventories and forward cash purchase and sales contracts and uses exchange traded futures contracts to reduce price risk. Exchange-traded futures contracts are valued at market price. Changes in market price of contracts related to corn and natural gas are recorded in cost of goods sold and changes in market prices of contracts related to sale of ethanol are recorded in revenues.

Unrealized gains and losses on forward contracts are deemed "normal purchases" under derivative accounting guidelines and, therefore, are not marked to market in the Company's financial statements. The following table represents the approximate amount of realized and unrealized gains (losses) and changes in fair value recognized in earnings on commodity contracts for periods ended October 31, 2014, 2013 and 2012 and the fair value of derivatives as of October 31, 2014 and 2013:


40

GOLDEN GRAIN ENERGY, LLC
Notes to Financial Statements



 
 
Income Statement Classification
 
Realized Gain (Loss)
 
Change in Unrealized Gain (Loss)
 
Total Gain (Loss)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Commodity Contracts for the
 
Revenue
 
$
(2,736,000
)
 
$
(1,232,000
)
 
$
(3,968,000
)
fiscal year 2014
 
Cost of Goods Sold
 
3,108,000

 
1,518,000

 
4,626,000

 
 
Total
 
$
372,000

 
$
286,000

 
$
658,000

 
 
 
 
 
 
 
 
 
Commodity Contracts for the
 
Revenue
 
$
(3,388,000
)
 
$
1,405,000

 
$
(1,983,000
)
fiscal year 2013
 
Cost of Goods Sold
 
1,222,000

 
(1,270,000
)
 
(48,000
)
 
 
Total
 
$
(2,166,000
)
 
$
135,000

 
$
(2,031,000
)
 
 
 
 
 
 
 
 
 
Commodity Contracts for the
 
Revenue
 
$
693,000

 
$
1,084,000

 
$
1,777,000

fiscal year 2012
 
Cost of Goods Sold
 
(3,540,000
)
 
(1,287,000
)
 
(4,827,000
)
 
 
Total
 
$
(2,847,000
)
 
$
(203,000
)
 
$
(3,050,000
)

 
 
Balance Sheet Classification
 
October 31, 2014
 
October 31, 2013
Futures and option contracts through March 2015
 
 
 
 
 
 
In gain position
 
 
 
$
648,000

 
$
3,775,000

In loss position
 
 
 
(726,000
)
 
(4,131,000
)
Cash held by broker
 
 
 
464,000

 
1,032,000

 
 
Current Asset
 
$
386,000

 
$
676,000


As of October 31, 2014, the Company had the following approximate outstanding purchase and sales commitments, of which approximately $5,510,000 were with related parties.
 
 
Commitments Through
 
Amount
Sale commitments
 
 
 


Distiller Grains - fixed price
 
March 2015
 
$
8,799,000

 
 
 
 
 
Purchase commitments
 
 
 
 
Corn - fixed price
 
October 2015
 
$
5,834,000

Corn - basis contract
 
July 2015
 
14,740,000

Natural gas - fixed price
 
March 2015
 
3,318,000


As of October 31, 2014, the Company has fixed price futures and forward contracts in place for approximately 8% of anticipated corn needs and 23% of natural gas needs for the next 12 months with no open positions beyond that point.


41

GOLDEN GRAIN ENERGY, LLC
Notes to Financial Statements



8.    FAIR VALUE MEASUREMENTS

Financial assets and liabilities carried at fair value are 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 classification of such instruments pursuant to the valuation hierarchy, is set forth below.
 
Marketable Securities: The Company's short-term investments are classified within Level 1 and comprise of short-term liquid investments (e.g. mutual funds), classified as trading securities, which are carried at fair value based on the quoted market prices.

Derivative financial instruments: Commodity futures and exchange-traded commodity options contracts are reported at fair value utilizing Level 1 inputs. For these contracts, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from markets such as the CME and NYMEX.  Crush swaps are bundled contracts or combined contracts that include a portion of corn, ethanol and natural gas rolled into a single trading instrument. These contracts are reported at fair value utilizing Level 2 inputs and are based on the various trading activity of the components of each segment of the bundled contract.

The following table summarizes financial assets and financial liabilities measured at the approximate fair value on a recurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 
 
Total
 
Level 1
 
Level 2
 
Level 3
Marketable securities, October 31, 2014
 
 
 
 
 
 
 
 
Assets
 
$
5,264,000

 
$
5,264,000

 
$

 
$

Derivative financial instruments
 
 
 
 
 
 
 
 
October 31, 2014
 
 
 
 
 
 
 
 
Assets
 
$
648,000

 
$
447,000

 
$
201,000

 
$

Liabilities
 
(726,000
)
 
(610,000
)
 
(116,000
)
 

October 31, 2013
 
 
 
 
 
 
 
 
Assets
 
$
3,775,000

 
$
2,414,000

 
$
1,361,000

 
$

Liabilities
 
(4,131,000
)
 
(1,861,000
)
 
(2,270,000
)
 




42

GOLDEN GRAIN ENERGY, LLC
Notes to Financial Statements



9. INVESTMENTS

Condensed, combined unaudited financial information of the Company’s investment in Absolute Energy, Homeland Energy Solutions, Guardian Energy and RPMG is as follows (in 000’s)

Balance Sheet
 
9/30/2014
 
9/30/2013
 
9/30/2012
Current Assets
 
$