Attached files
| file | filename |
|---|---|
| EX-31.1 - CERTIFICATION - RED TRAIL ENERGY, LLC | certification311123114.htm |
| EX-32.2 - CERTIFICATION - RED TRAIL ENERGY, LLC | certification322123114.htm |
| EX-32.1 - CERTIFICATION - RED TRAIL ENERGY, LLC | certification321123114.htm |
| EX-31.2 - CERTIFICATION - RED TRAIL ENERGY, LLC | certification312123114.htm |
| EXCEL - IDEA: XBRL DOCUMENT - RED TRAIL ENERGY, LLC | Financial_Report.xls |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the quarterly period ended December 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 000-52033 | |
RED TRAIL ENERGY, LLC
(Exact name of registrant as specified in its charter)
North Dakota | 76-0742311 | |||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||
3682 Highway 8 South, P.O. Box 11, Richardton, ND 58652 | ||||
(Address of principal executive offices) | ||||
(701) 974-3308 | ||||
(Registrant's telephone number, including area code) | ||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act:
Large Accelerated Filer o | Accelerated Filer o |
Non-Accelerated Filer x | Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes x No
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
As of February 13, 2015, there were 40,148,160 Class A Membership Units outstanding.
1
INDEX
Page Number | |
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
RED TRAIL ENERGY, LLC
Condensed Balance Sheets
ASSETS | December 31, 2014 | September 30, 2014 | ||||||
(Unaudited) | ||||||||
Current Assets | ||||||||
Cash and equivalents | $ | 13,551,886 | $ | 21,952,259 | ||||
Restricted cash | 3,627,590 | — | ||||||
Accounts receivable, primarily related party | 2,063,486 | 1,011,411 | ||||||
Other receivables | 111,507 | 617,955 | ||||||
Commodities derivative instruments, at fair value | — | 3,615,151 | ||||||
Inventory | 19,791,814 | 13,318,724 | ||||||
Prepaid expenses | 243,627 | 107,012 | ||||||
Total current assets | 39,389,910 | 40,622,512 | ||||||
Property, Plant and Equipment | ||||||||
Land | 836,428 | 836,428 | ||||||
Land improvements | 4,127,372 | 4,127,372 | ||||||
Buildings | 5,498,862 | 5,498,862 | ||||||
Plant and equipment | 77,959,531 | 77,739,946 | ||||||
Construction in progress | 3,914,248 | 3,326,725 | ||||||
92,336,441 | 91,529,333 | |||||||
Less accumulated depreciation | 41,076,234 | 40,049,818 | ||||||
Net property, plant and equipment | 51,260,207 | 51,479,515 | ||||||
Other Assets | ||||||||
Debt issuance costs, net of amortization | 41,442 | 45,962 | ||||||
Investment in RPMG | 605,000 | 605,000 | ||||||
Patronage equity | 2,865,440 | 2,865,440 | ||||||
Deposits | 40,000 | 40,000 | ||||||
Total other assets | 3,551,882 | 3,556,402 | ||||||
Total Assets | $ | 94,201,999 | $ | 95,658,429 | ||||
Notes to Unaudited Condensed Financial Statements are an integral part of this Statement.
3
RED TRAIL ENERGY, LLC
Condensed Balance Sheets
LIABILITIES AND MEMBERS' EQUITY | December 31, 2014 | September 30, 2014 | ||||||
(Unaudited) | ||||||||
Current Liabilities | ||||||||
Accounts payable | $ | 5,088,890 | $ | 3,052,375 | ||||
Accrued expenses | 5,583,016 | 3,167,994 | ||||||
Commodities derivative instruments, at fair value (see note 2) | 625,178 | — | ||||||
Accrued loss on firm purchase commitments (see note 7) | 3,288,000 | 3,270,000 | ||||||
Current maturities of long-term debt | 2,041,892 | 9,266,343 | ||||||
Total current liabilities | 16,626,976 | 18,756,712 | ||||||
Long-Term Liabilities | ||||||||
Notes payable | 4,872,100 | 5,372,713 | ||||||
Contracts payable | 275,000 | 275,000 | ||||||
Total long-term liabilities | 5,147,100 | 5,647,713 | ||||||
Members’ Equity (40,148,160 Class A Membership Units issued and outstanding) | 72,427,923 | 71,254,004 | ||||||
Total Liabilities and Members’ Equity | $ | 94,201,999 | $ | 95,658,429 | ||||
Notes to Unaudited Condensed Financial Statements are an integral part of this Statement.
4
RED TRAIL ENERGY, LLC
Statements of Operations (Unaudited)
Three Months Ended | Three Months Ended | ||||||
December 31, 2014 | December 31, 2013 | ||||||
(Unaudited) | (Unaudited) | ||||||
Revenues, primarily related party | $ | 29,612,851 | $ | 33,785,964 | |||
Cost of Goods Sold | |||||||
Cost of goods sold | 27,735,580 | 29,163,305 | |||||
Loss on firm purchase commitments | 46,000 | — | |||||
Total Cost of Goods Sold | 27,781,580 | 29,163,305 | |||||
Gross Profit | 1,831,271 | 4,622,659 | |||||
General and Administrative Expenses | 544,767 | 471,087 | |||||
Operating Income | 1,286,504 | 4,151,572 | |||||
Other Income (Expense) | |||||||
Interest income | 18,249 | 8,003 | |||||
Other income | 6,894 | 76,736 | |||||
Interest expense | (137,727 | ) | (168,591 | ) | |||
Total other income (expense), net | (112,584 | ) | (83,852 | ) | |||
Net Income | $ | 1,173,920 | $ | 4,067,720 | |||
Weighted Average Units Outstanding | |||||||
Basic | 40,148,160 | 40,148,160 | |||||
Diluted | 40,148,160 | 40,148,160 | |||||
Net Income Per Unit | |||||||
Basic | $ | 0.03 | $ | 0.10 | |||
Diluted | $ | 0.03 | $ | 0.10 | |||
Notes to Unaudited Condensed Financial Statements are an integral part of this Statement.
5
RED TRAIL ENERGY, LLC
Condensed Statements of Cash Flows (Unaudited)
Three Months Ended | Three Months Ended | ||||||
December 31, 2014 | December 31, 2013 | ||||||
Cash Flows from Operating Activities | (Unaudited) | (Unaudited) | |||||
Net income | $ | 1,173,920 | $ | 4,067,720 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization | 1,030,937 | 1,037,352 | |||||
Change in fair value of derivative instruments | 4,240,329 | 516,683 | |||||
Noncash patronage equity | — | (87,500 | ) | ||||
Change in operating assets and liabilities: | |||||||
Restricted cash | (3,627,590 | ) | (589,956 | ) | |||
Accounts receivable | (545,628 | ) | 852,610 | ||||
Other receivables | — | (213,787 | ) | ||||
Inventory | (6,473,091 | ) | (1,878,404 | ) | |||
Prepaid expenses | (136,615 | ) | (167,961 | ) | |||
Accounts payable | 2,036,515 | 695,612 | |||||
Accrued expenses | 2,415,022 | 4,801,446 | |||||
Accrued purchase commitment losses | 18,000 | (113,000 | ) | ||||
Net cash provided by operating activities | 131,799 | 8,920,815 | |||||
Cash Flows from Investing Activities | |||||||
Capital expenditures | (807,108 | ) | (167,409 | ) | |||
Net cash (used in) investing activities | (807,108 | ) | (167,409 | ) | |||
Cash Flows from Financing Activities | |||||||
Disbursements in excess of bank balances | — | (3,126,883 | ) | ||||
Net advances on short-term borrowings | — | (3,708,000 | ) | ||||
Debt repayments | (7,725,064 | ) | (507,837 | ) | |||
Net cash (used in) financing activities | (7,725,064 | ) | (7,342,720 | ) | |||
Net (Decrease) Increase in Cash and Equivalents | (8,400,373 | ) | 1,410,686 | ||||
Cash and Equivalents - Beginning of Period | 21,952,259 | 1,000 | |||||
Cash and Equivalents - End of Period | $ | 13,551,886 | $ | 1,411,686 | |||
Supplemental Disclosure of Cash Flow Information | |||||||
Interest paid | $ | 138,243 | $ | 179,743 | |||
Distribution declared but not paid | $ | — | $ | — | |||
Capital expenditures in accounts payable | $ | 275,364 | $ | — | |||
Notes to Unaudited Condensed Financial Statements are an integral part of this Statement.
6
RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 2014
The accompanying condensed unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as permitted by such rules and regulations. These financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the Company's audited financial statements for the fiscal year ended September 30, 2014, contained in the Company's Annual Report on Form 10-K.
In the opinion of management, the interim condensed unaudited financial statements reflect all adjustments considered necessary for fair presentation. The adjustments made to these statements consist only of normal recurring adjustments. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2015.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Red Trail Energy, LLC, a North Dakota limited liability company (the “Company”), owns and operates a 50 million gallon annual name-plate production ethanol plant near Richardton, North Dakota (the “Plant”).
Accounting Estimates
Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported revenues and expenses. Significant items subject to such estimates and assumptions include the useful lives of property, plant and equipment, valuation of derivatives, inventory, patronage equity and purchase commitments, the analysis of long-lived assets impairment and other contingencies. Actual results could differ from those estimates.
Net Income (Loss) Per Unit
Net income (loss) per unit is calculated on a basic and fully diluted basis using the weighted average units outstanding during the period. The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not expect the future adoption of any such pronouncements to have a material impact on the Company's financial condition or results of operations.
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” which supersedes the guidance in “Revenue Recognition (Topic 605)” and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period and is to be applied retrospectively, with early application not permitted. We are evaluating the new standard, but do not at this time expect this standard to have a material impact on our consolidated financial statements.
2. DERIVATIVE INSTRUMENTS
Commodity Contracts
As part of its hedging strategy, the Company may enter into ethanol, soybean, soybean oil, and corn commodity-based derivatives in order to protect cash flows from fluctuations caused by volatility in commodity prices in order to protect gross profit margins from potentially adverse effects of market and price volatility on ethanol sales, corn oil sales, and corn purchase commitments where the prices are set at a future date. These derivatives are not designated as effective hedges for accounting purposes. For derivative instruments that are not accounted for as hedges, or for the ineffective portions of qualifying hedges, the change in fair value is recorded through earnings in the period of change. Ethanol derivative fair market value gains or losses are included in the results of operations and are classified as revenue and corn derivative changes in fair market value are included in cost of goods sold.
7
RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 2014
As of: | December 31, 2014 (unaudited) | September 30, 2014 | ||||||||||||||||
Contract Type | # of Contracts | Notional Amount (Qty) | Fair Value | # of Contracts | Notional Amount (Qty) | Fair Value | ||||||||||||
Corn futures | 1,192 | 5,960,000 | bushels | $ | (600,350 | ) | 1,377 | 6,885,000 | bushels | $ | 7,162,638 | |||||||
Corn options | — | — | $ | — | 250 | 1,250,000 | bushels | $ | (745,313 | ) | ||||||||
Soybean oil options | — | — | $ | — | 200 | 1,000,000 | gal | $ | 2,618,750 | |||||||||
Soybean oil futures | 37 | 22,200 | gal | $ | 195,042 | 77 | 46,200 | gal | $ | 370,446 | ||||||||
Ethanol futures | 120 | 5,040,000 | gal | $ | (219,870 | ) | 90 | 3,780,000 | gal | $ | 506,436 | |||||||
Total fair value | $ | (625,178 | ) | $ | 9,912,957 | |||||||||||||
Amounts are combined on the balance sheet - negative numbers represent liabilities | ||||||||||||||||||
The following tables provide details regarding the Company's derivative financial instruments at December 31, 2014 and September 30, 2014:
Derivatives not designated as hedging instruments: | ||||||||
Balance Sheet - as of December 31, 2014 (unaudited) | Asset | Liability | ||||||
Commodity derivative instruments, at fair value | $ | — | $ | 625,178 | ||||
Total derivatives not designated as hedging instruments for accounting purposes | $ | — | $ | 625,178 | ||||
Balance Sheet - as of September 30, 2014 | Asset | Liability | ||||||
Commodity derivative instruments, at fair value | $ | 3,615,151 | $ | — | ||||
Total derivatives not designated as hedging instruments for accounting purposes | $ | 3,615,151 | $ | — | ||||
Statement of Operations Income/(Expense) | Location of gain (loss) in fair value recognized in income | Amount of gain(loss) recognized in income during the three months ended December 31, 2014 (unaudited) | Amount of gain (loss) recognized in income during the three months ended December 31, 2013 (unaudited) | |||||||
Corn derivative instruments | Cost of Goods Sold | $ | (2,785,328 | ) | $ | 749,375 | ||||
Ethanol derivative instruments | Revenue | (1,901,453 | ) | (565,320 | ) | |||||
Soybean oil derivative instruments | Revenue | — | — | |||||||
Total | $ | (4,686,781 | ) | $ | 184,055 | |||||
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RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 2014
3. INVENTORY
Inventory is valued at the lower of cost or market. Inventory values as of December 31, 2014 and September 30, 2014 were as follows:
As of | December 31, 2014 (unaudited) | September 30, 2014 | ||||||
Raw materials, including corn, chemicals and supplies | $ | 16,344,347 | $ | 9,962,057 | ||||
Work in process | 800,899 | 893,141 | ||||||
Finished goods, including ethanol and distillers grains | 805,009 | 661,159 | ||||||
Spare parts | 1,841,559 | 1,802,367 | ||||||
Total inventory | $ | 19,791,814 | $ | 13,318,724 | ||||
Lower of cost or market adjustments for the three months ended December 31, 2014 and 2013 were as follows:
For the three months ended December 31, 2014 (unaudited) | For the three months ended December 31, 2013 (unaudited) | |||||||
Loss on firm purchase commitments | $ | 46,000 | $ | — | ||||
Total loss on lower of cost or market adjustments | $ | 46,000 | $ | — | ||||
The Company has entered into forward corn purchase contracts under which it is required to take delivery at the contract price. At the time the contracts were created, the price of the contract approximated market price. Subsequent changes in market conditions could cause the contract prices to become higher or lower than market prices. As of December 31, 2014, the average price of corn purchased under certain fixed price contracts, that had not yet been delivered, was higher than approximated market price. Based on this information, the Company has an estimated loss on firm purchase commitments of $46,000 and $0 for the three months ended December 31, 2014 and 2013, respectively. The loss is recorded in “Loss on firm purchase commitments” on the statements of operations. The amount of the loss was determined by applying a methodology similar to that used in the impairment valuation with respect to inventory. Given the uncertainty of future ethanol prices, this loss may or may not be recovered, and further losses on the outstanding purchase commitments could be recorded in future periods.
4. BANK FINANCING
As of | December 31, 2014 (unaudited) | September 30, 2014 | ||||||
Long-term notes payable under loan agreement to bank | $ | 6,862,000 | $ | 14,579,000 | ||||
Capital lease obligations (Note 6) | 51,992 | 60,056 | ||||||
Total Long-Term Debt | 6,913,992 | 14,639,056 | ||||||
Less amounts due within one year | 2,041,892 | 9,266,343 | ||||||
Total Long-Term Debt Less Amounts Due Within One Year | $ | 4,872,100 | $ | 5,372,713 | ||||
The Company's notes payable consist of a term loan and a long-term revolver (LTR). As of December 31, 2014, the variable interest rate on both the term loan and the LTR was 3.74% . Both of these loans mature on April 16, 2017.
The Company also has a $10,000,000 operating line-of-credit that matures on February 28, 2015. At December 31, 2014, the Company had $0 drawn on this line-of-credit leaving a balance of $10,000,000 available. The variable interest rate was 3.67% for amounts drawn on the operating line of credit.
9
RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 2014
Scheduled debt maturities for the twelve months ending December 31 | Totals | |||
2015 | $ | 2,041,892 | ||
2016 | 2,002,578 | |||
2017 | 2,002,597 | |||
2018 | 864,617 | |||
Thereafter | 2,308 | |||
Total | $ | 6,913,992 | ||
As of December 31, 2014, the Company was in compliance with all of its debt covenants.
5. FAIR VALUE MEASUREMENTS
The following table provides information on those assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2014 and September 30, 2014, respectively.
Fair Value Measurement Using | |||||||||||||||||||
Carrying Amount as of December 31, 2014 (unaudited) | Fair Value as of December 31, 2014 (unaudited) | Level 1 | Level 2 | Level 3 | |||||||||||||||
Liabilities | |||||||||||||||||||
Commodities derivative instruments | $ | 625,178 | $ | 625,178 | $ | 625,178 | $ | — | $ | — | |||||||||
Total | $ | 625,178 | $ | 625,178 | $ | 625,178 | $ | — | $ | — | |||||||||
Fair Value Measurement Using | |||||||||||||||||||
Carrying Amount as of September 30, 2014 | Fair Value as of September 30, 2014 | Level 1 | Level 2 | Level 3 | |||||||||||||||
Assets | |||||||||||||||||||
Commodities derivative instruments | $ | 3,615,151 | $ | 3,615,151 | $ | 3,615,151 | $ | — | $ | — | |||||||||
Total | $ | 3,615,151 | $ | 3,615,151 | $ | 3,615,151 | $ | — | $ | — | |||||||||
The fair value of the corn, ethanol and soybean oil derivative instruments is based on quoted market prices in an active market.
Financial Instruments Not Measured at Fair Value
The estimated fair value of the Company's long-term debt, including the short-term portion, at December 31, 2014 and September 30, 2014 approximated the carrying value of approximately $6.9 million and $14.6 million, respectively. Fair value was estimated using estimated variable market interest rates as of December 31, 2014. The fair values and carrying values consider the terms of the related debt and exclude the impacts of debt discounts and derivative/hedging activity.
6. LEASES
The Company leases equipment under operating and capital leases through January 2020. The Company is generally responsible for maintenance, taxes, and utilities for leased equipment. Equipment under operating lease includes a locomotive and rail cars.
10
RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 2014
Rent expense for operating leases was approximately $128,000 and $129,000 for the three months ended December 31, 2014 and 2013, respectively. Equipment under capital leases consists of office equipment and plant equipment.
Equipment under capital leases is as follows at:
As of | December 31, 2014 (unaudited) | September 30, 2014 | ||||||
Equipment | $ | 564,648 | $ | 564,648 | ||||
Less accumulated amortization | (83,336 | ) | (73,906 | ) | ||||
Net equipment under capital lease | $ | 481,312 | $ | 490,742 | ||||
At December 31, 2014, the Company had the following minimum commitments, which at inception had non-cancelable terms of more than one year. Amounts shown below are for the 12 months period ending December 31:
Operating Leases | Capital Leases | |||||||
2015 | $ | 374,546 | $ | 41,892 | ||||
2016 | 241,008 | 2,578 | ||||||
2017 | 208,920 | 2,597 | ||||||
2018 | 109,810 | 2,617 | ||||||
2019 | 100,800 | 2,308 | ||||||
Thereafter | 8,400 | — | ||||||
Total minimum lease commitments | $ | 1,043,484 | 51,992 | |||||
Less amount representing interest | — | |||||||
Present value of minimum lease commitments included in current maturities of long-term debt on the balance sheet | $ | 51,992 | ||||||
7. COMMITMENTS AND CONTINGENCIES
Firm Purchase Commitments for Corn
To ensure an adequate supply of corn to operate the Plant, the Company enters into contracts to purchase corn from local farmers and elevators. At December 31, 2014, the Company had various fixed price contracts for the purchase of approximately 4.9 million bushels of corn. Using the stated contract price for the fixed price contracts, the Company had commitments of approximately $19.0 million related to the 4.9 million bushels under contract. The Company also has a contract with Modern Grain Inc. in Hebron to purchase 1 million bushels of corn. The purchase price for these bushels will be set at the time of purchase at the July index price less basis. The deadline for pricing these 1 million bushels is July 1, 2015. No purchase date has been set at this time.
Natural Gas Conversion
The Company has signed purchase orders to convert the energy source for the Plant from coal to natural gas. The total anticipated cost of this project is approximately$5,824,000. The Company has incurred approximately $3,654,000 in costs to date related to this project leaving approximately $2,170,000 in remaining costs. The project is expected to be completed by the middle of our second quarter of our 2015 fiscal year. In conjunction with the natural gas conversion project, the Company entered into a seven year agreement for natural gas transmission which includes minimum required transmission and consumption volumes.
8. RELATED-PARTY TRANSACTIONS
The Company has balances and transactions in the normal course of business with various related parties for the purchase of corn, sale of distillers grains and sale of ethanol. The related parties include unit holders, members of the board of governors of the Company, and RPMG, Inc. (“RPMG”). Significant related party activity affecting the financial statements is as follows:
11
RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 2014
December 31, 2014 (unaudited) | September 30, 2014 | |||||||
Balance Sheet | ||||||||
Accounts receivable | $ | 1,932,287 | $ | 1,476,130 | ||||
Accounts Payable | 719,380 | 482,046 | ||||||
For the three months ended December 31, 2014 (unaudited) | For the three months ended December 31, 2013 (unaudited) | |||||||
Statement of Operations | ||||||||
Revenues | $ | 29,081,224 | $ | 33,053,641 | ||||
Realized gain on corn hedge | 925,400 | 827,500 | ||||||
Cost of goods sold | 42,553 | 562,849 | ||||||
General and administrative | 18,073 | 15,181 | ||||||
Inventory Purchases | $ | 1,939,928 | $ | 2,623,661 | ||||
9. UNCERTAINTIES IMPACTING THE ETHANOL INDUSTRY AND OUR FUTURE OPERATIONS
The Company has certain risks and uncertainties that it experiences during volatile market conditions, which can have a severe impact on operations. The Company's revenues are derived from the sale and distribution of ethanol and distillers grains to customers primarily located in the United States. Corn for the production process is supplied to the plant primarily from local agricultural producers and from purchases on the open market. The Company's operating and financial performance is largely driven by prices at which the Company sells ethanol and distillers grains and by the cost at which it is able to purchase corn for operations. The price of ethanol is influenced by factors such as prices, supply and demand, weather, government policies and programs, and unleaded gasoline and the petroleum markets, although since 2005 the prices of ethanol and gasoline began a divergence with ethanol selling for less than gasoline at the wholesale level. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol. The Company's largest cost of production is corn. The cost of corn is generally impacted by factors such as supply and demand, weather, government policies and programs. The Company's risk management program is used to protect against the price volatility of these commodities.
The Company's financial performance is highly dependent on the Federal Renewable Fuels Standard ("RFS") which requires that a certain amount of renewable fuels must be used each year in the United States. Corn based ethanol, such as the ethanol the Company produces, can be used to meet a portion of the RFS requirement. In November 2013, the EPA issued a proposed rule which would reduce the RFS for 2014, including the RFS requirement related to corn based ethanol. The EPA proposed rule was subject to a comment period which expired in January 2014. The EPA has not yet finalized the proposed rule. If the EPA reduces the ethanol use requirement of the RFS, it may have a significant negative impact on the Company's financial performance.
The Company anticipates that the results of operations during the remainder of fiscal 2015 will continue to be affected by volatility in the commodity markets. The volatility is due to various factors, including uncertainty with respect to the availability and supply of corn, increased demand for grain from global and national markets, speculation in the commodity markets, demand for corn from the ethanol industry and drought conditions currently being experienced by much of the United States.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
We prepared the following discussion and analysis to help you better understand our financial condition, changes in our financial condition, and results of operations for the three month period ended December 31, 2014, compared to the same period of the prior fiscal year. This discussion should be read in conjunction with the condensed financial statements, notes and information contained in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2014. Unless otherwise stated, references in this report to particular years, quarters, months, or periods refer to our fiscal years ended in September and the associated quarters, months, or periods of those fiscal years.
Forward Looking Statements
This report contains forward-looking statements that involve future events, our future performance and our future operations and actions. In some cases you can identify forward-looking statements by the use of words such as "may," "should," "anticipate," "believe," "expect," "plan," "future," "intend," "could," "estimate," "predict," "hope," "potential," "continue," or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions and involve numerous assumptions, risks and uncertainties. Our actual results or actions may differ materially from these forward-looking statements for many reasons, including the following factors:
• | Negative operating margins which result from lower ethanol prices; |
• | Reduction in ethanol demand due to a decrease or elimination of the ethanol use requirement in the Federal Renewable Fuels Standard; |
• | Logistics difficulties preventing us from delivering our products to our customers; |
• | Fluctuations in the price and market for ethanol, distillers grains and corn oil; |
• | Our ability to successfully implement our natural gas conversion project; |
• | Availability and costs of products and raw materials, particularly corn, coal and natural gas; |
• | Changes in the environmental regulations that apply to our plant operations and our ability to comply with such regulations; |
• | Ethanol supply exceeding demand and corresponding ethanol price reductions impacting our ability to operate profitably and maintain a positive spread between the selling price of our products and our raw material costs; |
• | Our ability to generate and maintain sufficient liquidity to fund our operations, meet debt service requirements and necessary capital expenditures; |
• | Our ability to continue to meet our loan covenants; |
• | Limitations and restrictions contained in the instruments and agreements governing our indebtedness; |
• | Results of our hedging transactions and other risk management strategies; |
• | Changes and advances in ethanol production technology; and |
• | Competition from alternative fuels and alternative fuel additives. |
Overview
Red Trail Energy, LLC, a North Dakota limited liability company (the "Company," "Red Trail," or "we," "our," or "us"), owns and operates a 50 million gallon annual name-plate production ethanol plant near Richardton, North Dakota. Our revenues are derived from the sale and distribution of our ethanol, distillers grains and corn oil primarily in the continental United States. Corn is our largest cost component and our profitability is highly dependent on the spread between the price of corn and the price of ethanol.
During our second quarter of 2014, we commenced a project to convert our ethanol plant from a coal fired plant to a natural gas based ethanol plant. We anticipate that this project will be completed by the middle of the second quarter of our 2015 fiscal year. We plan to finance the natural gas conversion project from cash we have on hand as well as funds we have available to borrow on our line of credit.
Results of Operations for the Three Months Ended December 31, 2014 and 2013
The following table shows the results of our operations and the percentages of revenues, cost of goods sold, general and administrative expenses and other items to total revenues in our unaudited statements of operations for the three months ended December 31, 2014 and 2013:
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Three Months Ended December 31, 2014 (Unaudited) | Three Months Ended December 31, 2013 (Unaudited) | ||||||||||||
Statement of Operations Data | Amount | % | Amount | % | |||||||||
Revenues | $ | 29,612,851 | 100.00 | $ | 33,785,964 | 100.00 | |||||||
Cost of Goods Sold | 27,781,580 | 93.82 | 29,163,305 | 86.32 | |||||||||
Gross Profit | 1,831,271 | 6.18 | 4,622,659 | 13.68 | |||||||||
General and Administrative Expenses | 544,767 | 1.84 | 471,087 | 1.39 | |||||||||
Operating Income | 1,286,504 | 4.34 | 4,151,572 | 12.29 | |||||||||
Other Expense | (112,584 | ) | (0.38 | ) | (83,852 | ) | (0.25 | ) | |||||
Net Income | $ | 1,173,920 | 3.96 | $ | 4,067,720 | 12.04 | |||||||
The following table shows additional data regarding production and price levels for our primary inputs and products for the three months ended December 31, 2014 and 2013.
Three Months ended December 31, 2014 (unaudited) | Three Months ended December 31, 2013 (unaudited) | |||||||
Production: | ||||||||
Ethanol sold (gallons) | 13,690,081 | 12,359,493 | ||||||
Dried distillers grains sold (tons) | 25,590 | 28,674 | ||||||
Modified distillers grains sold (tons) | 19,191 | 18,410 | ||||||
Corn oil sold (pounds) | 2,120,540 | 2,646,860 | ||||||
Revenues: | ||||||||
Ethanol average price per gallon (net of hedging) | $ | 1.85 | $ | 2.10 | ||||
Dried distillers grains average price per ton | 109.62 | 189.15 | ||||||
Modified distillers grains average price per ton | 46.26 | 80.43 | ||||||
Corn oil average price per pound | 0.23 | 0.27 | ||||||
Primary Inputs: | ||||||||
Corn ground (bushels) | 4,848,133 | 4,876,288 | ||||||
Costs of Primary Inputs: | ||||||||
Corn average price per bushel (net of hedging) | $ | 3.43 | $ | 4.63 | ||||
Other Costs (per gallon of ethanol sold): | ||||||||
Chemical and additive costs | $ | 0.115 | $ | 0.113 | ||||
Denaturant cost | 0.044 | 0.052 | ||||||
Electricity cost | 0.066 | 0.055 | ||||||
Direct labor cost | 0.066 | 0.046 | ||||||
Revenue
Our revenue was lower for the first quarter of our 2015 fiscal year compared to the same period of our 2014 fiscal year due to lower prices for our products partially offset by increased sales. During the first quarter of our 2015 fiscal year, approximately 85.3% of our total revenue was derived from ethanol sales, approximately 12.5% was from distillers grains sales and approximately 1.6% was from corn oil sales. During the first quarter of our 2014 fiscal year, approximately 76.8% of our total revenue was derived from ethanol sales, approximately 20.4% was from distillers grains sales and approximately 2.1% was from corn oil sales.
Ethanol
The average price we received for our ethanol was approximately 11.9% less during the first quarter of our 2015 fiscal year compared to the first quarter of our 2014 fiscal year. Management attributes this decrease in the price we received for our ethanol during the first quarter of our 2015 fiscal year with lower market ethanol prices which have resulted from lower gasoline prices. The price of oil has dropped significantly since the end of our 2014 fiscal year which has a corresponding impact on
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gasoline prices. In recent years, ethanol prices have been less than gasoline prices which has positively impacted ethanol demand and prices. However, with the falling gasoline prices, the discount between the price of ethanol and the price of gasoline has been shrinking which has negatively impacted ethanol prices. Management believes that increased gasoline demand will positively impact ethanol prices, however, this additional demand has not been sufficient to maintain ethanol prices. Management believes lower ethanol prices may positively impact ethanol exports which could positively impact prices.
Uncertainty exists regarding ethanol demand due to a proposal by the EPA in November 2013 to reduce the ethanol use requirement in the Federal Renewable Fuels Standard (RFS) in 2014. However, the EPA failed to release the final rule during 2014 and instead announced that it would not issue a final rule for 2014 until sometime during 2015. If the ethanol use requirement in the RFS is reduced either in 2015 or in the future, it could negatively impact demand for ethanol which could decrease market ethanol prices. Lower ethanol prices, especially at times when corn prices are higher, can result in negative operating margins in the ethanol industry which can negatively impact our financial performance. Management anticipates that ethanol exports will continue to play a pivotal role in ethanol prices during our 2015 fiscal year. If ethanol exports fall off, especially at a time when domestic ethanol demand is lower, it may result in lower ethanol prices and unfavorable operating conditions in the ethanol industry. Further, if gasoline prices remain low, management anticipates that ethanol prices will remain low, despite increased ethanol demand due to higher gasoline demand. These uncertainties could lead to further ethanol price volatility during our 2015 fiscal year which could negatively impact our profitability.
We sold significantly more gallons of ethanol during the first quarter of our 2015 fiscal year compared to the first quarter of our 2014 fiscal year even though our ethanol production was only slightly higher during the first quarter of our 2015 fiscal year compared to the first quarter of our 2014 fiscal year. This significant increase in ethanol sales was due to timing issues during our 2014 fiscal year which decreased our ethanol sales during the first quarter of our 2014 fiscal year. Management anticipates that ethanol production and sales will be relatively consistent moving forward unless operating margins in the ethanol industry change in a way that requires us to either decrease or cease production.
From time to time we enter into forward sales contracts for our commodity sales. At December 31, 2014, we had approximately 5.0 million gallons of ethanol futures contracts and soybean oil futures contracts for approximately 22,000 gallons of soybean oil. These ethanol futures contracts resulted in a loss of approximately $1.9 million during the first quarter of our 2015 fiscal year which reduced our revenue. By comparison, our ethanol futures contracts resulted in a loss of approximately $565,000 for the first quarter of our 2014 fiscal year.
Distillers Grains
The average price we received for our distillers grains during the first quarter of our 2015 fiscal year was significantly lower compared to the first quarter of our 2014 fiscal year. Management attributes this decrease in distillers grains prices with lower corn and soybean prices which both impact demand and prices for distillers grains. Recently, China reversed its position regarding importing distillers grains which has positively impacted distillers grains demand and prices. However, distillers grains sellers are concerned that China could once again refuse distillers grains shipments which could negatively impact distillers grains prices in the United States. Management anticipates that distillers grains prices will continue to primarily track corn prices. If unfavorable margins continue in the ethanol industry, it may lead to lower distillers grains production which could increase distillers grains demand and prices. This increase results from the fact that many animal feeders rely on an established ration of distillers grains in their animal feed. It can be difficult for some animal feeding operations to change their rations in the short term which could support distillers grains prices.
We produced and sold less total tons of distillers grains during the first quarter of our 2015 fiscal year compared to the first quarter of our 2014 fiscal year due to the new crop corn's lower test weight. Management anticipates that we will continue to produce a comparable number of tons of distillers grains during our 2015 fiscal year provided that ethanol margins allow us to continue to operate the ethanol plant at capacity. In the event we slow or cease production of ethanol, it would correspondingly decrease production of distillers grains.
Corn Oil
The total pounds of corn oil we sold was lower during the first quarter of our 2015 fiscal year compared to the first quarter of our 2014 fiscal year. Management attributes this decrease in corn oil sales with decreased corn oil production due to lower distillers grain production. Further, the amount of corn oil which is contained in the corn we are using during our 2015 fiscal year is less than the corn we were using during our 2014 fiscal year which impacts our corn oil production efficiency. Management anticipates that corn oil production will be comparable to our first quarter results for the rest of our 2015 fiscal year provided we continue to operate the ethanol plant at capacity. Corn oil prices were lower during the first quarter of our 2015 fiscal year compared to the first quarter of our 2014 fiscal year due primarily to less corn oil demand from the biodiesel industry and lower corn and
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soybean oil prices. Management anticipates continued lower corn oil prices as the supply of corn oil continues to increase with relatively stable corn oil demand.
Cost of Goods Sold
Our cost of goods sold is primarily made up of corn and energy expenses. Our cost of goods sold as a percentage of revenues was 93.8% for the first quarter of our 2015 fiscal year as compared to 86.3% for the first quarter of our 2014 fiscal year. The increase in our cost of goods sold as a percentage of revenue was due to tighter operating margins during our 2015 fiscal year which decreased our total revenue more than the decrease we experienced in our cost of goods sold.
Corn Costs
Our cost of goods sold related to corn was lower for the first quarter of our 2015 fiscal year compared to the first quarter of our 2014 fiscal year due to slightly lower corn consumption and lower average corn prices during our 2015 fiscal year. Market corn prices have been lower recently due to the record corn crop which was harvested in the fall of 2014 along with increased corn supplies due to more corn carryover from the prior marketing year. Management anticipates that corn prices will remain lower during our 2015 fiscal year due to increased corn supplies and uncertainty regarding corn demand, especially due to the efforts to reduce the ethanol use requirement in the RFS and uncertainty regarding corn exports to China.
From time to time we enter into forward purchase contracts for our commodity purchases and sales. At December 31, 2014, we had forward corn purchase contracts for various delivery periods through December 2015 for a total commitment of approximately $19.0 million. We also had a commitment to purchase 1 million bushels of corn at December 31, 2014 which had not yet been priced. The price for these bushels of corn will be set when they are purchased at the July 2015 index price less basis. Our corn derivative positions resulted in a loss of approximately $2.8 million during the first quarter of our 2015 fiscal year which increased our cost of goods sold. By comparison, our corn derivative positions resulted in a gain of approximately $749,000 during the first quarter of our 2014 fiscal year which decreased our cost of goods sold.
Coal Costs
We purchase the coal needed to power our ethanol plant from a supplier under a long-term contract. Our coal costs were lower during the first quarter of our 2015 fiscal year compared to the first quarter of our 2014 fiscal year, due to decreased coal consumption, partially offset by an increase in the average price we paid per ton of coal purchased. Our coal consumption was lower during the first quarter of our 2015 fiscal year compared to the first quarter of our 2014 fiscal year due to decreased production of dried distillers grains. We anticipate that our project to convert the plant's fuel source from coal to natural gas will be operational during the second fiscal quarter of 2015 and as a result, we will not require coal for our operations. Management anticipates that the coal contract we have in place will be sufficient to maintain our operations until the natural gas conversion is operational. After the natural gas conversion project is complete, we will rely on natural gas to fuel our ethanol plant and our profitability will be impacted by changes in natural gas prices. We have all of the natural gas supply and distribution agreements we will need in place so we will be ready once our conversion project is operational.
General and Administrative Expenses
Our general and administrative expenses were higher for the first quarter of our 2015 fiscal year compared to the first quarter of our 2014 fiscal year due to an increase in consulting services and property taxes.
Other Income/Expense
We had more interest income during the first quarter of our 2015 fiscal year compared to the first quarter of our 2014 fiscal year because we had more cash on hand during the 2015 period. In addition, we had less interest expense during the first quarter of our 2015 fiscal year compared to the first quarter of our 2014 fiscal year because we had less borrowings on our credit facilities. We had less other income during the first quarter of our 2015 fiscal year compared to the first quarter of our 2014 fiscal year due to a nonrefundable deposit for waste water sales received in our 2014 fiscal year.
Changes in Financial Condition for the Three Months Ended December 31, 2014
Current Assets. We had less cash and equivalents at December 31, 2014 compared to September 30, 2014 primarily due to an excess cash flow prepayment we made on our long-term debt during our first fiscal quarter of 2015. We had approximately $3.6 million of restricted cash at December 31, 2014 related to an increase in our margin account needed for our hedging transactions.
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Due to the timing of payments from our marketers, we had more accounts receivable at December 31, 2014 compared to September 30, 2014. Due primarily to changing corn and ethanol prices, our derivative instruments went from an asset of approximately $3.6 million at September 30, 2014 to a liability of approximately $625,000 at December 31, 2014. This change shows how shifting commodity prices can have a significant impact on our financial statements. We had more inventory on hand at December 31, 2014 compared to September 30, 2014 due to having more corn inventory. Due to the current favorable corn prices, we have increased our corn storage licensed capacity in order to purchase additional bushels.
Property, Plant and Equipment. The gross value of our property, plant and equipment was higher at December 31, 2014 compared to September 30, 2014 due to plant improvements we have been making to convert the facility from a coal fired plant to natural gas. However, the net value of our property, plant and equipment was lower at December 31, 2014 due to depreciation.
Other Assets. Our other assets were comparable at December 31, 2014 and September 30, 2014.
Current Liabilities. Our accounts payable was higher at December 31, 2014 compared to September 30, 2014 due to our increased corn inventory purchases. We had significantly more in accrued expenses at December 31, 2014 compared to September 30, 2014 due to deferred corn payments. Many of our corn suppliers defer corn payments for tax purposes until after December 31st each year which increases our accrued expenses during our first quarter. We made these deferred corn payments early in January 2015. We had less current maturities on long-term debt at December 31, 2014 compared to September 30, 2014 due to the excess cash flow payment we made during our first fiscal quarter of 2015.
Long-term Liabilities. Our long-term liabilities were lower at December 31, 2014 compared to September 30, 2014, due to scheduled quarterly loan payments and the excess cash flow payment we made during our first fiscal quarter of 2015.
Liquidity and Capital Resources
Based on financial forecasts performed by our management, we anticipate that we will have sufficient cash from our current credit facilities and cash from our operations to continue to operate the ethanol plant for the next 12 months. Should we experience unfavorable operating conditions in the future, we may have to secure additional debt or equity sources for working capital or other purposes.
The following table shows cash flows for the three months ended December 31, 2014 and 2013:
2014 (unaudited) | 2013 (unaudited) | |||||||
Net cash provided by operating activities | $ | 131,799 | $ | 8,920,815 | ||||
Net cash (used in) investing activities | (807,108 | ) | (167,409 | ) | ||||
Net cash (used in) financing activities | (7,725,064 | ) | (7,342,720 | ) | ||||
Net (decrease) increase in cash | $ | (8,400,373 | ) | $ | 1,410,686 | |||
Cash and cash equivalents, end of period | $ | 13,551,886 | $ | 1,411,686 | ||||
Cash Flow from Operations
Our operations provided less cash during the first quarter of our 2015 fiscal year compared to the first quarter of our 2014 fiscal year due to less net income and more cash being used for corn inventory during the 2015 period. We also deposited more cash in our restricted cash account during the first quarter of our 2015 fiscal year compared to the first quarter of our 2014 fiscal year which decreased the cash which was generated by our operations.
Cash Flow From Investing Activities
We used more cash for capital expenditures during the first quarter of our 2015 fiscal year compared to the first quarter of our 2014 fiscal year primarily due to our natural gas conversion and hammer mill projects which were in process during our 2015 fiscal year. During the first quarter of our 2014 fiscal year, we primarily used cash for ordinary repair and replacement of equipment at the ethanol plant.
Cash Flow from Financing Activities
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During the first quarter of our 2015 fiscal year we made a significant excess cash flow prepayment on our long-term loan which used cash. By comparison, during the first quarter of our 2014 fiscal year, we used additional cash to repay checks we had issued in excess of bank balances and amounts we borrowed on our short-term revolving loan.
Our liquidity, results of operations and financial performance will be impacted by many variables, including the market price for commodities such as, but not limited to, corn, ethanol and other energy commodities, as well as the market price for any co-products generated by the facility and the cost of labor and other operating costs. Assuming future relative price levels for corn, ethanol and distillers grains remain consistent, we expect operations to generate adequate cash flows to maintain operations.
Capital Expenditures
The Company had approximately $3,914,000 in construction in progress as of December 31, 2014 related to costs associated with a project to convert the plant to use natural gas. During the three months ended December 31, 2014, the Company placed in service approximately $220,000 in capital projects with the majority of these costs related to the addition of a new hammer mill.
Capital Resources
Short-Term Debt Sources
The Company has a revolving line-of-credit of $10,000,000 with $0 drawn on this line-of-credit as of December 31, 2014. This revolving line-of-credit matures on February 28, 2015. The variable interest rate on this line-of-credit is 3.5% over the one-month LIBOR with a rate of 3.67% as of December 31, 2014.
Long-Term Debt Sources
As of December 31, 2014, our long-term debt consisted of a term loan and a long-term revolving line-of-credit. The following table summarizes our long-term debt instruments with our senior lender.
Outstanding Balance (Millions) | Interest Rate | Estimated | ||||||||||||||||||
Term Note | December 31, 2014 (Unaudited) | September 30, 2014 | December 31, 2014 (Unaudited) | September 30, 2014 | Quarterly Principal Payment Amounts | Notes | ||||||||||||||
Term Note | $ | 6.9 | $ | 14.6 | 3.74 | % | 3.74 | % | $ | 500,000 | 1, 2 | |||||||||
Long-Term Revolving Note | — | — | 3.74 | % | 3.74 | % | $ | 125,000 | 1, 2, 3 | |||||||||||
Notes
1 - Maturity date of April 2017.
2 - Variable interest rate at 3.5% over the three-month LIBOR, reset quarterly.
3 - Quarterly payments are equal to required quarterly reductions in total available/principal payments of $125,000.
Restrictive Covenants
We are subject to a number of covenants and restrictions in connection with our credit facilities, including:
• | Providing FNBO with current and accurate financial statements; |
• | Maintaining certain financial ratios including minimum working capital and fixed charge coverage ratio; |
• | Maintaining adequate insurance; |
• | Making, or allowing to be made, any significant change in our business or tax structure; |
• | Limiting our ability to make distributions to members; and |
• | Maintaining a threshold of capital expenditures. |
Excess Cash Flow Payments
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We are required to make a prepayment on our Term Loan within 120 days of the end of each of our fiscal years in an amount equal to 25% of our excess cash flow. Excess cash flow is defined in our loan agreement as our adjusted EBITDA earnings less scheduled payments which are due on our loans. Our adjusted EBITDA is calculated by reducing our EBITDA by approved capital expenditures and distributions we make during our fiscal year. Due to our net income for our 2014 fiscal year, we made an excess cash flow payment of approximately $7.2 million during the first quarter of our 2015 fiscal year which reduced the balance of our Term Loan.
As of December 31, 2014, we were in compliance with our loan covenants.
Industry Support
North Dakota Grant
In 2006, we entered into a contract with the State of North Dakota through the Industrial Commission for a lignite coal grant not to exceed $350,000. We received $275,000 from this grant during 2006 with this amount currently shown in the long-term liability section of our Balance Sheet as Contracts Payable. Because we have not met the minimum lignite usage requirements specified in the grant for any year in which the plant has operated, we expect to have to repay the grant and are awaiting instructions from the Industrial Commission as to the terms of the repayment schedule. This repayment could begin at some point in 2015, but as of December 31, 2014 we have not received any instructions from the Industrial Commission.
Critical Accounting Estimates
Our most critical accounting policies, which are those that require significant judgment, include policies related to the carrying amount of property, plant and equipment; valuation of derivatives, inventory and purchase commitments of inventory. An in-depth description of these can be found in our Annual Report on Form 10-K for the fiscal year ended September 30, 2014. For valuation allowances related to firm purchase commitments of inventory, please refer to the disclosures in Note 3 of the Notes to the Unaudited Condensed Financial Statements in this Quarterly Report. Management has not changed the method of calculating and using estimates and assumptions in preparing our condensed financial statements in accordance with generally accepted accounting principles. There have been no changes in the policies for our accounting estimates for the quarter ended December 31, 2014.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to the impact of market fluctuations associated with interest rates and commodity prices as discussed below. We have no exposure to foreign currency risk as all of our business is conducted in U.S. Dollars. We use derivative financial instruments as part of an overall strategy to manage market risk. We use cash, futures and option contracts to hedge changes to the commodity prices of corn and ethanol. We do not enter into these derivative financial instruments for trading or speculative purposes, nor do we designate these contracts as hedges for accounting purposes pursuant to the requirements of Generally Accepted Accounting Principles ("GAAP").
Commodity Price Risk
We expect to be exposed to market risk from changes in commodity prices. Exposure to commodity price risk results from our dependence on corn in the ethanol production process and the sale of ethanol.
We enter into fixed price contracts for corn purchases on a regular basis. It is our intent that, as we enter into these contracts, we will use various hedging instruments (puts, calls and futures) to maintain a near even market position. For example, if we have 1 million bushels of corn under fixed price contracts we would generally expect to enter into a short hedge position to offset our price risk relative to those bushels we have under fixed price contracts. Because our ethanol marketing company (RPMG) is selling substantially all of the gallons it markets on a spot basis we also include the corn bushel equivalent of the ethanol we have produced that is inventory but not yet priced as bushels that need to be hedged.
Although we believe our hedge positions will accomplish an economic hedge against our future purchases, they are not designated as hedges for accounting purposes, which would match the gain or loss on our hedge positions to the specific commodity purchase being hedged. We use fair value accounting for our hedge positions, which means as the current market price of our
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hedge positions changes, the gains and losses are immediately recognized in our cost of sales. The immediate recognition of hedging gains and losses under fair value accounting can cause net income to be volatile from quarter to quarter and year to year due to the timing of the change in value of derivative instruments relative to the cost of the commodity being hedged. However, it is likely that commodity cash prices will have the greatest impact on the derivatives instruments with delivery dates nearest the current cash price.
As of December 31, 2014, we had approximately 4.9 million bushels of corn under fixed price contracts. As of December 31, 2014 we accrued a $3,288,000 loss on firm purchase commitments related to these corn contracts.
It is the current position of our ethanol marketing company, RPMG, that under current market conditions selling ethanol in the spot market will yield the best price for our ethanol. RPMG will, from time to time, contract a portion of the gallons they market with fixed price contracts.
We estimate that our expected corn usage will be between 18 million and 20 million bushels per calendar year for the production of approximately 50 million to 54 million gallons of ethanol. As corn prices move in reaction to market trends and information, our income statement will be affected depending on the impact such market movements have on the value of our derivative instruments.
To manage our coal price risk, we entered into a coal purchase agreement with our supplier to supply us with coal, fixing the price at which we purchase coal. If we are unable to continue buying coal under this agreement, we may have to buy coal in the open market.
A sensitivity analysis has been prepared to estimate our exposure to corn and ethanol price risk. Market risk related to our corn and ethanol prices is estimated as the potential change in income resulting from a hypothetical 10% adverse change in the average cost of our corn and average ethanol sales price as of December 31, 2014, net of the forward and future contracts used to hedge our market risk for corn and ethanol. The volumes are based on our expected use and sale of these commodities for a one year period from December 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 | ||||||||
Ethanol | 49,985,000 | Gallons | 10 | % | $ | (8,997,300 | ) | ||||
Corn | 9,129,000 | Bushels | 10 | % | $ | (3,103,860 | ) | ||||
Interest Rate Risk
We are exposed to market risk from changes in interest rates on our senior debt which bears variable interest rates. We anticipate that a hypothetical 1% change in the interest rate on our senior debt as of December 31, 2014, would cause an adverse change to our income in the amount of approximately $69,000 for a 12 month period.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit pursuant to the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosures.
Our management, including our President and Chief Executive Officer (the principal executive officer), Gerald Bachmeier, along with our Chief Financial Officer, (the principal financial officer), Jodi Johnson, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2014. Based on this review and evaluation, these officers believe that our disclosure controls and procedures are effective in ensuring that material information related to us is recorded, processed, summarized and reported within the time periods required by the forms and rules of the Securities and Exchange Commission.
For the fiscal quarter ended December 31, 2014, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings
From time to time in the ordinary course of business, we may be named as a defendant in legal proceedings related to various issues, including without limitation, workers' compensation claims, tort claims, or contractual disputes. We are not currently involved in any material legal proceedings.
Item 1A. Risk Factors
The following risk factor is provided due to material changes from the risk factors previously disclosed in our annual report on Form 10-K. The risk factor set forth below should be read in conjunction with the risk factors section and the Management's Discussion and Analysis section for the fiscal year ended September 30, 2014, included in our annual report on Form 10-K.
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 decreased 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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information
None.
Item 6. Exhibits.
(a) | The following exhibits are filed as part of this report. |
Exhibit No. | Exhibits | ||
31.1 | Certificate Pursuant to 17 CFR 240.13a-14(a)* | ||
31.2 | Certificate Pursuant to 17 CFR 240.13a-14(a)* | ||
32.1 | Certificate Pursuant to 18 U.S.C. Section 1350* | ||
32.2 | Certificate Pursuant to 18 U.S.C. Section 1350* | ||
101 | The following financial information from Red Trail Energy, LLC's Quarterly Report on Form 10-Q for the quarter ended December 31, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Balance Sheets as of December 31, 2014 and September 30, 2014, (ii) Statements of Operations for the three months ended December 31, 2014 and 2013, (iii) Statements of Cash Flows for the three months ended December 31, 2014 and 2013, and (iv) the Notes to Unaudited Condensed Financial Statements.** | ||
(*) Filed herewith.
(**) Furnished herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
RED TRAIL ENERGY, LLC | |||
Date: | February 13, 2015 | /s/ Gerald Bachmeier | |
Gerald Bachmeier | |||
President and Chief Executive Officer | |||
(Principal Executive Officer) | |||
Date: | February 13, 2015 | /s/ Jodi Johnson | |
Jodi Johnson | |||
Chief Financial Officer | |||
(Principal Financial and Accounting Officer) | |||
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