UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

Form 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2016

Commission file number: 000-52421

 

ADVANCED BIOENERGY, LLC

(Exact name of Registrant as Specified in its Charter)

 

 

 

8000 Norman Center Drive, Suite 610

Bloomington, MN 55437

(763) 226-2701

(Address, including zip code, and telephone number,

Including area code, of Registrant’s Principal Executive Offices)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Membership Units

 

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

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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.  ☐

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

 

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

Our membership units are not publicly traded; therefore, our public float is not measurable.

As of December 23, 2016, the number of outstanding membership units was 25,410,851.

Portions of the registrant’s definitive Proxy Statement for the registrant’s 2017 Annual Meeting of Members are incorporated by reference into Part III.

 

 

 

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ADVANCED BIOENERGY, LLC

FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2016

INDEX

 

 

 

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION

This Annual Report on Form 10-K contains forward-looking statements regarding our business, financial condition, results of operations, performance and prospects. All statements that are not historical or current facts are forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks, uncertainties and other factors, many of which may be beyond our control and may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Certain of these risks and uncertainties are described in the “Risk Factors” section of this Annual Report on Form 10-K. These risks and uncertainties include, but are not limited to, the following:

You can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events, are based on assumptions, and are subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our estimates and assumptions only as of the date of this report. Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future. Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed from time to time with the U.S. Securities and Exchange Commission, which we refer to as the SEC, that advise interested parties of the risks and factors that may affect our business.

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INTELLECTUAL PROPERTY

Advanced BioEnergyTM, our logos and the other trademarks, trade names and service marks of Advanced BioEnergy mentioned in this report are our property. This report also contains trademarks and service marks belonging to other entities.

INDUSTRY AND MARKET DATA

We obtained the industry, market and competitive position data used throughout this report from our own research, studies conducted by third parties, independent industry associations, governmental associations or general publications and other publicly available information. In particular, we have based much of our discussion of the ethanol industry, including government regulation relevant to the industry and forecasted growth in demand, on information published by the Renewable Fuels Association (“RFA”) and Growth Energy, the national trade associations for the U.S. ethanol industry. Because the RFA and Growth Energy are trade organizations for the ethanol industry, they may present information in a manner that is more favorable to that industry than would be presented by an independent source. Although we believe these sources are reliable, we have not independently verified the information. Forecasts are particularly likely to be inaccurate, especially over long periods of time.

ETHANOL UNITS

All references in this report to gallons of ethanol are to gallons of denatured ethanol. Denatured ethanol is ethanol blended with 2.0% to 2.5% denaturant, such as gasoline, to render it undrinkable and thus not subject to alcoholic beverage taxes.

 

 

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PART I

COMPANY OVERVIEW

Advanced BioEnergy, LLC (“Company,” “we,” “our,” “Advanced BioEnergy” or “ABE”) was formed in 2005 as a Delaware limited liability company. Our business consists of producing ethanol and co-products, including wet, modified and dried distillers’ grains, and corn oil. Ethanol is a renewable, environmentally clean fuel source that is produced at numerous facilities in the United States, mostly in the Midwest. In the U.S., ethanol is produced primarily from corn and then blended with unleaded gasoline in varying percentages. The ethanol industry in the U.S. has grown significantly as the use of ethanol reduces harmful auto emissions, enhances octane ratings of the gasoline with which it is blended, offers consumers a cost-effective choice, and decreases the amount of crude oil the U.S. needs to import from foreign sources.

To execute our business plan, in November 2006, we acquired ABE South Dakota, LLC (f/k/a Heartland Grain Fuels, LP), which owned existing ethanol production facilities in Aberdeen and Huron, South Dakota. We commenced construction of our expansion facility in Aberdeen, South Dakota in April 2007, and commenced operations in January 2008. Our production operations are carried out primarily through our operating subsidiary: ABE South Dakota, LLC (“ABE South Dakota”) which owns and operates ethanol facilities in Aberdeen and Huron, South Dakota.

Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Based on the related business nature and expected financial results, the Company’s plants are aggregated into one reportable segment.

FACILITIES

The table below provides a summary of our dry mill ethanol plants in operation as of September 30, 2016:

 

 

In October 2015, we amended the existing lease agreement for our corporate headquarters. Under the amended lease, we agreed to lease approximately 4,400 square feet for our corporate and administrative staff in Bloomington, Minnesota, through September 2021. The base rent is $19.00 per square foot, or approximately $7,000 per month for the twelve month period beginning July 1, 2016, with annual increases of $.50 per square foot. We believe this space will be sufficient for our needs until the end of the lease period.

We believe that the plants are in adequate condition to meet our current and future production goals. We believe that the plants are adequately insured for replacement cost plus related disruption expenditures.

Under the ABE South Dakota, LLC security agreement with AgCountry (defined below), AgCountry holds a first priority security interest and mortgage in all inventory, accounts receivable, intangibles, equipment, fixtures, buildings, and a first mortgage in land owned or leased by ABE South Dakota.

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ETHANOL

Ethanol sales have represented 80%, 79%, and 81% of our revenues in the years ended September 30, 2016, 2015, and 2014, respectively. In 2015, the United States consumed 13.95 billion gallons of ethanol representing 9.9% of the 140.43 billion gallons of finished motor gasoline consumed, according to the U.S Energy Information Administration (“EIA”). Ethanol is currently blended with gasoline to meet regulatory standards as a clean air additive, an octane enhancer, a fuel extender and as a gasoline alternative.

Ethanol is most commonly sold as E10, the 10 percent blend of ethanol that can be used in all American automobiles. Increasingly, ethanol is also available as E15, which is a higher octane fuel with a 15 percent blend of ethanol. In June 2012, the EPA approved E15 for use in vehicles with model years 2001 and later. According to the Renewable Fuels Association, this group of approved vehicles makes up 80 percent of all vehicles on the road today.  Although regulatory issues remain in many states, E15 is now available in limited locations in 23 states.  Ethanol is also available as E85, a higher percentage ethanol blend for use in flexible fuel vehicles.

The Renewable Fuels Standard

The Renewable Fuels Standard (“RFS”) is a national program that imposes requirements with respect to the amount of renewable fuel produced and used in the United States. The RFS was revised by the EPA in July 2010 (“RFS2”) and applies to refineries, blenders, distributors and importers. We believe the RFS2 program has and will continue to increase the market for renewable fuels, such as ethanol, as a substitute for petroleum-based fuels. The RFS2 required that 16.55 billion gallons be sold or dispensed in 2013, increasing to 36.0 billion gallons by 2022, representing 7% of the anticipated gasoline and diesel consumption in 2022. In 2013, RFS2 required refiners and importers to blend renewable fuels totaling at least 9.74% of total fuel volume, of which 8.12% of total fuel volume, or 13.8 billion gallons, could be derived from corn-based ethanol. The remainder of the requirement is to be met by non-corn related advanced renewable fuels such as cellulosic ethanol and biomass-based biodiesel. The RFS requirement for corn-based ethanol is capped at 15.0 billion gallons starting in 2015.

On November 30, 2015, the EPA announced final Renewable Volume Obligations (“RVOs”) for calendar year 2016. The final RVOs for corn-based ethanol blending in 2016 were set below the original blending requirements set by the RFS. The industry heavily advocated for increased RVO numbers in order to break through the “blend wall” that is established when the production capacity of the industry exceeds the mandated blending of corn-based ethanol. The final RVO numbers for corn-based ethanol were closer to current production capacity than they had been in the past, but still below the original statutory requirements. As of December 2016, current annualized ethanol production is approximately 15.4 billion gallons per the RFA. The final RVO requirement for 2016 that can be met with corn-based ethanol is 14.50 billion gallons.  On November 23, 2016, the EPA announced the final rule for 2017 RVOs, which is set at 15.0 billion gallons for corn-based ethanol.  This rule is set at 100% of the original conventional biofuel requirement of 15.0 billion gallons, and is considered a favorable outcome by the industry.

The following chart illustrates the potential United States ethanol demand based on the schedule of minimum usage established by the RFS2 program through the year 2022 (in billions of gallons):

 

 

 

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The RFS2 went into effect on July 1, 2010 and requires certain gas emission reductions for the entire lifecycle, including production of fuels. The greenhouse gas reduction requirement generally does not apply to facilities that commenced construction prior to December 2007. If this changes and our plants must meet the standard for emissions reduction, it may impact the way we procure feed stock and modify the way we market and transport our products.

Clean Air Additive

A clean air additive is a substance that, when added to gasoline, reduces tailpipe emissions, resulting in improved air quality characteristics. Ethanol contains 35% oxygen, approximately twice that of MTBE, a historically used oxygenate. The additional oxygen found in ethanol, when blended with gasoline at a 10% level, results in more complete combustion of the fuel in the engine cylinder and reduces tailpipe emissions, including volatile organic compound emissions, by as much as 30%. Pure ethanol, which is non-toxic, water soluble and biodegradable, replaces some of the harmful gasoline components, including benzene.

Octane Enhancer

Pure ethanol possesses an average octane rating of 113, enabling refiners to conform lower octane blend stock to gasoline standards, while also expanding the volume of fuel produced. In addition, ethanol is commonly added to finished regular grade gasoline at the wholesale terminal to produce higher octane mid-grade and premium gasoline. At present, ethanol represents one of the few commercially viable sources of octane enhancer available to refiners.

Fuel Extender

Ethanol extends the volume of gasoline by the amount of ethanol blended with conventional gasoline, thereby reducing dependence on foreign crude oil and refined products. Furthermore, ethanol is easily added to gasoline after the refining process, reducing the need for large, capital intensive capacity expansion projects at refineries.

E85, a Gasoline Alternative

Ethanol is the primary blend component in E85. According to the RFA, today there are over 3,400 retail stations offering E85 in the U.S., and there are more than 1,500 new stations scheduled to open in the next year. The RFA estimates that there are now more than 20.0 million ethanol-flexible fuel vehicles (“FFVs”), on the road in the U.S. today, which is approximately eight percent of all vehicles.

E15

As noted above, to increase ethanol usage, Growth Energy requested a waiver from the EPA to increase the allowable amount of ethanol blended to a 15% level. In June 2012, the EPA approved E15 to be used in vehicles with model years 2001 and later. Although regulatory issues remain in many states, E15 is available in limited locations in 23 states as of December 2016.

Ethanol Competition

The ethanol we produce is similar to ethanol produced by other plants. The RFA reports that as of December 2016, current annualized U.S. ethanol production capacity was approximately 15.4 billion gallons per year. On a national level there are numerous other production facilities with which we are in direct competition, many of whom have greater resources than we do. As of July 2016, South Dakota had 15 ethanol plants producing an aggregate of 1.0 billion gallons of ethanol per year.

The largest ethanol producers include:  Archer Daniels Midland Company; Cargill, Inc.; Flint Hills Resources, LP; Green Plains Renewable Energy, Inc.; POET, LLC and Valero Renewable Fuels. Producers of this size may have an advantage over us from economies of scale and stronger negotiating positions with purchasers. We market our ethanol primarily on a regional and national basis. We believe that we are able to reach the best available markets through the use of experienced ethanol marketers and by the rail delivery methods we use. Our plants compete with other ethanol producers on the basis of price, and, to a lesser extent, delivery service. We believe that we can compete favorably with other ethanol producers due to our proximity to ample grain, natural gas, electricity and water supplies at favorable prices.

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Competition from Alternative Fuels

Alternative fuels and alternative ethanol production methods are continually under development. The major oil companies have significantly greater resources than we have to develop alternative products and to influence legislation and public perception of ethanol. New ethanol products or methods of ethanol production developed by larger and better-financed competitors could provide them competitive advantages and harm our business.

Ethanol Marketing

ABE South Dakota has ethanol marketing agreements with NGL Energy Partners, LP (“NGL”), a diversified energy business. These ethanol marketing agreements require that we sell to NGL all of the denatured fuel-grade ethanol produced at the South Dakota plants. These ethanol marketing agreements expire on June 30, 2019.

CO-PRODUCTS

Sales of distillers’ grains have represented 18%, 20%, and 18% of our revenues for the years ended September 30, 2016, 2015, and 2014, respectively. When our plants are operating at capacity, they produce approximately 231,000 tons of dried distillers’ grains equivalents per year, approximately 15-16 pounds per bushel of corn used. Distillers’ grains are a high-protein, high-energy animal feed supplement primarily marketed to the dairy and beef industry, but also to the poultry and swine markets. Dry mill ethanol processing creates three forms of distillers’ grains: wet distillers’ grains with solubles, known as wet distillers’ grains; modified wet distillers’ grains with solubles, known as modified distillers’ grains; and dry distillers’ grains with solubles. Wet and modified distillers’ grains have been dried to approximately 65% and 50% moisture levels, respectively, and are predominately sold to nearby markets. Dried distillers’ grains have been dried to 11% moisture, have an almost indefinite shelf life and may be sold and shipped to more distant markets. In this Form 10-K, we sometimes refer to these products as “distillers’ grains” or “distillers’.”

In April 2012, we installed corn oil extraction technology at our Aberdeen plant. We recently installed corn oil extraction technology at our Huron plant, which became fully operational in October 2016. Corn oil systems are designed to extract non-edible corn oil during the thin stillage evaporation process immediately prior to production of distillers’ grains. Corn oil is produced by processing evaporated thin stillage through a disk stack style centrifuge. Corn oil has a lower density than the water or solids that make up the syrup. The centrifuges separate the relatively light oil from the heavier components of the syrup, eliminating the need for significant retention time. De-oiled syrup is returned to the process for blending into wet, modified, or dry distillers’ grains.

Industrial uses for corn oil include being used as feedstock for biodiesel, livestock feed additives, rubber substitutes, rust preventatives, inks, textiles, soaps and insecticides. Our corn oil is primarily sold by truck to biodiesel manufacturers.

Competition

In the sales of distillers’ grains, we compete with other ethanol producers, as well as a number of large and smaller suppliers of competing animal feed. We believe the principal competitive factors are price, proximity to purchasers and product quality. Currently we derive 66% of our distillers’ grain revenues from the sale of dried distillers’ grains, which have an indefinite shelf life and can be transported by truck or rail, and 34% from the sale of modified or wet distillers’ grains, which have a shorter shelf life and are typically sold in local markets and delivered via truck.

We compete with other ethanol producers in the sale of corn oil. We ship all of the corn oil produced at our facilities via truck.  Many producers have added corn oil technology to their facilities.

Co-Product Marketing

ABE South Dakota has a marketing agreement with Dakotaland Feeds, LLC (“Dakotaland Feeds”) for marketing the sale of ethanol co-products produced at the Huron plant. ABE South Dakota has a marketing agreement with NGL (formerly Gavilon, LLC) for dried distillers’ grains produced at the Aberdeen plants that became effective July 1, 2013. The marketing agreement with NGL requires NGL to use commercially reasonable efforts to purchase substantially all of the dried distillers’ grains produced at the Aberdeen plants through July 31, 2017. The Aberdeen plant self-markets its wet and modified distillers’ grains.

ABE South Dakota is party to an agreement with Gavilon Ingredients, LLC, to market all the corn oil produced by the Aberdeen and Huron plant through September 30, 2017 and November 2017, respectively.

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DRY MILL PROCESS

Dry mill ethanol plants produce ethanol primarily by processing corn. Other possible feeds are grain sorghum, or other cellulosic materials. The corn is conveyed directly from South Dakota Wheat Growers to the plant where it is weighed and transferred to a scalper to remove rocks, cobs, and other debris. The corn is then fed to a hammermill where it is ground into flour and conveyed into a slurry tank. Water, heat and enzymes are added to the flour in the slurry tank to convert starch from the corn into sugar. The slurry is pumped to a liquefaction tank where additional enzymes are added. These enzymes continue the starch-to-sugar conversion. The grain slurry is then pumped into fermenters, where yeast is added, to begin the batch-fermentation process. Fermentation is the process by which yeast converts the sugar into alcohol and carbon dioxide. After the fermentation is complete, a vacuum distillation system removes the alcohol from the corn mash. The 95% (190-proof) alcohol from the distillation process is then transported to a molecular sieve system, where it is dehydrated to 100% alcohol (200 proof). The 200-proof alcohol is then pumped to storage tanks and blended with a denaturant, usually natural gasoline. The 200-proof alcohol and 2.0-2.5% denaturant together constitute denatured fuel ethanol.

Corn mash left over from distillation is pumped into a centrifuge for dewatering. The liquid from the centrifuge, known as thin stillage, is then pumped from the centrifuges to an evaporator, where it is concentrated into a syrup. The solids that exit the centrifuge, known as the wet cake, are conveyed to the dryer system. Syrup is added to the wet cake as it enters the dryer, where moisture is removed. The process produces distillers’ grains with solubles, which is used as a high-protein/fat animal-feed supplement. Dry-mill ethanol processing creates three forms of distillers’ grains: wet distillers’ grains with solubles, known as wet distillers’ grains; modified wet distillers’ grains with solubles, known as modified distillers’ grains; and dry distillers’ grains with solubles, known as dry distillers’ grains. Wet and modified distillers’ grains have been dried to approximately 65% and 50% moisture levels, respectively, and are predominately sold to nearby markets. Dried distillers’ grains have been dried to 11% moisture, have an almost indefinite shelf life and may be sold and shipped to more distant markets.

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

RAW MATERIALS

Corn

In 2015, the ethanol industry consumed approximately 5.2 billion bushels of corn, which approximated 38% of the 13.6 billion bushels of 2014 domestic corn production according to the U.S. Department of Agriculture.

Our production facilities produce ethanol by using a dry-mill process, which yields approximately 2.8 gallons of denatured ethanol per bushel of corn. When our South Dakota facilities are operating at capacity, they process approximately 27 million bushels of corn per year. We have a grain origination agreement with South Dakota Wheat Growers Association (“SDWG”) under which SDWG originates, stores and delivers corn to the Aberdeen and Huron plants. Although our agreement with SDWG allows us to purchase corn from other sources, we have historically not done this. Our agreement with SDWG was automatically renewed in November 2016 expires in November 2019.

We purchase corn from SDWG through forward fixed-priced contracts, forward basis contracts and daily spot pricing. Our forward contracts specify the amount of corn, the price and the time period over which the corn is to be delivered. These forward contracts are at fixed-prices or prices based on the Chicago Board of Trade (“CBOT”) prices.

Natural Gas

When our South Dakota facilities operate at capacity, they require approximately 2.1 million British Thermal Units (“mmbtu”) of natural gas per year. Natural gas prices and availability are affected by weather conditions and overall economic conditions. We have constructed our own natural gas pipeline for the Aberdeen plant. This pipeline originates at a mainline and allows our Aberdeen plant to source gas from various national marketers without paying transportation cost to the local utility. Our Huron plant does not have an owned pipeline and is subject to additional transportation charges. The Huron plant generally purchases its natural gas from national suppliers. Natural gas prices can be volatile; therefore from time to time we use hedging strategies to reduce our exposure to natural gas price fluctuations.

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Shipment of Ethanol by Rail Car

We transport our ethanol to our customers primarily via tanker rail cars. As of September 30, 2016, we are leasing ethanol tank cars under leases that expire at varying times over the next four years. Over the past several years, there have periodically been periods of increased rail traffic congestion throughout the United States, primarily due to the increase significant in cargo trains carrying shale oil. From time to time, this congestion has affected our ability to have our tanker rail cars return to the Aberdeen and Huron plants on a timely basis. Delays in returning rail cars to our plants may affect our ability to operate our plants at full capacity due to ethanol storage capacity constraints. To mitigate this risk, the Company added one million gallons of denatured ethanol storage at the Aberdeen plant which became operational in January 2015. The Company may also consider additional storage capacity at the Huron plant in the future.

ENVIRONMENTAL MATTERS

We are subject to various federal, state and local environmental laws and regulations, including those relating to the discharge of materials into the air, water and ground; the generation, storage, handling, use, transportation and disposal of hazardous materials; and the health and safety of our employees. Any violation of these laws and regulations or permit conditions could result in substantial fines, natural resource damage, criminal sanctions, and damage claims from third parties, and permit revocations or facility shutdowns. We believe we are currently in substantial compliance with environmental laws and regulations and do not anticipate a material adverse effect on our business or financial condition as a result of our efforts to comply with these requirements. However, our business is still subject to risks associated with environmental and other regulations and associated costs. Protection of the environment requires us to incur expenditures for equipment, processes and permitting. We use various pollution control equipment in our production facilities. In the fiscal 2015 first quarter, we installed a Continuous Emissions Monitoring System (“CEMS”) at our Aberdeen plant to enable us to burn increased levels of natural gas while ensuring compliance with emissions regulations. The total capital expenditure related to the bag house and CEMS unit was approximately $420,000.

EMPLOYEES

As of December 1, 2016, we had 60 full-time employees. None of our employees are covered by a collective bargaining agreement.

SEASONALITY

Our operating results are influenced by seasonal fluctuations in the price of our primary operating inputs, corn and natural gas, and the price of our primary products, ethanol and distillers’ grains. Historically, the spot price of corn tends to rise during the spring planting season in May and June and tends to decrease during the fall harvest in October and November. The price for natural gas however, tends to move opposite of corn and tends to be lower in the spring and summer and higher in the fall and winter. The price of distillers’ grains tends to rise during the fall and winter cattle feeding seasons and be lower in the spring and summer when pasture grazing is readily available, although this effect can be mitigated if export markets are strong.

REPORTS

The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports are available on the Company’s website www.advancedbioenergy.com as soon as reasonably practicable after it electronically files such materials with the SEC.

 

 

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RISKS RELATED TO OUR BUSINESS

Current ABE South Dakota debt financing agreements contain restrictive covenants. Our failure to comply with applicable debt financing covenants and agreements could have a material adverse effect on our business, results of operations and financial condition.

The terms of our existing debt financing agreements contain, and any future debt financing agreements we enter into may contain, financial, maintenance, organizational, operational or other restrictive covenants. If ABE South Dakota is unable to comply with these covenants or service its debt, we may be forced to reduce or delay planned capital expenditures, sell assets, restructure our indebtedness or submit to foreclosure proceedings, any of which could result in a material adverse effect upon our business, results of operations and financial condition

Our financial performance is highly dependent on commodity prices, which are subject to significant volatility, uncertainty, and supply disruptions, so our results may be materially adversely affected.

Our results of operations and financial condition are significantly affected by the cost and supply of corn and natural gas, and by the selling price for ethanol, distillers’ grains, corn oil and gasoline, which are commodities. Changes in the price and supply of these commodities are subject to and determined by market forces over which we have no control.

Our revenues exclusively depend on the market prices for ethanol, distillers’ grains and corn oil. These prices can be volatile due to a number of factors, including overall supply and demand, the price of corn, the price of and demand for gasoline, the level of government support and the availability and price of competing products.

Certain members beneficially own a large percentage of our units, which may allow them to collectively control substantially all matters requiring member approval and, certain of our principal members, including Hawkeye Energy Holdings, LLC and Clean Energy Capital, LLC (f/k/a Ethanol Capital Management, LLC) (“CEC”), have been granted other special voting rights.

In August 2009, we and each of our then current directors, South Dakota Wheat Growers Association, CEC and Hawkeye executed a Voting Agreement (the “Voting Agreement”). The Voting Agreement, among other things, requires the parties to (a) nominate for election to the board two designees of Hawkeye, two designees of CEC and the Chief Executive Officer of the Company, (b) recommend to the members the election of each of these designees, (c) vote (or act by written consent) all units (or other voting equity securities) of the Company they beneficially own, hold of record or otherwise control at any time, in person or by proxy, to elect each of the designees to the board, (d) not take any action that would result in (and take any action necessary to prevent) the removal of any of the designees from the board or the increase in the size of the board to more than nine members without the consent of the Hawkeye, CEC and Chief Executive Officer, and (e) not grant a proxy with respect to any units that is inconsistent with the parties’ obligations under the Voting Agreement. The Company has also granted Hawkeye board observation rights under the Voting Agreement. At December 1, 2016, the parties to the Voting Agreement held in the aggregate approximately 46% of the outstanding units of the Company.

As a result of the Voting Agreement, Hawkeye and CEC have the ability to significantly influence the outcome of any actions taken by our board of directors. In addition, given the large ownership of these two entities, they can significantly influence other actions, such as amendments to our operating agreement, mergers, going private transactions, and other extraordinary transactions, and any decisions concerning the terms of any of these transactions. The ownership and voting positions of these members may have the effect of delaying, deterring, or preventing a change in control or a change in the composition of our board of directors. These members may also use their contractual rights, including access to management, and their large ownership position to address their own interests, which may be different from those of our other members.

We are required to sell substantially all of our ethanol to NGL Energy Partners LP, which may place us at a competitive disadvantage and reduce profitability.

The Company’s operating subsidiary, ABE South Dakota, has ethanol marketing agreements with NGL Energy Partners, LP (“NGL”), a diversified energy business. These ethanol marketing agreements require that we sell to NGL all of the denatured fuel-grade ethanol produced at the South Dakota plants. These ethanol marketing agreements expire on June 30, 2019.

ABE South Dakota depends on NGL to market ABE’s ethanol and manage the logistics of ABE South Dakota’s rail cars to ensure ABE South Dakota is able to continue producing ethanol without exceeding its storage capacity, which would result in unplanned slowdowns or shut downs. Any failure or default by NGL in its obligations to ABE South Dakota may negatively affect our profitability.

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We depend upon NGL to market the ethanol we produce, and we sublease from NGL a majority of the ethanol rail cars we use to transport our ethanol to customers. If we are unable to renew these agreements with NGL, our liquidity and profitability could be adversely affected, if we are unable to find similar pricing and payment terms from other marketers.

We depend on others for sales of our products, which may place us at a competitive disadvantage and reduce profitability.

As noted above, we currently have agreements with a third-party marketing firm, NGL, to market all of the ethanol we produce at our facilities. We also contract with third parties to market the sale of most of the distillers’ grains produced at our South Dakota plants, and corn oil produced at the Aberdeen plant. We also begin producing corn oil at the Huron plant in October 2016. If the ethanol or co-product marketers breach their contracts or do not have the ability, for financial or other reasons, to market all of the ethanol we produce or to market the co-products produced at the South Dakota plants, we may not have any readily available alternative means to sell our products. Our lack of a sales force and reliance on these third parties to sell and market most of our products may place us at a competitive disadvantage. Our failure to sell all of our ethanol and co-products may result in lower revenues and reduced profitability.

We are exposed to credit risk resulting from non-payment by significant customers.

We have a concentration of credit risk because our ABE South Dakota subsidiary generally sells all of its ethanol to a single customer. Although we typically receive payments within twenty days from the date of sale for our ethanol, distillers’ grains and corn oil, we continually monitor this credit risk exposure. In addition, we may prepay for or make deposits on undelivered inventories. Our credit risk concentrations for inventory advances are primarily with a few major suppliers of petroleum products and agricultural inputs. The inability of a third party to pay our accounts receivable or to deliver us inventory for advance payments we made may cause us to experience losses and may adversely affect our liquidity and our ability to make our payments when due. As of September 30, 2016, the total receivable balance at ABE South Dakota was $4.6 million, of which 97% was due from three customers.

Our profitability depends on the spread between ethanol and corn prices, which can vary significantly.

Gross profit on gallons produced at our facilities, which accounts for the substantial majority of our operating income, principally depends on the spread between ethanol and corn prices.

The price of corn is influenced by weather conditions (including droughts or excess rainfall) and other factors affecting crop yields, farmer planting decisions and general economic, market and regulatory factors, including government policies and subsidies with respect to agriculture and international trade, and global and local supply and demand. Conversely, ethanol prices are primarily influenced by market demand and can fluctuate widely depending on industry-wide ethanol inventory levels.

Volatility in oil and gas prices may materially affect ethanol pricing and demand and make it difficult to manage profit margins.

Ethanol has historically traded at a discount to gasoline; however with the recent volatility in oil and gas prices, ethanol prices have also fluctuated. When ethanol trades at a discount to gasoline it encourages discretionary blending, thereby increasing the demand for ethanol beyond required blending rates. Conversely, when ethanol trades at a premium to gasoline, there is a disincentive for discretionary blending and ethanol demand is negatively affected. Consequently, ethanol pricing and demand may also be volatile, which makes it difficult to manage profit margins and which could result in a material adverse effect on our business, results of operations and financial condition.

The market for natural gas is subject to market conditions that create uncertainty in the price and availability of the natural gas that we use in our manufacturing process.

Natural gas costs represented approximately 4.2% of our cost of goods sold in the year ended September 30, 2016. We rely upon third parties for our supply of natural gas that we consume to produce ethanol. The prices for and availability of natural gas are subject to volatile market conditions. These market conditions often are affected by factors beyond our control such as higher prices resulting from colder than average weather conditions, hurricanes in the Gulf of Mexico, and the expansion of hydraulic fracturing in the U.S. over the past several years, which has expanded domestic supplies, and overall economic conditions. Significant disruptions in the supply of natural gas could impair our ability to produce ethanol. Furthermore, increases in natural gas prices or changes in our natural gas costs relative to natural gas costs paid by competitors may adversely affect our results of operations and financial position. Natural gas prices over the period from October 1, 2012 through September 30, 2016, based on the New York Mercantile Exchange or NYMEX, daily futures data, have ranged from a low of $2.44 per million British Thermal Units, or mmbtu, on April 27, 2015 to a high of $6.49 per mmbtu on February 24, 2014. At September 30, 2016, the NYMEX price of natural gas was $3.24 per mmbtu.

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We may engage in hedging transactions and other risk mitigation strategies that could harm our results.

We are exposed to a variety of market risks, including the effects of changes in commodity prices. Hedging activities can result in losses when a position is purchased in a declining market or a position is sold in a rising market. We cannot ensure that we will not experience hedging losses in the future. Hedging arrangements also expose us to the risk of financial loss in situations where the other party to the hedging contract defaults on its contract or, in the case of exchange-traded contracts, where there is a change in the expected differential between the underlying price in the hedging agreement and the actual prices paid or received by us. In addition, failure to have adequate capital to use various hedging strategies, may expose us to substantial risk of loss, or result in a loss for our company. As of September 30, 2015 and 2016, we did not have any derivative contracts outstanding.

Our lack of business diversification could result in adverse operating results if our revenues from our primary products decrease.

Our business consists of the production and sale of ethanol, distillers’ grains, and corn oil. We do not have any other lines of business or other potential sources of revenue. Our lack of business diversification could cause us to shut down operations and be unable to meet financial obligations if we are unable to generate positive cash flows from the production and sale of ethanol and co-products because we do not currently expect to have any other lines of business or alternative revenue sources.

Our operating results may fluctuate significantly, which makes our future results difficult to predict and could cause our operating results to fall below expectations.

Our operating results have fluctuated in the past and may fluctuate significantly in the future due to a variety of factors, many of which are outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful, and our past results do not necessarily indicate our future performance.

We depend on certain key personnel, and the loss of any of these persons may prevent us from implementing our business plan in an effective and timely manner.

Our success depends largely upon the continued services of our chief executive officer and other key personnel. Any loss or interruption of the services of one of these key personnel could result in our inability to manage our operations effectively or pursue our business strategy.

RISKS RELATED TO OUR UNITS

We have placed significant restrictions on transferability of the units, no public trading market exists for our units and there is no assurance that unit holders will receive future cash distributions.

Our units are subject to substantial transfer restrictions pursuant to our operating agreement. As a result, investors may not be able to liquidate their investments in the units and, therefore, may be required to assume the risks of investments in us for an indefinite period of time, which may be the life of our Company.

Further, although our units are now listed on an internet-based matching platform, there is currently no established public trading market for our units, and we do not anticipate an active trading market will develop. In order for the Company to maintain its partnership tax status, unit holders may not trade the units on an established securities market or readily trade the units on a secondary market (or the substantial equivalent thereof).

To help ensure that a secondary market does not develop, our operating agreement prohibits transfers without the approval of our board of directors. The board of directors will not approve transfers unless they fall within “safe harbors” contained in the publicly traded partnership rules under the tax code, which include, without limitation, the following:

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Distributions are payable at the sole discretion of our board of directors, subject to the provisions of the Delaware Limited Liability Company Act, our operating agreement and the requirements of our creditors. We cannot ensure that we will make cash distributions in the future. Our board may elect to retain future profits to provide operational financing for the plants, debt retirement and possible plant expansion, the construction or acquisition of additional plants or other company opportunities. This means that members may receive little or no return on their investment and be unable to liquidate their investment due to transfer restrictions and lack of a public trading market.

Our members have limited voting rights.

Members cannot exercise control over our daily business affairs. Subject to the provisions in our operating agreement, our board of directors may modify our business plans without the members’ consent.

In addition to the election of directors, the disposition of substantially all of our assets through merger, exchange or otherwise, except for dissolution of our Company or a transfer of our assets to a wholly owned subsidiary, requires the affirmative vote of a majority of our membership voting interests.

Our members may only propose amendments to the Operating Agreement if they hold more than 1% of the units outstanding. Members may demand a member meeting only if they represent a majority of the membership voting interests.

Amendments to our operating agreement (other than amendments that would modify the limited liability of a member or alter a member’s economic interest, which requires a two-thirds vote of the membership interests adversely affected) require the affirmative vote of a majority of the membership voting interests represented at a meeting.

RISKS RELATED TO THE ETHANOL INDUSTRY

If demand does not sufficiently increase and production capacity and imported ethanol increase, industry overcapacity could develop.

According to the RFA, domestic ethanol production capacity has increased dramatically from 1.7 billion gallons per year in January 1999 to 15.4 billion gallons per year as of December 2016. In addition to this increase in production capacity, excess ethanol production capacity also may result from decreases in the demand for ethanol or increased imported supply, which could result from a number of factors, including but not limited to, regulatory developments, reduced exports and reduced gasoline consumption in the U.S. Reduced gasoline consumption could occur as a result of increased prices for gasoline or crude oil, which could cause businesses and consumers to reduce driving or acquire vehicles with more favorable gasoline mileage, or as a result of technological advances, such as the commercialization of engines utilizing hydrogen fuel-cells, which could supplant gasoline-powered engines. There are a number of governmental initiatives designed to reduce gasoline consumption, including tax credits for hybrid vehicles and consumer education programs. In August 2012, the Federal government issued regulations to increase fuel efficiency and reduce greenhouse gas pollution for all new cars and trucks sold in the United States. These new standards will cover cars and light trucks for Model Years 2017-2025, requiring performance equivalent to 54.5 mpg in 2025. These standards are likely to reduce the overall demand for gasoline, and therefore ethanol.

Any increase in the supply of distillers’ grains, without corresponding increases in demand, could lead to lower prices or an inability to sell our distillers’ grains. A decline in the price of distillers’ grains, or the distillers’ grains market generally, could have a material adverse effect on our business, results of operations and financial condition.

Volatility in gasoline selling price and production cost may reduce our gross margins.

Ethanol is used both as a fuel additive to reduce vehicle emissions and as an octane enhancer to improve the octane rating of the gasoline with which it is blended. Therefore, the supply and demand for gasoline affects the price of ethanol, and our business and future results of operations may be materially adversely affected if gasoline demand or price decreases.

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The price of distillers’ grains is affected by the price of other commodity products; decreases in the price of these commodities could decrease the price of distillers’ grains.

Distillers’ grains compete with other protein-based animal feed products. The price of distillers’ grains may decrease when the price of competing feed products decrease. The prices of competing animal feed products are based in part on the prices of the commodities from which they are derived. Downward pressure on commodity prices, such as corn and soybean meal, will generally cause the price of competing animal feed products to decline, resulting in downward pressure on the price of distillers’ grains. Because the price of distillers’ grains is not tied to production costs, decreases in the price of distillers’ grains will result in us generating less revenue and lower profit margins.

Growth in the sale and distribution of ethanol depends on the changes in and expansion of related infrastructure, which may not occur on a timely basis, if at all, and our operations could be adversely affected by infrastructure disruptions.

Ethanol is currently blended with gasoline to meet regulatory standards as a clean air additive, an octane enhancer, a fuel extender and a gasoline alternative. In 2015, the United States consumed 13.95 billion gallons of ethanol representing 9.9% of the 140.43 billion gallons of finished motor gasoline consumed, according to the U.S Energy Information Administration (“EIA”). Ethanol plants in the United States produced 14.8 billion gallons in 2015, approximately 0.5 billion gallons more than were produced in 2014. The demand for ethanol is affected by what is commonly referred to as the “blending wall”, which is a regulatory cap on the amount of ethanol that can be blended into gasoline. The blend wall affects the demand for ethanol, and as industry production capacity reaches the blend wall, the supply of ethanol in the market may surpass the demand. Assuming current gasoline usage in the U.S. at 140.43 billion gallons per year and a blend rate of 10% ethanol and 90% gasoline, the current blend wall is approximately 14.0 billion gallons of ethanol per year. In order to expand demand for ethanol, higher percentage blends must be used in standard vehicles.

To drive growth in ethanol usage, Growth Energy requested a waiver from the EPA to increase the allowable amount of ethanol blended into gasoline from the current 10% level to a 15% level. A final decision, announced on October 13, 2010, allows for E15 usage in 2007 and newer vehicles, and was updated on January 21, 2011 to include 2001 to 2006 vehicles. Although regulatory issues remain in many states, E15 is now available in limited locations in 23 states.

Additional infrastructure will be required to handle the additional 5% of blending including:

Without infrastructure investments by unrelated parties, the demand for ethanol may not increase, which could have an adverse effect on our business.

Corn-based ethanol may compete with cellulose-based ethanol in the future, which could make it more difficult for us to produce ethanol on a cost-effective basis.

A current focus in ethanol production research is the development of an efficient method of producing ethanol from cellulose-based biomass, such as agricultural waste, forest residue, and municipal solid waste and energy crops. This focus is driven by governmental mandates including the Renewable Fuels Standard, as most recently amended (“RFS2”), and the fact that cellulose-based biomass would create opportunities to produce ethanol in areas that are unable to grow corn. Furthermore, ethanol produced from cellulose based biomass is generally considered to emit less carbon emission than ethanol produced from corn. If an efficient method of producing ethanol from cellulose-based biomass is developed and commercialized on a large scale, we may not be able to compete effectively. There is currently one commercial scale cellulosic ethanol plants operating. We currently believe it would not be cost-effective for us to convert our existing plants into cellulose-based biomass facilities. If we are unable to produce ethanol as cost effectively as cellulose-based producers, our ability to generate revenue and operate profitably will be negatively affected.

Competition from new or advanced technology may lessen the demand for ethanol and negatively affect our profitability.

Alternative fuels, gasoline oxygenates and ethanol production methods are continually under development. A number of automotive, industrial and power generation manufacturers are developing more efficient engines, hybrid engines and alternative clean power systems using fuel cells or clean burning gaseous fuels. Vehicle manufacturers are working to develop vehicles that are more

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fuel efficient and have reduced emissions using conventional gasoline. Vehicle manufacturers have developed and continue to work to improve hybrid technology, which powers vehicles by engines that utilize both electric and conventional gasoline fuel sources. In the future, the emerging fuel cell industry will offer a technological option to address increasing worldwide energy costs, the long-term availability of petroleum reserves and environmental concerns. Fuel cells have emerged as a potential alternative to certain existing power sources because of their higher efficiency, reduced noise and lower emissions. Fuel cell industry participants are currently targeting the transportation, stationary power and portable power markets to decrease fuel costs, lessen dependence on crude oil and reduce harmful emissions. If the fuel cell and hydrogen industries continue to expand and gain broad acceptance, and hydrogen becomes 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, which would adversely affect our profitability and reduce the value of our units.

Competition in the ethanol industry could limit our growth and harm our operating results.

The market for ethanol and other biofuels is highly competitive. Our current and prospective competitors include many large companies that have substantially greater market presence, geographic diversity, name recognition and financial, marketing and other resources than we do. We compete directly or indirectly with large companies, such as  Archer Daniels Midland Company; Cargill, Inc.; Flint Hills Resources, LLC; Green Plains Renewable Energy, Inc.; POET, LLC and Valero Energy Corporation and with other companies that are seeking to develop large-scale ethanol plants and alliances. Pressure from our competitors could require us to reduce our prices or increase our spending for marketing, which would erode our margins and could have a material adverse effect on our business, financial condition and results of operations.

Imported ethanol may be a less expensive alternative to domestic ethanol, which would cause us to lose market share and reduce the value of your investment.

Brazil is currently the world’s second largest producer and exporter of ethanol. In Brazil, ethanol is produced primarily from sugarcane, which can be less costly to produce than U.S. corn-based ethanol. Now that import tariffs have been removed, a significant barrier to entry into the U.S. ethanol market has been eliminated. Competition from ethanol imported from Brazil or Caribbean or Central American countries may affect our ability to sell our ethanol profitably.

RISKS RELATED TO ETHANOL PRODUCTION

Operational difficulties at our plants could negatively affect our sales volumes and could cause us to incur substantial losses.

Our operations are subject to unscheduled downtime and operational hazards inherent to our industry, such as equipment failures, utility outages, fires, explosions, abnormal pressures, blowouts, pipeline ruptures, transportation disruptions and accidents and natural disasters. We may have difficulty managing the process maintenance required to maintain our nameplate production capacities. If our ethanol plants do not produce ethanol and distillers’ grains at the levels we expect, our business, results of operations, and financial condition may be materially adversely affected.

Improperly trained employees may not follow procedures, resulting in damage to certain parts of the ethanol production facility, which could negatively affect operating results if our plants do not produce ethanol and its by-products as anticipated.

The production of ethanol and distillers’ grains demands continuous supervision and judgments regarding mixture rates, temperature and pressure adjustments. Errors of judgment due to lack of training or improper manufacturer instructions could send chemicals into sensitive areas of production, which may reduce or halt ethanol or distillers’ grains production at our facilities.

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

There have been periodic significant increases in rail traffic congestion throughout the United States primarily due to the increase in cargo trains carrying shale oil. From time to time, this congestion has and may continue to affect our ability to have our tanker rail cars return to the Aberdeen and Huron plants on a timely basis. Delays in returning rail cars to our plants may affect our ability to operate our plants at full capacity due to ethanol storage capacity constraints. In response to the rail congestion issues we constructed an additional one million gallons of denatured ethanol storage at our Aberdeen, South Dakota plant. The additional storage became operational in January 2015 and increased the total denatured ethanol storage at the Aberdeen plant to approximately two million gallons. We are evaluating whether to add ethanol storage at our Huron, South Dakota plant.

We may have difficulty obtaining enough corn to operate the plants profitably.

There may not be an adequate supply of corn produced in the areas surrounding our plants to satisfy our requirements. Even if there is an adequate supply of corn and we make arrangements to purchase it, we could encounter difficulties finalizing the sales

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transaction and managing the delivery of the corn, including difficulties caused by inclement weather. If we do not obtain corn in the quantities we plan to use, we may not be able to operate our plants at full capacity. If the price of corn in our local markets is higher due to lack of supply, drought, or other reasons, our profitability may suffer and we may incur significant losses from operations. As a result, our ability to make a profit may decline.

RISKS RELATED TO REGULATION AND GOVERNMENTAL ACTION

We are exposed to additional regulatory risk that may prevent the sale of our products to customers located in certain states or require us to change the way we operate.

Legislative acts by the State of California and the Environmental Protection Agency (i.e. RFS2) require cleaner emissions and reduced carbon footprints including effects caused by indirect land use. These acts, when implemented, may prohibit the sale of our products to certain customers, which may materially adversely impact our results from operations, or may require us to procure feedstock and market our products in a fashion that negatively impacts our financial performance.

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

Various federal and state laws, regulations and programs affect the demand for ethanol as a fuel or fuel additive. Tariffs generally apply to the import of ethanol from other countries. These laws, regulations and programs are constantly changing. Federal and state legislators and environmental regulators could adopt or modify laws, regulations or programs that could adversely affect the use of ethanol.

On November 23, 2016, the EPA announced final RVO requirements for the RFS for calendar year 2017. The conventional biofuel requirement of 15 billion gallons is an increase from the 14.8 billion gallons in the rule proposed in May 2016. This final rule achieves the statutory requirement level as originally set by Congress when the RFS was enacted. However, opponents of ethanol such as large oil companies will likely continue their efforts to repeal or reduce the RFS through lawsuits or lobbying of Congress. Successful reduction or repeal of the blending requirements of the RFS could result in a significant decrease in ethanol demand.

Current ethanol production capacity is approximately 15.4 billion gallons according to the RFA. Reduction of blending requirements could reduce the demand for and price of ethanol. If demand for ethanol decreases, it could materially adversely affect our business, results of operations and financial condition.

The U.S. Department of Transportation will require the tanker cars we use to transport ethanol to be replaced or retrofitted to meet new rail safety standards.

We use tanker rail cars to transport the majority of the ethanol produced at our facilities. We currently have 272 tanker cars under lease. The tanker cars used by our company and the rest of the ethanol industry are DOT-111 tanker cars; these are the same type of tanker cars used by the oil industry to transport crude oil.

In response to various incidents on the rail system involving the transportation of crude oil products, the Department of Transportation (“DOT”) has issued new safety regulations surrounding the transportation of highly flammable liquids, which includes not only crude oil products, but ethanol. The DOT originally proposed a three-year timetable for replacing or modifying current DOT-111 railcars used in ethanol service. However, the ethanol industry argued that it should be afforded more time because corn-based fuel shipped by rail poses less of a risk to public safety than crude oil. The DOT’s final rule gave the ethanol industry until May 1, 2023 to replace or retrofit current DOT-111 cars. Although the extended timetable was a positive outcome for the ethanol industry, the new requirements could result in a shortage of compliant tanker cars. This could have an adverse impact on our operations, because we may be faced with drastically increased lease costs or be forced to retrofit the tanker cars we have under lease, which could have an adverse impact on our business both in the cost of the retrofits as well as potential disruption to our production as a result of cars being out of service while they are retrofitted.

Imported ethanol could undermine the ethanol industry in the U.S.

Imported ethanol is no longer subject to any tariffs since December 31, 2011. Since production costs for ethanol in many countries may be less from time to time than what they are in the U.S., the duty-free import of ethanol may negatively affect the demand for domestic ethanol and the price at which we sell our ethanol.

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

In November 2015, in response to Food Safety and Modernization Act (“FSMA”) implemented in 2011, the Food and Drug Administration (“FDA”) issued final rules for Current Good Manufacturing Practices (“CGMP”): Hazard Analysis, Risk-Based Preventative Controls and Oversight and Management of Preventative Controls for human and animal food facilities. The final rules require FDA-registered food facilities to address safety concerns for sourcing, manufacturing and shipping food products through food safety programs and plans, which includes conducting hazard analyses, developing risk-based preventative controls and monitoring, and addressing intentional adulteration, recalls, sanitary transportation and supplier verification.  The implementation of the final rule varies depending on the size of the organization and other criteria.  We are subject to CGMP compliance beginning September 2017 with preventive controls becoming effective one year later.  We are currently in the process of preparing a detailed compliance plan using third party resources and training our employees on the requirements of FSMA. Implementation of the final regulations may change our operating procedures for the production, handling and sale of distillers’ grains, and may increase our operating and compliance costs.

Actions by the Chinese government may limit the sale of distillers’ grains to China.

China is currently the largest export market for U.S. dry distillers’ grains. China imported 6.3 million metric tons in 2015, or approximately one half of all distillers’ grains exported. In late 2013, the Chinese government signaled its intent to regulate the quality of food imports into China. To achieve this goal, the China AQSIQ (General Administration of Quality Supervision, Inspection and Quarantine) agency indicated that it would require U.S. food producers to register and comply with Chinese food preparation guidelines, and the U.S. government to monitor the production of food products in the U.S. that are exported to China, in a manner similar to the system proposed under the FSMA.

In November 2013, Chinese authorities rejected corn shipments to China because the cargoes included MIR162, a variety of genetically engineered, insect-resistant corn that had been approved in the United States and a number of other countries but not in China. In June 2014, quarantine authorities in China stopped issuing permits for the import of dried distillers’ grains from the United States due to the presence of MIR162 in shipments.

In late December 2014, Chinese officials lifted the ban on MIR162, thereby re-opening the market for distiller’s grains exports to China. Once the ban had been lifted, China resumed imports of distiller’s grains. If China were to reinstate the ban on MIR162 or take similar action, it could decrease demand for distillers’ grains and decrease distillers’ grain prices in the United States’ domestic market by decreasing worldwide demand.

Chinese investigations into United States distillers grains exports into China could negatively affect the demand and pricing for distillers grains.

In January 2016, China’s Ministry of Commerce (“MOC”) launched anti-dumping and countervailing duties investigations into U.S. distillers grains being imported into China. The anti-dumping investigation is in response to claims made by Chinese producers that U.S. distillers grains were being sold at prices below normal value, thereby damaging the domestic industry.  The countervailing duties investigation is in response to claims that U.S. distillers grain exports are subsidized by the U.S. government. On September 23, 2016, China's MOC issued a preliminary duty of 33.8 percent for all producers related to the antidumping investigation on U.S. distillers grain, due at the time of product arrival.  On September 28, 2016, MOC issued preliminary duties of between 10 and 10.7 percent, depending on the producer of the product, related to the countervailing duty investigation on U.S. distillers grain; this is also due at time of product arrival.  These duties were larger than expected and market prices for U.S. distillers began to drop following the imposition of these duties.

China is the world’s largest importer of distillers grain, and accounted for 50 percent of the U.S. distillers exports in 2015.  We cannot estimate the exact effect these duties will have on the overall domestic distillers grains market.  However, the U.S. is the world's largest exporter of distillers grains, and if the duties remain in place once the MOC makes a final determination on its investigations, it will likely continue to reduce distillers grains prices in the domestic market by decreasing worldwide demand for distillers grains.

Various studies have criticized ethanol, and could lead to the reduction or repeal of government regulations such as the RFS that promote the use and domestic production of ethanol.

Although many trade groups, academics and governmental agencies have supported ethanol as a fuel additive that promotes a cleaner environment, others have criticized ethanol production as consuming considerably more energy and emitting more greenhouse gases than other biofuels. Other studies have suggested that corn-based ethanol is less efficient than ethanol produced from switch grass or wheat grain and that ethanol’s demand on corn has resulted in higher food prices and shortages. If these views gain

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widespread acceptance, support for existing measures promoting use and domestic production of corn-based ethanol could decline, leading to reduction or repeal of these measures.

We may be adversely affected by environmental, health and safety laws, regulations and liabilities.

We are subject to extensive air, water and other environmental regulations, including those relating to the discharge of materials into the air, water and ground; the generation, storage, handling, use, transportation and disposal of hazardous materials; and the health and safety of our employees. In addition, the plants we operate or manage need to maintain a number of environmental permits. Each ethanol plant we operate or manage is subject to environmental regulation by the State of South Dakota and by the EPA. These laws, regulations and permits can often require expensive pollution control equipment or operational changes to limit actual or potential impacts on the environment. A violation of these laws and regulations or permit conditions can result in substantial fines, natural resource damages, criminal sanctions, permit revocations or facility shutdowns, liability for the costs of investigation or remediation and for damages to natural resources. Our operating subsidiary may also be subject to related claims by private parties alleging property damage and personal injury due to exposure to hazardous or other materials from those plants.

Environmental issues, such as contamination and compliance with applicable environmental standards, could arise at any time during operation of an ethanol plant. If this occurs, our operating subsidiary could be required to spend significant resources to remedy the issues and may limit operation of the ethanol plant. Our operating subsidiary may be liable for the investigation and cleanup of environmental contamination that might exist or could occur at each of the properties that it owns or operates where it handles hazardous substances. If these substances have been or are disposed of or released at sites that undergo investigation or remediation by regulatory agencies, our operating subsidiary may be responsible under the CERCLA (otherwise known as the “Superfund Act”) or other environmental laws for all or part of the costs of investigation and remediation, and for damages to natural resources. Our operating subsidiary may also be subject to related claims by private parties, including our employees and property owners or residents near the plants, alleging property damage and personal injury due to exposure to hazardous or other materials at or from those plants. Additionally, employees, property owners or residents near our ethanol plants could object to the air emissions or water discharges from our ethanol plants. Ethanol production has been known to produce an unpleasant odor. Environmental and public nuisance claims or toxic tort claims could be brought against us as a result of this odor or their other releases to the air or water. Some of these matters may require us to expend significant resources for investigation, cleanup, installation of control technologies or other compliance-related items, or other costs.

Additionally, the hazards and risks associated with producing and transporting our products (such as fires, natural disasters, explosions, abnormal pressures and blowouts) may also result in personal injury claims by third parties or damage to property owned by us or by third parties. We could sustain losses for uninsurable or uninsured events, or in amounts in excess of existing insurance coverage. Events that result in significant personal injury to third parties or damage to property owned by us or third parties or other losses that are not fully covered by insurance could have a material adverse effect on our business, results of operations and financial condition.

We also cannot ensure that our operating subsidiary will be able to comply with all necessary permits to continue to operate its ethanol plants. Failure to comply with all applicable permits and licenses could subject our operating subsidiary to future claims or increase costs and materially adversely affect our business, results of operations and financial condition. Additionally, environmental laws and regulations, both at the federal and state level, are subject to change and these changes can be made retroactively. Consequently, even if our operating subsidiary obtains the required permits, it may be required to invest or spend considerable resources to comply with future environmental regulations, such as regulation of greenhouse gasses, or new or modified interpretations of those regulations, which could materially adversely affect our business, results of operations and financial condition. Present and future environmental laws and regulations (and interpretations thereof) applicable to the operations of our operating subsidiary, more vigorous enforcement policies and discovery of currently unknown conditions may require substantial expenditures that could have a material adverse effect on our business, results of operations and financial condition.

Our employees are exposed to the physical hazards of heights, rotating, motorized mechanical and mobile machinery, and equipment and chemicals. Despite procedures, training, physical and engineered barriers and preventative measures, we may still be exposed to liabilities of Occupational Safety and Health Administration fines and incur potential punitive damages as a result of employee injuries that fall outside the workman’s compensation program and insurable losses.

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RISKS RELATED TO TAX ISSUES

Income allocations assigned to unit holder units may result in taxable income in excess of cash distributions, which means unit holders may have to pay income tax on their investment with personal funds.

Unit holders will be required to pay tax on their allocated shares of our taxable income. It is likely that a unit holder will receive allocations of taxable income in some years that result in a tax liability that is in excess of any cash distributions we may make to the unit holder in that year. Among other things, this result might occur due to accounting methodology, lending covenants that restrict our ability to pay cash distributions, or our decision to retain the cash generated by the business to fund our operating activities and obligations. In the event unit holders have used prior tax losses to offset non-ABE taxable income, the use of these losses may result in future tax liability.

IRS classification of the company as a corporation rather than as a partnership would result in higher taxation and reduced profits.

We are a Delaware limited liability company that has elected to be taxed as a partnership for federal and state income tax purposes, with income, gain, loss, deduction and credit passed through to the holders of the units. However, if for any reason the IRS successfully determines that we should be taxed as a corporation rather than as a partnership, we would be taxed on our net income at rates of up to 35% for federal income tax purposes, and all items of our income, gain, loss, deduction and credit would be reflected only on our tax returns and would not be passed through to the holders of the units. If we were to be taxed as a corporation for any reason, distributions we make to investors will be treated as ordinary dividend income to the extent of our earnings and profits, and the payment of dividends would not be deductible by us, thus resulting in double taxation of our earnings and profits. If we pay taxes as a corporation, we will have less cash to distribute to our unit holders. Treatment of our company as a corporation for tax purposes could materially adversely affect our business and financial condition.

We might elect to convert our entity status from a limited liability company to a corporation, which would increase our tax burden.

Although we have no current plans to convert to a corporation, our company might elect in the future to convert to a corporation. If we convert to a corporation, no profits will be allocable to unit holders, there will be no tax liability to our unit holders unless we pay a dividend and our company, as a result, would not make tax distributions to our unit holders with respect to these allocable profits. Conversion to a corporation would require an approval by member vote pursuant to our operating agreement. If we elect to be organized as a corporation, we will be subject to Subchapter C of the Internal Revenue Code. We would be taxed on our net income at rates of up to 35% for federal income tax purposes, and all items of our income, gain, loss, deduction and credit would be reflected only on our tax returns and would not be passed through to the unit holders. Distributions, if made to investors, would be treated as ordinary dividend income to the extent of our earnings and profits, and the payment of dividends would not be deductible by us, resulting in double taxation of our earnings and profits. If we pay taxes as a corporation, we will also have less cash to distribute to our unit holders. Treatment of our company as a corporation for tax purposes could materially adversely affect our business and financial condition.

The IRS may classify your investment as a passive activity, resulting in the inability of unit holders to deduct losses associated with their investment.

It is likely that an investor’s interest in us will be treated as a “passive activity” for tax purposes. If an investor is an individual, estate, trust or a closely held corporation, and if the investor’s interest is deemed to be a “passive activity,” then the investor’s allocated share of any loss we incur will be deductible only against income or gains the investor has earned from other passive activities. Passive activity losses that are disallowed in any taxable year are suspended and may be carried forward and used as an offset against passive activity income in future years. These rules could restrict a unit holder’s ability to currently deduct any of our losses that are passed through to such unit holder.

An IRS audit could result in adjustments to our allocations of income, gain, loss and deduction, causing additional tax liability to unit holders.

The IRS may audit our income tax returns and may challenge positions taken for tax purposes and allocations of income, gain, loss and deduction to investors. If the IRS were successful in challenging our allocations in a manner that reduces loss or increases income allocable to unit holders, our unit holders may have additional tax liabilities. In addition, such an audit could lead to separate audits of a unit holder’s tax returns, especially if adjustments are required, which could result in adjustments on unit holders’ tax returns. Any of these events could result in additional tax liabilities, penalties and interest to unit holders, and the cost of filing amended tax returns.

 

 

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The table below provides a summary of our ethanol plants in operation as of September 30, 2016. We currently own each of these facilities.

 

 

(3)     Actual permitted gallons are 65.7 million for Aberdeen and 42.0 million for Huron totaling 107.7 million gallons.

 

In October 2015, we amended the existing lease agreement for our corporate headquarters. Under the amended lease, we agreed to lease approximately 4,400 square feet for our corporate and administrative staff in Bloomington, Minnesota, through September 2021. The base rent is $19.00 per square foot, or approximately $7,000 per month for the twelve month period beginning July 1, 2016, with annual increases of $.50 per square foot. We believe this space will be sufficient for our needs until the end of the lease period.

We believe that each of the operating facilities is in adequate condition to meet our current and future production goals. We believe that these plants are adequately insured for replacement cost plus related disruption expenditures.

Under the ABE South Dakota, LLC security agreement with AgCountry (defined below), AgCountry holds a first priority security interest and mortgage in all inventory, accounts receivable, intangibles, equipment, fixtures, buildings, and a first mortgage in land owned or leased by ABE South Dakota.

 

 

None.

 

 

None.

 

 

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PART II

Market Information

There is no established trading market for our membership units, but since June 2015, our units have been listed on AgStockTrade.com, an internet-based matching platform. Our membership units are subject to substantial transfer restrictions pursuant to our operating agreement, which prohibits transfers without the approval of our board of directors. The board of directors will not approve transfers unless they fall within “safe harbors” contained in the publicly traded partnership rules under the tax code, which include, without limitation, the following:

Holders

There were 1,541 holders of record of our units as of December 1, 2016.

Issuer Purchases of Equity Securities

We did not make any purchases of our equity securities during fiscal 2016.

Distributions

In December 2012, after the sale of the Fairmont facility, we paid a distribution of $4.15 per unit to our unit holders. Our board of directors declared a cash distribution of $0.31 per unit on September 18, 2013, which was paid out in October 2013. In June 2014, our board of directors declared a cash distribution of $0.48 per unit, which was paid out in June 2014. We did not make any distributions in the fiscal year ended September 30, 2016. Subject to any loan covenants or restrictions with any lenders, we may elect to make future distributions to our members in proportion to the units that each member holds relative to the total number of units outstanding. There can be no assurance that we will ever be able to pay any subsequent distributions to our unit holders.

Our board may elect to retain future profits to provide operational financing for the plants, debt retirement, implementation of new technology and various expansion plans, including development of new product lines. Additionally, our lenders may further restrict our ability to make distributions. Unit holders will be required to report on their income tax return their allocable share of the income, gains, losses and deductions we have recognized without regard to whether we make any cash distributions to our members.

Performance Graph

As disclosed above under “Market Information” and elsewhere in this Form 10-K, there is no established trading market for our membership units, which are subject to substantial transfer restrictions pursuant to our operating agreement. Given that our units are not publicly traded on an exchange or any over-the-counter market and we have very limited valuation data on our membership units, we have omitted the performance graph showing the change in our unit holder return.

Unregistered Sales of Equity Securities

The Company had no unregistered sales of securities in fiscal 2016.

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Securities Authorized for Issuance under Equity Compensation Plans

The equity securities outstanding as of September 30, 2016 under equity compensation plans are the January 2013 Unit Appreciation Rights, a unit appreciation right of 12,500 units, and an equity award of 100,000 units.  Each of the equity awards are to the Company’s Chief Executive Officer Richard Peterson. The following table provides information as of September 30, 2016 with respect to Company’s Units under equity compensation plans.  

 

 

 

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The following table presents selected consolidated financial and operating data as of the dates and for the periods indicated. The selected consolidated income statement data and other financial data for the years ended September 30, 2013 and 2012 and as of September 30, 2014, 2013 and 2012 have been derived from our audited consolidated financial statements that are not included in this Form 10-K. The selected consolidated balance sheet financial data as of September 30, 2016 and 2015 and the selected consolidated income statement data and other financial data for each of the three years in the period ended September 30, 2016 have been derived from the audited Consolidated Financial Statements included elsewhere in this Form 10-K. You should read the following table in conjunction with Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated 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.

This selected financial data includes comparative income statement data whose presentation has been adjusted for the effects of discontinued operations, due to the sale of the Fairmont facility in December 2012.

 

 

 

 

 

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GENERAL

The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of our consolidated financial condition and results of operations. This discussion should be read in conjunction with the consolidated financial statements included herewith and the notes to the consolidated financial statements thereto and the risk factors contained herein.

This Management’s Discussion and Analysis section discusses the Company’s results of operations for the years ending September 30, 2016, 2015 and 2014, together with its balance sheets as of September 30, 2016, and 2015.

OVERVIEW

Advanced BioEnergy, LLC (“Company,” “we,” “our,” “Advanced BioEnergy” or “ABE”) was formed in 2005 as a Delaware limited liability company. Our business consists of producing ethanol and co-products, including wet, modified and dried distillers’ grains, as well as corn oil. Ethanol is a renewable, environmentally clean fuel source that is produced at numerous facilities in the United States, mostly in the Midwest. In the U.S., ethanol is produced primarily from corn and then blended with unleaded gasoline in varying percentages. Ethanol is most commonly sold as E10. Increasingly, ethanol is also available as E85, which is a higher percentage ethanol blend for use in flexible-fuel vehicles. Ethanol has also recently become available in several states in limited locations as E15.

To execute our business plan, in November 2006 we acquired ABE South Dakota, LLC (“ABE South Dakota”) f/k/a Heartland Grain Fuels, LP, which owned existing ethanol production facilities in Aberdeen and Huron, South Dakota. We began construction of our new facility in Aberdeen, South Dakota in April 2007, and began operations in January 2008. Our production operations are carried out primarily through our operating subsidiary ABE South Dakota which owns and operates plants in Aberdeen and Huron, South Dakota.

Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources in assessing performance. Based on the related business nature and expected financial results, the Company’s plants are aggregated into one operating segment.

 

 

We believe that each of the operating facilities is in adequate condition to meet our current and future production goals. We believe that these plants are adequately insured for replacement cost plus related disruption expenditures.

PLAN OF OPERATIONS THROUGH SEPTEMBER 30, 2017

Over the next year we will continue our focus on operational improvements at our South Dakota operating facilities. These operational improvements include exploring methods to improve ethanol yield per bushel and increasing production output at each of

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our plants, continued emphasis on safety and environmental regulation, reducing our operating costs, and optimizing our margin opportunities through prudent risk-management policies.

RESULTS OF OPERATIONS

Year Ended September 30, 2016 Compared to Year Ended September 30, 2015

The following table reflects quantities of our products sold at average net prices as well as bushels of corn ground and therms of natural gas burned at average costs for fiscal 2016 and fiscal 2015 for our South Dakota plants only:

 

 

 

Net Sales

Net sales for fiscal 2016 were $144.9 million, compared to $152.1 million for fiscal 2015, a decrease of $7.2 million or 5%. The decrease was a result of lower net ethanol and distillers’ prices, partially offset by an increase in ethanol gallons,  distillers’ tons, and corn oil pounds sold. The decline in ethanol and distillers prices is the result of various factors including but not limited to market demand for our products, the spread between ethanol/distillers and corn prices and overall gasoline demand. Ethanol gallons sold increased 3.4 million gallons or 4% in fiscal 2016, compared to fiscal 2015. Ethanol gallons and distillers’ tons sold were favorably affected by increased production efficiency in fiscal 2016.

Cost of Goods Sold

Cost of goods sold for fiscal 2016 was $145.4 million, compared to $151.5 million for fiscal 2015, a decrease of $6.1 million. A decrease in corn costs represented a portion of the fiscal 2016 decline in cost of goods sold in fiscal 2016. Corn costs represented 70.4% and 66.7% of cost of sales for the fiscal years 2016 and 2015, respectively. Corn prices declined approximately 1% in fiscal 2016 from fiscal 2015, and we used 3% more corn bushels in fiscal 2016 than in fiscal 2015, resulting from higher ethanol production in fiscal 2016.

Natural gas costs represented 4.2% and 5.9% of cost of sales for fiscal years 2016 and 2015, respectively. The cost of natural gas per mmbtu decreased 31% in fiscal 2016, compared to fiscal 2015. The decreased cost of natural gas in fiscal 2016 was due to record ending stocks coming out of the build season in March 2016, which drove prices lower in fiscal 2016.  The record ending stocks were driven by lower overall natural gas demand in 2015.  The lower demand was driven by a cool summer in 2015, which led to lower air conditioning usage, and warmer than normal winter months which led to lower heating needs in the winter months of late 2015 and early 2016.

Selling, General, and Administrative Expenses

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

Overall selling, general and administrative costs increased by approximately $0.3 million to $3.3 million in fiscal 2016, compared to fiscal 2015. As a percentage of net sales, fiscal 2016 selling, general and administrative expenses increased to 2.2%, compared to 2.0% for fiscal 2015. The increase was primarily a result of $0.2 million non-recurring expenses in fiscal 2016.

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Asset Impairment

Expense related to asset impairment for fiscal 2016 was $1.6 million, compared to no asset impairment expense for fiscal 2015. The $1.6 million of expense in fiscal 2016 was the result of the Company’s decision not to resume operations at its smaller Aberdeen plant in the fourth quarter of fiscal 2016.

Interest Expense

Interest expense for fiscal 2016 was $0.9 million, compared to $0.1 million for fiscal 2015, an increase of $0.8 million. Fiscal 2016 interest expense included $1.1 million of variable rate interest related to our outstanding debt and $0.1 million of amortization of deferred financing costs. These fiscal 2016 interest expense items were offset by $0.3 million of amortization of deferred gain resulting from the troubled debt restructuring that occurred in 2010. Fiscal 2015 interest expense included $1.5 million of variable rate interest related to our outstanding debt and $0.1 million of waiver fee amortization. These fiscal 2015 interest expense items were offset by the amortization of $1.5 million of deferred gain from the troubled debt restructuring in 2010.

As a result of debt sweep payments made to the 2010 Credit Agreement during fiscal 2015 and 2016, the carrying value of the debt exceeded the scheduled principal and interest payments remaining over the term of the loan. Therefore, as a result of the prepayments made during fiscal 2015 and the final payment on the 2010 Credit Agreement in fiscal 2016, gains of approximately $322,000 and $325,000 were recognized as other income during fiscal years ended September 30, 2015 and September 30, 2016, respectively.

Year Ended September 30, 2015 Compared to Year Ended September 30, 2014

The following table reflects quantities of our products sold at average net prices as well as bushels of corn ground and therms of natural gas burned at average costs for fiscal 2015 and fiscal 2014 for our South Dakota plants only:

 

 

 

Net Sales

Net sales for fiscal 2015 were $152.1 million, compared to $198.8 million for fiscal 2014, a decrease of $46.7 million or 24%. The decrease was a result of lower net ethanol and distillers’ prices, partially offset by an increase in ethanol gallons and distillers’ tons sold. The decline in ethanol and distillers prices is the result of various factors including but not limited to market demand for our products, the spread between ethanol/distillers and corn prices and overall gasoline demand. Ethanol gallons sold increased 6.5 million gallons or 8% in fiscal 2015, compared to fiscal 2014. Ethanol gallons and distillers’ tons sold were favorably affected by increased production efficiency in fiscal 2015. In fiscal 2014, ethanol gallons sold were negatively affected by overall rail service issues that directly affected our ability to maintain production rates at various times throughout fiscal 2014. These reduced fiscal 2014 production rates also negatively affected net distillers’ sales in that year.

Cost of Goods Sold

Cost of goods sold for fiscal 2015 was $151.5 million, compared to $165.2 million for fiscal 2014, a decrease of $13.7 million. A decrease in corn costs represented a majority of the fiscal 2015 decline in cost of goods sold in fiscal 2015. Corn costs represented 66.7% and 66.1% of cost of sales for the fiscal years 2015 and 2014, respectively. Corn prices declined approximately 14% in fiscal 2015 from fiscal 2014. This decrease in corn prices was primarily driven by a record corn harvest in the fall of 2014, resulting in a significant increase in the supply of corn available to the market. Additionally, the U.S. faced increased competition for corn exports due to an increase in the value of the U.S. dollar against other currencies and strong corn production in South America, which also drove corn prices lower. We used 8% more corn bushels in fiscal 2015 than in fiscal 2014.

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Natural gas costs represented 5.9% and 9.4% of cost of sales for fiscal years 2015 and 2014, respectively. The cost of natural gas per mmbtu decreased 44% in fiscal 2015, compared to fiscal 2014. The decreased cost of natural gas in fiscal 2015 was due to the record high prices experienced in fiscal 2014, which were driven by extremely cold temperatures and other service disruptions experienced primarily between December 2013 and March 2014, resulting in higher fiscal 2014 natural gas prices throughout the U. S. Although our overall fiscal 2015 production was higher than in fiscal 2014, our natural gas consumption was consistent with fiscal 2014. This was due to fiscal 2014 factors that increased our natural gas consumption, including colder temperatures and our approximately 10% increase in the production of dried distillers’ compared to modified/wet distillers’.

Selling, General, and Administrative Expenses

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

Overall selling, general and administrative costs decreased by approximately $1.8 million to $3.0 million in fiscal 2015, compared to fiscal 2014. As a percentage of net sales, fiscal 2015 selling, general and administrative expenses decreased to 2.0%, compared to 2.4% for fiscal 2014. The decrease was primarily a result of $0.4 million non-recurring expenses in fiscal 2014 related to the sale of the Fairmont facility, and decreases in the following expenses in fiscal 2015: a $0.5 million decrease in technology and dues & subscriptions expense, and a $0.4 million decrease in salaries, benefits, travel, and employee relations.

Interest Expense

Interest expense for fiscal 2015 was $0.1 million, compared to $0.7 million for fiscal 2014, a decrease of $0.6 million. Fiscal 2015 interest expense included $1.5 million of variable rate interest related to our outstanding debt and $0.1 million of waiver fee amortization. These fiscal 2015 interest expense items were offset by the amortization of $1.5 million of deferred gain from the troubled debt restructuring in 2010. Fiscal 2014 interest expense included $2.7 million of variable rate interest related to our outstanding debt, $0.3 million of default interest and $0.1 million of waiver fee amortization. The preceding fiscal 2014 interest expense items were offset by the amortization of $2.4 million of deferred gain from the troubled debt restructuring in 2010.

 

As a result of debt sweep payments made during fiscal 2014 and 2015, the carrying value of the debt exceeded the scheduled principal and interest payments remaining over the term of the loan. Therefore, as a result of the prepayments made during fiscal 2014 and 2015, gains of approximately $1.3 million and $325,000 were recognized as other income during fiscal years ended September 30, 2014 and September 30, 2015, respectively.

Changes in Financial Position for the Year ended September 30, 2016

Current Assets

The decrease in current assets at September 30, 2016 compared to September 30, 2015 of $3.9 million was primarily due to principal, interest and other debt payments of $5.0 million, offset by cash generated from operations of $1.7 million.

Property, Plant and Equipment

The $8.9 million decrease in property, plant and equipment at September 30, 2016 compared to September 30, 2015 was primarily due to recognition of $9.6 million of depreciation expense, $1.6 million loss on impairment and disposals and $0.2 million for the salvage value of the smaller Aberdeen plant reclassified to other assets in fiscal 2016, offset by $2.5 million of capital expenditures.

Current Liabilities

Accounts payable and accrued expenses decreased by $1.8 million at September 30, 2016 compared to September 30, 2015. The primarily reason for the decrease is due to the amount of corn payable.   At September 30, 2016 there was $2.0 million or 8 days of corn payable compared to $3.2 million or 13 days corn payable as of September 30, 2015.  Additionally there is a difference of timing of payments to vendors.

Current Portion of Long-Term Debt and Long-term Debt

The current portion of long-term debt decreased by $1.7 million at September 30, 2016 compared to September 30, 2015. The decrease was due to (i) our payment of the restructuring and waiver fee of $3.1 million at the time of the debt refinancing in December 2015, (ii) the amortization of $87,000 of deferred waiver and financing fees, and (iii) $86,000 of the current portion of deferred financing costs incurred at the time of the 2015 debt refinancing that we are amortizing over the term of the loan.  These items were offset by $307,000 in amortization of additional carrying value of long-term debt, $322,000 of gain recognition related to

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the carrying value of long-term debt, and a $1.0 million increase in the annual debt amortization of the 2015 Credit Agreement versus the 2010 Credit Agreement.

Long-term debt decreased by $3.3 million at September 30, 2016 compared to September 30, 2015. This decrease was due to $2.0 million debt payments, a $1.0 million increase in the annual debt amortization of the 2015 Credit Agreement versus the 2010 Credit Agreement, and $0.3 million of long-term deferred financing costs.

CAPITAL RESOURCES

During fiscal 2016, we conducted our business activities and plant operations through the parent company, Advanced BioEnergy, and its primary operating subsidiary, ABE South Dakota. ABE Fairmont has minimal activity following the sale of the Fairmont facility. The liquidity and capital resources for each entity are based on the entity’s existing financing arrangements and capital structure. Advanced BioEnergy is highly restricted in its ability to use the cash and other financial resources of ABE South Dakota for the benefit of Advanced BioEnergy, with the exception of allowable distributions under the 2015 Credit Agreement with AgCountry.

Advanced BioEnergy, LLC (“ABE”)

ABE had cash and cash equivalents of $5.1 million on hand at September 30, 2016. ABE did not have any debt outstanding as of September 30, 2016.

From time to time, ABE may receive certain allowable distributions from ABE South Dakota, subject to compliance with the terms and conditions of the 2015 Credit Agreement. ABE will not receive any distribution from ABE South Dakota for its fiscal 2016 financial results.

In connection with the execution of a rail car sublease, the Company, as parent of ABE South Dakota, agreed to post a $2.5 million irrevocable and non-transferable standby letter of credit in May 2012 for the benefit of NGL Crude Logistics, LLC (“NGL” f/k/a Gavilon) as security for the payment obligations of ABE South Dakota under certain agreements with NGL. The Company deposited $2.5 million in a restricted account as collateral for this letter of credit and classified it as restricted cash. Effective May 15, 2014, the letter of credit and corresponding deposit of collateral was decreased by $1.0 million in conjunction with an amendment to the rail car sublease. Effective June 27, 2016, the letter of credit and corresponding deposit of collateral was decreased by $0.5 million in conjunction with an amendment to the rail car sublease. We believe ABE has sufficient financial resources available to fund current operations and capital expenditure requirements for at least the next 12 months.

ABE Fairmont

ABE Fairmont had cash and cash equivalents of $0.0 million on hand at September 30, 2016.

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

ABE South Dakota

ABE South Dakota had cash and cash equivalents of $10.2 million  on hand at September 30, 2016. As of September 30, 2016, ABE South Dakota had interest-bearing term debt outstanding of $28.0 million.

2015 Senior Credit Agreement

On December 29, 2015, ABE South Dakota entered into a Master Credit Agreement (“2015 Credit Agreement”) with AgCountry Farm Credit Services, PCA as lender, (“AgCountry”) to refinance its existing 2010 Senior Credit Agreement. On December 29, 2015, the Company also entered into (i) a First Supplement to the 2015 Credit Agreement covering a $10.0 million Revolving Term Facility and (ii) a Second Supplemental covering a $20.0 million Term Loan. The transaction funded on December 30, 2015.

The $20.0 million Term Loan has a variable interest rate (“Variable Rate”) equal to the one-month LIBOR rate plus a “Margin” of 350 basis points. The applicable LIBOR interest rate at December 1, 2016 was 0.53%. Beginning April 1, 2016, the Company began making quarterly principal payments of $1.0 million, plus accrued interest, on the Term Loan. The Term Loan will be fully amortized over five years with the final payment on January 1, 2021. The Company may elect one or more fixed or adjustable interest

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rates, rather than the Variable Rate, based on AgCountry’s cost of funds at the time of the election, plus the Margin. Any election must apply to $1.0 million or more owing on the Term Loan.

The $10.0 Revolving Term Facility also has a Variable Rate equal to the one month LIBOR rate plus an initial Margin of 350 basis points. Borrowings under the Revolving Term Facility may be advanced, repaid and re-borrowed during the term. The Company makes quarterly interest payments on the Revolving Term Facility, with the full principal amount outstanding due on January 1, 2021. Under the Revolving Term Facility, the Company is required to pay unused commitment fees of 50 basis points.

The Margin will (i) decrease to 3.25% when the aggregate principal balance of all outstanding loans and the unfunded commitment level is $20.0 million or less, and (ii) decrease to 3.00% when this amount is $15.0 million or less.

ABE South Dakota, LLC also entered into a Security Agreement with AgCountry under which borrowings under the 2015 Credit Agreement are secured by substantially all of ABE South Dakota’s assets. AgCountry holds a first priority security interest and mortgage in all inventory, accounts receivable, intangibles, equipment, fixtures, buildings, and a first mortgage in land owned or leased by ABE South Dakota.

The 2015 Credit Agreement also included financial and non-financial covenants that limit distributions and debt and require minimum working capital, owner’s equity, current ratio, debt to EBITDA ratio, and fixed charge coverage ratios. Those covenants, as amended, include the following:

2016 Term Loan

On September 28, 2016, ABE South Dakota entered into the Third Supplement to the Master Credit Agreement (“2016 Term Loan”) with AgCountry to finance the corn oil extraction system at the Huron plant.  The total loan commitment for the 2016 Term Loan is $1.7 million, and the loan has a variable interest rate equal to the one-month LIBOR rate plus a “Margin” of 350 basis points.  Beginning January 1, 2017, the Company must begin making quarterly payments of accrued interest on the 2016 Term Loan.  Beginning April 1, 2017, the Company must begin making quarterly principal payments of $212,500 on the 2016 Term Loan. As of September 30, 2016 no funds had been drawn from this loan.  Funds were drawn subsequent to the end of the Company’s fiscal year, and the balance outstanding as of December 23, 2016 was $1.1 million.

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Amendment and Waivers to 2015 Credit Agreement

On September 28, 2016, ABE South Dakota entered into a Limited Waiver and First Amendment to Master Credit Agreement (“First Amendment”) to (i) eliminate the Owner’s Equity Ratio Covenant, (ii) temporarily increase the Capital Expenditures Covenant to $3.0 million for fiscal 2016 to finance the corn oil extraction system at the Huron plant, and (iii) waive other obligations related to the post closing agreement.  

On November 19, 2016, ABE South Dakota received a waiver to the 2015 Credit Agreement from AgCountry that waived certain Events of Default related to the Working Capital requirement and the Total Outstanding Debt to EBITDA Ratio at September 30, 2016.

2010 Senior Credit Agreement

ABE South Dakota entered into an Amended and Restated Senior Credit Agreement effective as of June 18, 2010, and amended on December 9, 2011 (the “2010 Senior Credit Agreement”) among ABE South Dakota, the lenders from time to time party thereto, and an Administrative Agent and Collateral Agent. The principal amount of the term loan facility was payable in quarterly payments of $750,000, with the remaining principal amount fully due and payable on March 31, 2016. Loans outstanding under the 2010 Senior Credit Agreement were subject to mandatory prepayment in certain circumstances, including, but not limited to, mandatory prepayments based upon receipt of certain proceeds of asset sales, casualty proceeds, termination payments, and cash flows.

ABE South Dakota agreed to pay a $3.0 million restructuring fee to the lender due at the earlier of March 31, 2016 and the date on which the loans were repaid in full. ABE South Dakota recorded the restructuring fee as long-term, non-interest bearing debt. ABE South Dakota was also obligated to pay the final installment of a waiver fee to the senior lenders in March, 2016. The original waiver fee was $275,000 of which $68,750 was payable in March 2016. The Company recorded this fee as non-interest bearing debt on its consolidated balance sheet, and amortized the fee to interest expense over the remaining life of the debt.

ABE South Dakota’s obligations under the 2010 Senior Credit Agreement were secured by a first-priority security interest in all of the equity in and assets of ABE South Dakota. ABE South Dakota was allowed to make equity distributions (other than certain tax distributions) to ABE only upon ABE South Dakota meeting certain financial conditions and if there is no more than $25 million of principal outstanding on the senior term loan. The 2010 Senior Credit Agreement and the related loan documentation included, among other terms and conditions, limitations (subject to specified exclusions) on ABE South Dakota’s ability to make asset dispositions; merge or consolidate with or into another person or entity; create, incur, assume or be liable for indebtedness; create, incur or allow liens on any property or assets; make investments; declare or make specified restricted payments or dividends; enter into new material agreements; modify or terminate material agreements; enter into transactions with affiliates; change its line of business; and establish bank accounts. Substantially all cash of ABE South Dakota was required to be deposited into special, segregated project accounts subject to security interests to secure obligations in connection with the 2010 Senior Credit Agreement. The 2010 Senior Credit Agreement contained customary events of default and also includes an event of default for defaults on other indebtedness by ABE South Dakota and certain changes of control.

In connection with closing the 2015 Credit Agreement, ABE South Dakota paid in full all amounts outstanding under the 2010 Senior Credit Agreement, including $29.0 million of principal, accrued interest, the $3.0 restructuring fee, and the waiver fee of $68,750, and all security interests of the prior lenders were extinguished.

CASH FLOWS

The following table shows our cash flows for the years ended September 30:

 

 

Cash Flow from Operations

Our cash flows from operations in fiscal 2016 were lower compared to fiscal 2015, primarily due to decreased margins in fiscal 2016.

Our cash flows from operations in fiscal 2015 were higher compared to fiscal 2014, primarily due to decreased margins in fiscal 2015.

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Cash Flow from Investing Activities

We received more cash from investing activities in fiscal 2016 compared to fiscal 2015, primarily as a result of entering into the 2015 Credit Agreement with AgCountry which eliminated restricted cash requirements of $3.1 million.  The change in restricted cash was offset by capital expenditures, primarily consisting of the addition of a corn oil system at the Huron plant, as well as a change in estimate on the useful life of process equipment.

We received less cash from investing activities in fiscal 2015 compared to fiscal 2014, primarily due to capital expenditures, including the fiscal 2015 addition of one million gallons of ethanol storage at our Aberdeen plant. In fiscal 2015, our restricted cash balances decreased due to the use of the ABE South Dakota capital expenditure account to fund the ethanol storage facility.

Cash Flow from Financing Activities

We used less cash for financing activities in fiscal 2016 versus 2015 primarily due to lower overall debt payments. In fiscal 2016, we received $30.0 million in proceeds from the 2015 Credit Agreement and used $34.1 million for payments on debt, including $2.0 million toward normal principal payments and $32.1 million to satisfy all remaining obligations of the 2010 Senior Credit Agreement.  This resulted in a net use of cash from financing activities of $4.1 million in fiscal 2016, compared to $11.0 million used for principal payments and $0.2 million for the payment of waiver fees in fiscal 2015.   

We used less cash for financing activities in fiscal 2015 versus 2014 primarily due to lower overall debt payments. In fiscal 2015, we used $11.0 million toward normal principal and debt sweep payments at ABE South Dakota compared to $28.7 million for these payments in Fiscal 2014. In fiscal 2014, an additional $20.1 million went to pay distributions to members in October 2014 and June 2014.

CREDIT ARRANGEMENTS

A summary of debt in effect at September 30, 2016 is as follows (in thousands, except percentages)(1):

 

 

CONTRACTUAL OBLIGATIONS

The following table summarizes our contractual obligations as of September 30, 2016.

 

 

 

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SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Note 1 to our consolidated financial statements contains a summary of our significant accounting policies, many of which require the use of estimates and assumptions. Accounting estimates are an integral part of the preparation of financial statements and are based upon management’s current judgment. We use our knowledge and experience about past events and certain future assumptions to make estimates and judgments involving matters that are inherently uncertain and that affect the carrying value of our assets and liabilities. We believe that of our significant accounting policies, the following are noteworthy because changes in these estimates or assumptions could materially affect our financial position and results of operations:

Revenue Recognition

Ethanol revenue is recognized when product title and all risk of ownership is transferred to the customer as specified in the contractual agreements with the marketers. Under the terms of the marketing agreements with NGL, revenue is recognized when product is loaded into rail cars or trucks for shipment. Revenue from the sale of co-products is recorded when title and all risk of ownership transfers to customers. Co-products are normally shipped free on board (“FOB”) shipping point. Interest income is recognized as earned. In accordance with the Company’s agreements for the marketing and sale of ethanol and related products, commissions due to the marketers are deducted from the gross sale price at the time of payment.

Commodity Sales and Purchase Contracts, Derivative Instruments

The Company enters into forward sales contracts for ethanol, distillers and corn oil, and purchase contracts for corn and natural gas. The Company classifies these sales and purchase contracts as normal sales and purchase contracts and accordingly these contracts are not marked to market. These contracts provide for the sale or purchase of an item other than a financial instrument or derivative instrument that will be delivered in quantities expected to be sold or used over a reasonable period in the normal course of business.

On occasion, the Company has entered into derivative contracts to hedge the Company’s exposure to price risk related to forecasted corn purchases and forecasted ethanol sales. Accounting for derivative contracts requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction.

 

Although the Company believes its derivative positions are economic hedges, it has not designated any of these positions as hedges for accounting purposes and has recorded its derivative positions on its balance sheet at their fair value, with changes in fair value recognized in current period earnings.

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

Inventories

Ethanol inventory, raw materials, work-in-process and parts inventory are valued using methods that approximate the lower of cost (first-in, first-out) or net realizable value (“NRV”). Distillers grains and related products are stated at net realizable value. In the valuation of inventories and purchase and sale commitments, the Company determines NRV by estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.

Property and Equipment

Property and equipment is carried at cost less accumulated depreciation computed using the straight-line method over the estimated useful lives:

 

 

During the fourth quarter of fiscal 2016, the Company decided to permanently cease operations at its smaller Aberdeen plant.  Accordingly, the Company recorded an impairment of approximately $1.6 million during the fourth quarter of fiscal 2016. In

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connection with the impairment of the smaller Aberdeen plant, The Company also re-evaluated the estimated lives of process equipment.  Prior to June 30, 2016, the Company used an estimated useful life of 10 years for process equipment.  Based on the re-evaluation, the Company determined a change in estimate was necessary.  Accordingly, the Company adjusted the estimated useful life for process equipment to 15 years in the fourth quarter of fiscal 2016.  As a result of this change in estimate, depreciation expense was reduced by approximately $1.8 million in fiscal 2016 and depreciation in future periods will be reduced to reflect the longer estimated useful life.

Maintenance and repairs are charged to expense as incurred; major improvements and betterments are capitalized. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount on the asset may not be recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows from operations are less than the carrying value of the asset group. An impairment loss would be measured by the amount by which the carrying value of the asset exceeds the estimated fair value.

INTEREST RATE/FOREIGN EXCHANGE RISK

Our future earnings may be affected by changes in interest rates due to the impact those changes have on our interest expense on borrowings under our credit facility. As of September 30, 2016, we had $28.0 million of outstanding borrowings with variable interest rates. With each 1% increase in interest rates we will incur additional annual interest charges of $0.28 million.

We have no international sales. Substantially all of our purchases are denominated in U.S. dollars.

IMPACT OF INFLATION

We believe that inflation has not had a material impact on our results of operations since inception. We cannot ensure that inflation will not have an adverse impact on our operating results and financial condition in future periods.

OFF-BALANCE SHEET ARRANGEMENTS

We have no off-balance sheet arrangements.

 

 

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We consider market risk to be the impact of adverse changes in market prices on our results of operations. We are subject to significant market risk with respect to the price of ethanol and corn. For the year ended September 30, 2016, sales of ethanol represented 80% of our total revenues and corn costs represented 70% of total cost of goods sold. In general, ethanol prices are affected by the supply and demand for ethanol, the cost of ethanol production, the availability of other fuel oxygenates, the regulatory climate and the cost of alternative fuels such as gasoline. The price of corn is affected by weather conditions and other factors affecting crop yields, farmer planting decisions and general economic, market and regulatory factors. At September 30, 2016, the price per gallon of ethanol and the price per bushel of corn on the CBOT were $1.38 and $3.02, respectively.

We are also subject to market risk on the selling prices of our distillers’ grains, which represented 18% of our total revenues for the fiscal year ended September 30, 2016. These prices fluctuate seasonally when the price of corn or other cattle feed alternatives fluctuate in price. The average dried distillers’ grains spot price for local customers was $87 per ton at September 30, 2016.

We are also subject to market risk with respect to our supply of natural gas that we consume in the ethanol production process. Natural gas costs represented 4% of total cost of sales for the year ended September 30, 2016. The price of natural gas is affected by overall supply, weather conditions and general economic, market and regulatory factors. At September 30, 2016, the price of natural gas on the NYMEX was $3.24 per mmbtu.

To reduce price risk caused by market fluctuations in the cost and selling prices of related commodities, we have entered into forward purchase/sale contracts. We entered into forward sales contracts which guaranteed prices on 28% of our ethanol gallons sold through October 2016. At September 30, 2016 we had entered into forward sale contracts representing 100% of our expected distillers’ grains production output through October 2016.

The following represents a sensitivity analysis that estimates our annual exposure to market risk with respect to our current corn and natural gas requirements and ethanol sales. Market risk is estimated as the potential impact on operating income resulting from a hypothetical 10% change in the fair value of our current corn and natural gas requirements and ethanol sales, net of corn and natural gas forward contracts used to hedge market risk with respect to our current corn and natural gas requirements. The results of this analysis, which may differ from actual results, are as follows:

 

 

 

 

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Financial Statements

 

 

 

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Members

Advanced BioEnergy, LLC

We have audited the accompanying consolidated balance sheets of Advanced BioEnergy, LLC & subsidiaries as of September 30, 2016 and 2015, and the related consolidated statements of operations, changes in members’ equity and cash flows for each of the three years in the period ended September 30, 2016. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Advanced BioEnergy, LLC & subsidiaries as of September 30, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2016 in conformity with U. S. generally accepted accounting principles.

/s/ RSM US LLP

Des Moines, Iowa

December 23, 2016

 

 

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ADVANCED BIOENERGY, LLC & SUBSIDIARIES

Consolidated Balance Sheets

 

 

See notes to consolidated financial statements.

 

 

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ADVANCED BIOENERGY, LLC & SUBSIDIARIES

Consolidated Statements of Operations

 

 

See notes to consolidated financial statements

 

 

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ADVANCED BIOENERGY, LLC & SUBSIDIARIES

Consolidated Statements of Changes in Members’ Equity

For the Years Ended September 30, 2016, 2015 and 2014

 

 

See notes to consolidated financial statements

 

 

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ADVANCED BIOENERGY, LLC & SUBSIDIARIES

Consolidated Statements of Cash Flows

 

 

See notes to consolidated financial statements.

 

 

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ADVANCED BIOENERGY, LLC & SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, ABE Fairmont, LLC (“ABE Fairmont”) and ABE South Dakota, LLC, (“ABE South Dakota”). Substantially all of the assets of ABE Fairmont were sold in December 2012 and the subsidiary is now inactive. All intercompany balances and transactions have been eliminated in consolidation.

Advanced BioEnergy, LLC is organized as a Delaware limited liability company. Members’ liability is limited pursuant to the Delaware Limited Liability Company Act. The Company’s operating agreement provides for the term of the entity to last until a Dissolution Event occurs as defined in the operating agreement; there is no exact Dissolution Event or date specified.

The Company currently operates two ethanol production facilities in Aberdeen and Huron, South Dakota with a combined production capacity of 80 million gallons per year.

Cash, Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company’s cash balances are maintained in bank depositories and periodically exceed federally insured limits. The Company has not experienced losses in these accounts. Prior to the December 2015 debt refinancing, the Company segregated cash restricted for debt service and classified these funds according to the future anticipated use of the funds.  Restricted cash at September 30, 2015 included cash held for debt service under the terms of its prior debt agreement and a deposit for a rail car sublease.  Restricted cash at September 30, 2016 included a deposit for a rail car sublease.

Fair Value of Financial Instruments

Financial instruments include cash, cash equivalents and restricted cash, accounts receivable, accounts payable, accrued expenses, and long-term debt. The fair value of the long-term debt is estimated based on level 3 inputs based on the current anticipated interest rate that management believes would currently be available to the Company for similar debt, taking into account the current credit risk of the Company and other market factors.  Based on these factors, the fair value of the long-term debt is currently estimated at carrying value. Excluding cash and cash equivalents, the fair value of the other financial instruments are estimated to approximate carrying value due to the short-term nature of these instruments, and are considered to be Level 3 inputs.

Fair Value Measurements

In determining fair value of its derivative financial instruments, the Company uses various methods including market, income and cost approaches. Based on these approaches, the Company often uses certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market-corroborated, or generally unobservable inputs. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three fair value hierarchy categories:

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.

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

There were no balances of financial assets or financial liabilities, including derivative financial instruments, measured at the approximate fair value at September 30, 2016 or 2015.

 

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Deferred Financing Costs

Deferred financing costs are recorded at cost and include expenditures related to secure debt financing. Deferred financing costs are shown as contra debt and are being amortized into interest expense over the term of the agreement using the straight-line method, which approximates the effective interest method.

Receivables

Credit sales are made to a relatively small number of customers with no collateral required. Trade receivables are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by regularly evaluating individual receivables and considering a customer’s financial condition, credit history and current economic conditions. Receivables are written off if deemed uncollectible. Recoveries of receivables previously written off are recorded when received. There was no allowance for doubtful accounts recorded at September 30, 2016 or September 30, 2015.

Inventories

Ethanol inventory, raw materials, work-in-process and parts inventory are valued using methods that approximate the lower of cost (first-in, first-out) or net realizable value (“NRV”). Distillers grains and related products are stated at net realizable value. In the valuation of inventories and purchase and sale commitments, the Company determines NRV by estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.

Property and Equipment

Property and equipment is carried at cost less accumulated depreciation computed using the straight-line method over the estimated useful lives:

 

 

During the fourth quarter of fiscal 2016, the Company decided to permanently cease operations at its smaller Aberdeen plant.  Accordingly, the Company impaired the value of this asset to an estimated salvage value of $200,000 and recorded an impairment of approximately $1.6 million during the fourth quarter of fiscal 2016. In connection with the impairment of the smaller Aberdeen plant, The Company also re-evaluated the estimated lives of process equipment.  Prior to June 30, 2016, the Company used an estimated useful life of 10 years for process equipment.  Based on the re-evaluation, the Company determined a change in estimate was necessary.  Accordingly, the Company adjusted the estimated useful life for process equipment to 15 years in the fourth quarter of fiscal 2016.  As a result of this change in estimate, depreciation expense was reduced by approximately $1.8 million, or $0.07 per unit, in fiscal 2016 and depreciation in future periods will be reduced to reflect the longer estimated useful life.

Maintenance and repairs are charged to expense as incurred; major improvements and betterments are capitalized. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount on the asset may not be recoverable. An impairment loss is recognized when estimated undiscounted future cash flows from operations are less than the carrying value of the asset group. An impairment loss is measured by the amount by which the carrying value of the asset group exceeds the estimated fair value on that date.

Commodity Sales and Purchase Contracts, Derivative Instruments

The Company enters into forward sales contracts for ethanol, distillers and corn oil, and purchase contracts for corn and natural gas. The Company classifies these sales and purchase contracts as normal sales and purchase contracts and accordingly these contracts are not marked to market. These contracts provide for the sale or purchase of an item other than a financial instrument or derivative instrument that will be delivered in quantities expected to be sold or used over a reasonable period in the normal course of business.

On occasion, the Company has entered into derivative contracts to hedge the Company’s exposure to price risk related to forecasted corn purchases and forecasted ethanol sales. Accounting for derivative contracts requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction.

 

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Although the Company believes its derivative positions are economic hedges, none have been designated as a hedge for accounting purposes and derivative positions are recorded on the balance sheet at their fair value, with changes in fair value recognized in current period earnings.

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

Revenue Recognition

Ethanol revenue is recognized when product title and all risk of ownership is transferred to the customer as specified in the contractual agreements with the marketers. Under the terms of the marketing agreements, revenue is recognized when product is loaded into rail cars or trucks for shipment. Revenue from the sale of co-products is recorded when title and all risk of ownership transfers to customers. Co-products are normally shipped free on board (“FOB”) shipping point. In accordance with the Company’s agreements for the marketing and sale of ethanol and related products, commissions due to the marketers are deducted from the gross sale price at the time of payment. Interest income is recognized as earned.

Unit Based Compensation

The Company uses the estimated market value at the time the units are granted to value those units granted to officers and directors. The Company records compensation cost on the straight line method over the vesting period for service based awards. If the units vest upon achievement of a certain milestone, the Company recognizes the expense in the period in which the goal was met.

Shipping Costs

Shipping costs are not separately identified under the contract with the marketer and therefore are reflected net in sales.

Income (Loss) Per Unit

Basic and diluted income per unit is computed using the weighted-average number of vested units outstanding during the period. Unit warrants are considered unit equivalents and are considered in the diluted income-per-unit computation.

Segment Reporting

Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Based on the related business nature and expected financial results, the Company’s plants are aggregated into one reporting segment.

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.

Income Taxes

The Company has elected to be treated as a partnership for tax purposes and generally does not incur income taxes. Instead, the Company’s earnings and losses are included in the income tax returns of the members. Therefore, no provision or liability for federal or state income taxes has been included in these financial statements. The Company files income tax returns in the U.S. federal and various state jurisdictions. The Company’s federal income tax returns are open and subject to examination from the 2013 tax return year and forward. Various state income tax returns are generally open from the 2012 and later tax return years based on individual state statute of limitations.

Management has evaluated the Company’s tax positions under the Financial Accounting Standards Board issued guidance on accounting for uncertainty in income taxes and concluded the Company has taken no uncertain tax positions that require adjustment to the financial statements to comply with the provisions of this guidance.

 

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Recent Accounting Pronouncements

Effective October 1, 2015, the company adopted the amended guidance in ASC 835-30, Interest - Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. As of September 30 2016, debt issuance costs associated with issued debt totaled $478,000.  There were no debt issuance costs associated with issued debt for any prior periods presented.

Effective October 1, 2015, the company adopted the amended guidance in ASC 330, Inventory: Simplifying the Measurement of Inventory, which requires inventory to be measured at lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The amended guidance was applied prospectively.  The adoption of this guidance effective October 1, 2015, had no impact on our financial position or results of operations.

Effective October 1, 2018, the company will adopt the amended guidance in ASC 606, Revenue from Contracts with Customers, which requires revenue recognition to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The updated standard permits either the retrospective with cumulative effect transition method.  The company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements and related disclosures.

In February 2016, the ASC was amended and a new accounting standard, ASC Topic 842, “Leases,” was issued to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. In order to meet that objective, the new standard requires recognition of the assets and liabilities that arise from leases. Accordingly, a lessee will recognize a right-of-use (ROU) asset for its right to use the underlying asset and a lease liability for the corresponding lease obligation. The lease liability will initially be measured at the present value of the future minimum lease payments over the lease term. The ROU asset will initially be measured as the sum of the initial lease liability, initial costs directly attributable to negotiating and arranging the lease, and payments made by a lessee to the lessor at or before the lease commencement date less any lease incentives received. Lessees can make an accounting policy election by class of underlying asset not to recognize a ROU asset and corresponding lease liability for leases with a term of 12 months or less. Accounting by lessors will remain largely unchanged from current U.S. GAAP. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that companies may elect to apply. These practical expedients relate to the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset. The transition guidance also provides specific guidance for sale and leaseback transactions, build-to-suit leases, leveraged leases, and amounts previously recognized in accordance with the business combinations guidance for leases. The new standard is effective for public companies for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. We believe that adopting this standard will have a material impact on our balance sheet.

 

 

 

 

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

 

 

 

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

 

 

 

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

 

 

The estimated maturities of debt at September 30, 2016 are as follows (in thousands):

 

 

2015 Senior Credit Agreement for the South Dakota Plants

On December 29, 2015, ABE South Dakota entered into a Master Credit Agreement (“2015 Credit Agreement”) with AgCountry Farm Credit Services, PCA as lender, (“AgCountry”) to refinance its existing 2010 Senior Credit Agreement. On December 29, 2015, the Company also entered into (i) a First Supplement to the 2015 Credit Agreement covering a $10.0 million Revolving Term Facility and (ii) a Second Supplemental covering a $20.0 million Term Loan. The transaction funded on December 30, 2015.

The $20.0 million Term Loan has a variable interest rate (“Variable Rate”) equal to the one-month LIBOR rate plus a “Margin” of 350 basis points. The applicable LIBOR interest rate at September 30, 2016 was 0.51%. Beginning April 1, 2016, the Company began making quarterly principal payments of $1.0 million, plus accrued interest, on the Term Loan. The Term Loan will be fully amortized over five years with the final payment on January 1, 2021. The Company may elect one or more fixed or adjustable interest rates, rather than the Variable Rate, based on AgCountry’s cost of funds at the time of the election, plus the Margin. Any election must apply to $1.0 million or more owing on the Term Loan. At September 30, 2016, the outstanding balance on the Term Loan was $18.0 million.

The $10.0 Revolving Term Facility also has a Variable Rate equal to the one-month LIBOR rate plus an initial Margin of 350 basis points. Borrowings under the Revolving Term Facility may be advanced, repaid and re-borrowed during the term. The Company will make quarterly interest payments on the Revolving Term Facility, with the full principal amount outstanding due on January 1, 2021. Under the Revolving Term Facility, the Company is required to pay unused commitment fees of 50 basis points.

The Margin will (i) decrease to 3.25% when the aggregate principal balance of all outstanding loans and the unfunded commitment level is $20.0 million or less, and (ii) decrease to 3.00% when this amount is $15.0 million or less.

ABE South Dakota, LLC also entered into a Security Agreement with AgCountry under which borrowings under the 2015 Credit Agreement are secured by substantially all of ABE South Dakota’s assets. AgCountry holds a first priority security interest and mortgage in all inventory, accounts receivable, intangibles, equipment, fixtures, buildings, and a first mortgage in land owned or leased by ABE South Dakota.

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The 2015 Credit Agreement also included financial and non-financial covenants that limit distributions and debt and require minimum working capital, owner’s equity, current ratio, debt to EBITDA ratio, and fixed charge coverage ratios. Those covenants, as amended, include the following:

ABE South Dakota is also prohibited from making member distributions in excess of 40% of pre-tax net income in a given year without the prior consent of Ag Country. When ABE South Dakota achieves and maintains owners’ equity ratio of 60.0% and working capital of $15.0 million, then it may pay member dividends of 100.0% of pre-tax net income. If the owner’s equity ratio declines below 60.0%, or working capital declines below $15.0 million, then dividends will be restricted until ABE South Dakota regains compliance. ABE South Dakota must meet all loan covenants before and after any distribution.

2016 Term Loan

On September 28, 2016, ABE South Dakota entered into the Third Supplement to the Master Credit Agreement (“2016 Term Loan”) with AgCountry to finance the corn oil extraction system at the Huron plant.  The total loan commitment for 2016 Term Loan is $1.7 million, and the loan has a variable interest rate equal to the one-month LIBOR rate plus a “Margin” of 350 basis points.  Beginning January 1, 2017, the Company must begin making quarterly payments of accrued interest on the 2016 Term Loan.  Beginning April 1, 2017, the Company must begin making quarterly principal payments of $212,500 on the 2016 Term Loan. As of September 30, 2016 no funds had been drawn from this loan.  Funds were drawn subsequent to the end of the Company’s fiscal year, and the balance outstanding as of December 23, 2016 was $1.1 million.

Amendment and Waivers to 2015 Credit Agreement

On September 28, 2016, ABE South Dakota entered into a Limited Waiver and First Amendment to Master Credit Agreement (“First Amendment”) to (i) eliminate the Owner’s Equity Ratio Covenant, (ii) temporarily increase the Capital Expenditures Covenant to $3.0 million for fiscal 2016 to finance the corn oil extraction system at the Huron plant, and (iii) waive other obligations related to the post closing agreement.  

On November 19, 2016, ABE South Dakota received a waiver to the 2015 Credit Agreement from AgCountry that waived certain Events of Default related to the Working Capital requirement and the Total Outstanding Debt to EBITDA Ratio at September 30, 2016.

2010 Senior Credit Agreement

ABE South Dakota entered into an Amended and Restated Senior Credit Agreement (the “2010 Senior Credit Agreement”), effective as of June 18, 2010, and amended on December 9, 2011, which was accounted for under troubled debt restructuring rules. The 2010 Senior Credit Agreement was executed among ABE South Dakota, the lenders from time to time party thereto, and an Administrative Agent and Collateral Agent. The 2010 Senior Credit Agreement converted the outstanding principal amount of the

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loans and certain other amounts under interest rate protection agreements to a senior term loan. The interest accrued on outstanding term and working capital loans under the previous credit agreement were reduced to zero. ABE South Dakota agreed to pay a $3.0 million restructuring fee to the lender due at the earlier of March 31, 2016 and the date on which the loans are repaid in full. ABE South Dakota recorded the restructuring fee as non-interest bearing debt on its consolidated balance sheets. See “Additional Carrying Value of Restructured Debt” below.

The principal amount of the term loan facility was payable in quarterly payments of $750,000, with the remaining principal amount fully due and payable on March 31, 2016. During the year ended September 30, 2015, ABE South Dakota made debt sweep payments totaling $8.0 million in addition to its scheduled principal payments of $3.0 million. ABE South Dakota was also obligated to pay the remaining $68,750 installment of a $275,000 waiver fee to the senior lenders on March 31, 2016. The Company recorded this fee as non-interest bearing debt on its consolidated balance sheet and is included in the Restructuring Fee category in the above debt tables net of the unamortized portion.

ABE South Dakota had the option to select the interest rate on the senior term loan between base rate and euro-dollar rates for maturities of one to six months. Base rate loans bear interest at the administrative agent’s base rate plus an applicable margin of 3.0%. Euro-dollar loans bear interest at LIBOR plus the applicable margin of 4.0%. As of September 30, 2015, ABE South Dakota had selected the LIBOR plus 4.0% rate for a period of one month.

ABE South Dakota’s obligations under the 2010 Senior Credit Agreement were secured by a first-priority security interest in the equity and assets of ABE South Dakota.

ABE South Dakota was allowed to make equity distributions (other than certain tax distributions) to ABE only upon ABE South Dakota meeting certain financial conditions and if there is no more than $25 million of principal outstanding on the senior term loan. Loans outstanding under the 2010 Senior Credit Agreement were subject to mandatory prepayment in certain circumstances, including, but not limited to, mandatory prepayments based upon receipt of certain proceeds of asset sales, casualty proceeds, termination payments, and cash flows.

The 2010 Senior Credit Agreement and the related loan documentation included, among other terms and conditions, limitations (subject to specified exclusions) on ABE South Dakota’s ability to make asset dispositions; merge or consolidate with or into another person or entity; create, incur, assume or be liable for indebtedness; create, incur or allow liens on any property or assets; make investments; declare or make specified restricted payments or dividends; enter into new material agreements; modify or terminate material agreements; enter into transactions with affiliates; change its line of business; and establish bank accounts. Substantially all cash of ABE South Dakota was required to be deposited into special, segregated project accounts subject to security interests to secure obligations in connection with the 2010 Senior Credit Agreement. The 2010 Senior Credit Agreement contained customary events of default and also includes an event of default for defaults on other indebtedness by ABE South Dakota and certain changes of control.

In connection with closing, ABE South Dakota paid in full all amounts outstanding under the 2010 Senior Credit Agreement, including $29.0 million of principal, accrued interest, the $3.0 restructuring fee, and the waiver fee of $68,750, and all security interests of the prior lenders were extinguished.

Additional Carrying Value of Restructured Debt

Since the future maximum undiscounted cash payments on the 2010 Senior Credit Agreement (including principal, interest and the restructuring fee) exceeded the adjusted carrying value at the time of the June 2010 restructuring, no gain for the forgiven interest was recorded, the carrying value was not adjusted and the modification of terms was accounted for on a prospective basis, via a new effective interest calculation, amortized over the life of the note, offsetting interest expense.

As a result of the debt sweep payments made during the years ended September 30, 2015 and 2014, the carrying value of the debt exceeded the scheduled principal and interest payments remaining over the term of the loan. As a result, gains of $0.4 million and $1.0 million were recognized in fiscal 2015 and 2014, respectively. Since the remaining scheduled principal and interest payments were equal to the carrying amount, all remaining payments based on the current interest rates were treated as a reduction in the carrying value of the debt.

ABE Letter of Credit

In connection with the execution of a rail car sublease, the Company, as parent of ABE South Dakota agreed to post a $2.5 million irrevocable and non-transferable standby letter of credit in May 2012 for the benefit of its ethanol marketer as security for the payment obligations of ABE South Dakota. The Company deposited $2.5 million in a restricted account as collateral for this letter of credit and classified it as restricted cash. Effective May 15, 2014, the letter of credit and corresponding deposit of collateral was

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decreased by $1.0 million in conjunction with an amendment to the rail car sublease. Effective June 27, 2016, the letter of credit and corresponding deposit of collateral was decreased by $0.5 million in conjunction with an amendment to the rail car sublease.

 

 

Unit Appreciation Rights

As of September 30, 2016, the Company had 312,500 Unit Appreciation Rights (“UAR”) fully vested and outstanding. At the time of grant 200,000 of the UARs had an exercise price of $1.15 per unit. The exercise price of these UARs has been reduced to $0.36 per unit as of September 30, 2016 as a result of cash distributions paid to the Company’s unit holders subsequent to the date of the UAR grant. The exercise price of 12,500 UARs is $1.00 and the exercise price of the 100,000 unit equity award is $0.97 per unit.  The exercise price of each of these awards will be reduced by any future distributions paid to the Company’s unit holders. The units are contingently exercisable only under certain limited circumstances, and therefore the Company is not recognizing compensation expense related to the awards until these defined circumstances are probable of occurring.

Board Representation and Voting Agreement

The Company, certain directors of the Company, South Dakota Wheat Growers Association, Clean Energy Capital, LLC (“CEC”) and Hawkeye Energy Holdings, LLC (“Hawkeye”), have each executed a voting agreement (the “Voting Agreement”). The Voting Agreement requires the parties to (a) nominate for election to the Board two designees of Hawkeye, two designees of CEC and the Chief Executive Officer of the Company, (b) recommend to the members the election of each of the designees, (c) vote all units of the Company they beneficially own or otherwise control to elect each of the designees to the Board, (d) not take any action that would result in the removal of any of the designees from the Board or to increase the size of the Board to more than nine members, and (e) not grant a proxy with respect to any units that is inconsistent with the parties’ obligations under the Voting Agreement. At December 1, 2016, the parties to the Voting Agreement held in the aggregate approximately 46% of the outstanding units of the Company.

 

 

Subsequent to the sale of its Fairmont facility in fiscal 2013, the Company implemented a cost reduction program reducing its headquarters staff to align its staffing with the remaining on-going operations. In connection with this cost reduction program, the Company recognized expense of $1.8 million in fiscal 2014 and $0.4 million in fiscal 2015.

 

 

Lease Commitments

The Company leases ethanol and distillers rail cars, office and other equipment and an office facility under operating lease agreements with the following approximate future minimum rental commitments through 2021 for the years ended September 30 (in thousands):

 

 

The Company recognized rent expense related to the above leases of approximately $5.0 million, $5.1 million, and $4.8 million for the years ended September 30, 2016, 2015, and 2014, respectively.

 

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ABE South Dakota has ethanol marketing agreements with NGL Energy Partners, LP (“NGL”), a diversified energy business. These ethanol marketing agreements require that we sell to NGL all of the denatured fuel-grade ethanol produced at the South Dakota plants. The term of these ethanol marketing agreements expires on June 30, 2019.

ABE South Dakota is party to a co-product marketing agreement with Dakotaland Feeds, LLC (“Dakotaland Feeds”), whereby Dakotaland Feeds markets the local sale of distillers’ grains produced at the ABE South Dakota Huron plant to third parties for an agreed upon commission. ABE South Dakota has a marketing agreement with Gavilon to market the dried distillers’ grains from the Aberdeen plant through  July 31, 2017. ABE South Dakota self-markets the wet distillers’ grains produced at the Aberdeen plant.

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

 

 

 

The Company is exposed to a variety of market risks, including the effects of changes in commodity prices and interest rates. These financial exposures are monitored and managed by the Company as an integral part of its overall risk management program. The Company’s risk management program seeks to reduce the potentially adverse effects that the volatility of these markets may have on its current and future operating results. To reduce these effects, the Company generally attempts to fix corn purchase prices and related sale prices of ethanol, distillers’ grains and corn oil, with forward purchase and sale contracts to lock in future operating margins. In addition to entering into contracts to purchase 4.7 million bushels of corn in which the basis or futures price was not locked, the Company had entered into the following fixed price forward sales and purchase contracts at September 30, 2016:

 

 

Unrealized gains and losses on forward contracts, in which delivery has not occurred, are deemed “normal purchases and normal sales,” and, therefore are not marked to market in the financial statements.

 

 

The Company sponsors a 401(k) plan for eligible employees. Eligible employees may make elective deferral contributions to the plan. The Company’s matching contribution is 100% of the employee’s elective deferrals, not to exceed 5% of the employee’s eligible wages. The Company contributed approximately $160,000, $163,000, and $167,000, to the plan in the years ended September 30, 2016, 2015, and 2014, respectively.

 

 

Grain Purchases from South Dakota Wheat Growers Association (SDWG)

The Company purchased $104.9 million, $101.1 million and $109.2 million of corn from SDWG in the years ended September 30, 2016, 2015, and 2014 pursuant to a grain origination agreement, which covers all corn purchases in South Dakota.

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SDWG owns approximately 5% of the Company’s outstanding units. As of September 30, 2016 and 2015, the Company had outstanding amounts payable to SDWG of approximately $2.0 million and $3.3 million, respectively.

 

 

The following table presents summarized quarterly financial data for the years ended September 30, 2016 and 2015. Dollars in thousands, except per unit amounts:

 

 

 

 

The following financial information represents the unconsolidated financial statements of Advanced BioEnergy, LLC (“ABE”) as of September 30, 2016 and 2015, and for the years ended September 30, 2016, 2015 and 2014. ABE’s ability to receive distributions from ABE South Dakota is based on the terms and conditions in the ABE South Dakota credit agreement. Under its current credit agreement, ABE South Dakota is allowed to make equity distributions of up to 40% of its net income, and may distribute up to 100% of its net income if it achieves and maintains an owner’s equity ratio of at least 60% and working capital of at least $15 million. There were no distributions from ABE South Dakota during the last three fiscal years.

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Advanced BioEnergy, LLC (Unconsolidated)

Balance Sheets

 

 

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Advanced BioEnergy, LLC (Unconsolidated)

Statements of Operations

 

 

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Advanced BioEnergy, LLC (Unconsolidated)

Statements of Cash Flows

 

 

 

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None.

 

 

Disclosure Controls and Procedures

As of the end of the period covered by this report, our management conducted an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on this evaluation, the officer serving as both our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by our Company in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Commission rules and forms.

Management’s Annual Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance to our management and board of directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; (iii) provide reasonable assurance that receipts and expenditures of Company assets are made in accordance with management authorization; and (iv) provide reasonable assurance that unauthorized acquisition, use or disposition of Company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because changes in conditions may occur or the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of our internal control over financial reporting as of September 30, 2016. This assessment is based on the criteria for effective internal control described in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment, management concluded that our internal control over financial reporting was effective as of September 30, 2016.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.

Changes in Internal Controls over Financial Reporting

Our management, with the participation of the officer serving as both our chief executive officer and chief financial officer, performed an evaluation as to whether any change in the internal controls over financial reporting (as defined in Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934) occurred during our fourth fiscal quarter. Based on that evaluation, the chief executive officer and chief financial officer concluded that no change occurred in the internal controls over financial reporting during the period covered by this report that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

 

 

 

None.

 

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PART III

 

 

Incorporated herein by reference is the information appearing under the headings “Election of Directors” and “Company Governance” in the Company’s proxy statement for the Company’s 2017 Annual Meeting of Members (the “Proxy Statement”) to be filed no later than 120 days after the end of the fiscal year ended September 30, 2016.

There were no material changes to the procedures by which unit holders may recommend nominees to the board of directors since our last report.

Incorporated herein by reference is the information appearing under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.

The Company has adopted a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The Company has posted this Code of Business Conduct and Ethics on the Advanced BioEnergy website at www.advancedbioenergy.com.

We intend to disclose any amendments to, or waivers from, the Code of Business Conduct and Ethics applicable to our principal executive officer, principal financial officer, principal accounting officer or persons performing similar functions or with respect to the required elements of the Code of Business Ethics, by disclosing the amendment or waiver on this website.

 

 

Incorporated herein by reference is the information appearing under the heading “Executive Compensation” in the Proxy Statement.

 

 

Incorporated herein by reference is the information appearing under the heading “Security Ownership of Certain Beneficial Owners” in the Proxy Statement.

 

 

Incorporated herein by reference is the information appearing under the heading “Corporate Governance” in the Proxy Statement.

 

 

Incorporated herein by reference is the information appearing under the heading “Ratification of the Independent Registered Public Accounting Firm” in the Proxy Statement.

 

 

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PART IV

 

 

(1) Financial Statements—an index to our financial statements is located above on page 41 of this report. The financial statements appear on page 43 through page 62 of this report.

(2)  Exhibits—the exhibits filed herewith are set forth on the Exhibit Index filed as a part of this report beginning immediately following the signatures.

 

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, on December 23, 2016.

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on December 23, 2016.

 

 

 

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EXHIBIT INDEX

 

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