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EX-32 - EX-32 - Advanced BioEnergy, LLCck0001325740-ex32_9.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

Form 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2016

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

Commission file number: 000-52421

 

ADVANCED BIOENERGY, LLC

(Exact name of Registrant as Specified in its Charter)

 

Delaware

 

20-2281511

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

8000 Norman Center Drive, Suite 610

Bloomington, Minnesota 55437

(763) 226-2701

(Address, including zip code, and telephone number,

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

 

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 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):

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

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

As of February 1, 2017, the number of outstanding units was 25,410,851.

 

 


ADVANCED BIOENERGY, LLC

FORM 10-Q

Index

 

 

Page

Part I. Financial Information

 

Item 1. Financial Statements

3

Consolidated Balance Sheets

3

Consolidated Statements of Operations

4

Consolidated Statement of Changes in Members’ Equity

5

Consolidated Statements of Cash Flows

6

Notes to Consolidated Financial Statements

7

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

17

Item 3. Quantitative and Qualitative Disclosures About Market Risk

28

Item 4. Controls and Procedures

29

Part II. Other Information

 

Item 1. Legal Proceedings

30

Item 1A. Risk Factors

30

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

30

Item 3. Defaults Upon Senior Securities

30

Item 4. Mine Safety Disclosure

30

Item 5. Other Information

30

Item 6. Exhibits

30

Signatures

31

Exhibit Index

32

 

2


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ADVANCED BIOENERGY, LLC & SUBSIDIARIES

Consolidated Balance Sheets

(Dollars in thousands)

 

 

 

December 31,

 

 

September 30,

 

 

 

2016

 

 

2016

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

18,644

 

 

$

15,416

 

Accounts receivable:

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

7,502

 

 

 

4,492

 

Other receivables

 

 

590

 

 

 

584

 

Inventories

 

 

5,342

 

 

 

4,530

 

Prepaid expenses

 

 

1,061

 

 

 

712

 

Restricted cash

 

 

1,000

 

 

 

1,000

 

Total current assets

 

 

34,139

 

 

 

26,734

 

Property and equipment, net

 

 

32,570

 

 

 

32,231

 

Other assets

 

 

1,068

 

 

 

1,068

 

Total assets

 

$

67,777

 

 

$

60,033

 

LIABILITIES AND MEMBERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

5,175

 

 

$

3,634

 

Accrued expenses

 

 

2,285

 

 

 

2,243

 

Current portion of long-term debt (stated principal amount of $4,638

   and $4,000 at December 31, 2016 and September 30, 2016, respectively)

 

 

4,542

 

 

 

3,904

 

Total current liabilities

 

 

12,002

 

 

 

9,781

 

Other liabilities

 

 

37

 

 

 

40

 

Long-term debt (stated principal amount of $23,464 and $24,000 at

   December 31, 2016 and September 30, 2016, respectively)

 

 

23,178

 

 

 

23,689

 

Total liabilities

 

 

35,217

 

 

 

33,510

 

Members' equity:

 

 

 

 

 

 

 

 

Members' capital, no par value, 25,410,851 units issued and outstanding

 

 

48,638

 

 

 

48,638

 

Accumulated deficit

 

 

(16,078

)

 

 

(22,115

)

Total members' equity

 

 

32,560

 

 

 

26,523

 

Total liabilities and members' equity

 

$

67,777

 

 

$

60,033

 

 

See notes to consolidated financial statements.

3


ADVANCED BIOENERGY, LLC & SUBSIDIARIES

Consolidated Statements of Operations

(Dollars in thousands, except per unit data)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

 

December 31,

 

 

December 31,

 

 

 

 

2016

 

 

2015

 

 

Net sales

 

 

 

 

 

 

 

 

 

Ethanol and related products

 

$

38,509

 

 

$

37,078

 

 

Other

 

 

-

 

 

 

183

 

 

Total net sales

 

 

38,509

 

 

 

37,261

 

 

Cost of goods sold

 

 

31,118

 

 

 

37,943

 

 

Gross profit (loss)

 

 

7,391

 

 

 

(682

)

 

Selling, general and administrative expenses

 

 

1,159

 

 

 

749

 

 

Operating income (loss)

 

 

6,232

 

 

 

(1,431

)

 

Other income

 

 

29

 

 

 

371

 

 

Other expense

 

 

-

 

 

 

(90

)

 

Interest income

 

 

4

 

 

 

36

 

 

Interest expense

 

 

(228

)

 

 

(64

)

 

Net income (loss)

 

$

6,037

 

 

$

(1,178

)

 

Weighted average units outstanding - basic and diluted

 

 

25,411

 

 

 

25,411

 

 

Income (loss) per unit - basic and diluted

 

$

0.24

 

 

$

(0.05

)

 

 

See notes to consolidated financial statements.

4


ADVANCED BIOENERGY, LLC & SUBSIDIARIES

Consolidated Statement of Changes in Members’ Equity

For the Three Months Ended December 31, 2016

(Dollars in thousands)

(Unaudited)

 

 

 

Member

 

 

Members'

 

 

Accumulated

 

 

 

 

 

 

 

Units

 

 

Capital

 

 

Deficit

 

 

Total

 

MEMBERS' EQUITY - September 30, 2016

 

 

25,410,851

 

 

$

48,638

 

 

$

(22,115

)

 

$

26,523

 

Net income

 

 

-

 

 

 

-

 

 

 

6,037

 

 

 

6,037

 

MEMBERS' EQUITY - December 31, 2016

 

 

25,410,851

 

 

$

48,638

 

 

$

(16,078

)

 

$

32,560

 

 

See notes to consolidated financial statements

5


ADVANCED BIOENERGY, LLC & SUBSIDIARIES

Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

6,037

 

 

$

(1,178

)

Adjustments to reconcile net income (loss) to operating activities cash flows:

 

 

 

 

 

 

 

 

Depreciation

 

 

926

 

 

 

2,832

 

Amortization of deferred financing costs

 

 

25

 

 

 

44

 

Amortization of deferred rent

 

 

(3

)

 

 

(7

)

Amortization of additional carrying value of debt

 

 

-

 

 

 

(699

)

(Gain) on disposal of assets

 

 

(28

)

 

 

-

 

(Gain) on troubled debt restructuring

 

 

-

 

 

 

(322

)

Change in working capital components:

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

(3,010

)

 

 

(406

)

Other receivables

 

 

(6

)

 

 

(86

)

Inventories

 

 

(812

)

 

 

(449

)

Prepaid expenses

 

 

(349

)

 

 

(365

)

Accounts payable

 

 

1,620

 

 

 

(1,976

)

Accrued expenses

 

 

(209

)

 

 

77

 

Net cash provided by (used in) operating activities

 

 

4,191

 

 

 

(2,535

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(1,065

)

 

 

(169

)

Change in other assets

 

 

-

 

 

 

67

 

Change in restricted cash

 

 

-

 

 

 

3,082

 

Net cash provided by (used in) investing activities

 

 

(1,065

)

 

 

2,980

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Payments on debt

 

 

(1,000

)

 

 

(32,069

)

Proceeds from debt

 

 

1,102

 

 

 

30,000

 

Net cash provided by (used in) financing activities

 

 

102

 

 

 

(2,069

)

Net increase (decrease) in cash and cash equivalents

 

 

3,228

 

 

 

(1,624

)

Beginning cash and cash equivalents

 

 

15,416

 

 

 

16,566

 

Ending cash and cash equivalents

 

$

18,644

 

 

$

14,942

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

213

 

 

$

369

 

Supplemental disclosure of non-cash financing and investing activities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses related to fixed assets

 

$

256

 

 

$

-

 

 

See notes to consolidated financial statements.

6


ADVANCED BIOENERGY, LLC & SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Organization and Significant Accounting Policies

The consolidated financial statements include the accounts of Advanced BioEnergy, LLC (“ABE” or 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.

The accompanying unaudited consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles, or GAAP, for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  The interim financial statements should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended September 30, 2016. The financial information as of December 31, 2016 and the results of operations for the three months ended December 31, 2016 are not necessarily indicative of the results for the fiscal year ending September 30, 2017. In the opinion of management, the interim financial statements reflect all normal recurring adjustments necessary for fair presentation.

The Company currently owns 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.  Restricted cash at September 30, 2016 and December 31, 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. We estimate the fair value of the long-term debt based on level 3 inputs, including the current anticipated interest rate that management believes would be available to the Company for similar debt, considering 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.

Receivables

Credit sales are made to a relatively small numbers 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 December 31, 2016 or September 30, 2016.

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.

7


Property and Equipment

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

 

Office equipment

 

3-7 Years

Process equipment

 

15 Years

Buildings

 

40 Years

 

Prior to June 30, 2016, the Company used an estimated useful life of 10 years for process equipment.  Based on a re-evaluation of the useful lives of process equipment it conducted in the fiscal 2016 fourth quarter, the Company determined a change in estimate was necessary.  Accordingly, the Company increased the estimated useful life for process equipment from 10 to 15 years in the fiscal 2016 fourth quarter.  As a result of this change in estimate, depreciation expense was lower by approximately $1.8 million, or $0.07 per unit, in the fiscal 2017 first quarter than in the fiscal 2016 first quarter. Depreciation in future periods will be lower than in the past, reflecting 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 of the asset group 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 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.

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.

Income per Unit

Basic and diluted income per unit is computed using the weighted-average number of units outstanding during each period presented.

Accounting Estimates

Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles, or GAAP. 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.

8


Recent Accounting Pronouncements

          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 prior period reporting or 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. 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 are currently evaluating the potential effect of this new accounting standard on our balance sheet.

 

2. Inventories

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

 

 

 

December 31,

 

 

September 30,

 

 

 

2016

 

 

2016

 

Chemicals

 

$

826

 

 

$

814

 

Work in process

 

 

744

 

 

 

705

 

Ethanol

 

 

1,719

 

 

 

1,180

 

Distillers grain

 

 

164

 

 

 

45

 

Supplies and parts

 

 

1,889

 

 

 

1,786

 

Total

 

$

5,342

 

 

$

4,530

 

 

3. Property and Equipment

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

 

 

 

December 31,

 

 

September 30,

 

 

 

2016

 

 

2016

 

Land

 

$

1,811

 

 

$

1,811

 

Buildings

 

 

8,097

 

 

 

8,097

 

Process equipment

 

 

108,449

 

 

 

105,713

 

Office equipment

 

 

1,644

 

 

 

1,600

 

Construction in process

 

 

52

 

 

 

1,571

 

 

 

 

120,053

 

 

 

118,792

 

Accumulated depreciation

 

 

(87,483

)

 

 

(86,561

)

Property and equipment, net

 

$

32,570

 

 

$

32,231

 

 

9


4. Long-term Debt

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

 

 

 

December 31,

 

 

 

 

 

 

 

 

 

 

 

2016

 

 

December 31,

 

 

September 30,

 

 

 

Interest Rate

 

 

2016

 

 

2016

 

ABE South Dakota:

 

 

 

 

 

 

 

 

 

 

 

 

Senior debt principal - variable

 

 

4.04%

 

 

$

28,102

 

 

$

28,000

 

Deferred financing costs

 

N/A

 

 

 

(382

)

 

 

(407

)

Total outstanding (stated principal)

 

 

 

 

 

$

27,720

 

 

$

27,593

 

 

The estimated maturities of debt are as follows (in thousands):

 

 

 

Senior Debt

 

 

Deferred

 

 

 

 

 

Due By December 31:

 

Principal

 

 

Financing Costs

 

 

Total

 

2017

 

$

4,638

 

 

$

(96

)

 

$

4,542

 

2018

 

 

4,464

 

 

 

(96

)

 

 

4,368

 

2019

 

 

4,000

 

 

 

(95

)

 

 

3,905

 

2020

 

 

4,000

 

 

 

(95

)

 

 

3,905

 

2021

 

 

11,000

 

 

 

-

 

 

 

11,000

 

Total debt

 

$

28,102

 

 

$

(382

)

 

$

27,720

 

 

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 December 31, 2016 was 0.54%. 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 December 31, 2016, the balance of the Term Loan was $17.0 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 is required to 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. At December 31, 2016, the balance of the Revolving Term Facility was $10.0 million.

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 includes customary financial and non-financial covenants that limit capital expenditures, distributions and debt and require minimum working capital, current ratio, debt to EBITDA, and fixed charge coverage ratios.

10


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 began 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 December 31, 2016 $1.1 million had been drawn from this loan. 

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.

ABE Letter of Credit

The Company has a $1.0 million irrevocable and non-transferable standby letter of credit related to a rail car sublease.  This letter of credit is collateralized by $1.0 million of cash in a restricted account; the cash in this account has been classified as restricted cash.

5. Major Customers

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 ABE South Dakota’s major customers were as follows (in thousands):

 

 

 

As of and for the Quarter Ending

 

 

As of and for the Quarter Ending

 

 

As Of

 

 

 

December 31,

 

 

December 31,

 

 

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

NGL Energy - Ethanol

 

 

 

 

 

 

 

 

 

 

 

 

Three months revenues

 

$

31,802

 

 

$

30,072

 

 

 

 

 

Receivable balance at period end

 

 

6,718

 

 

 

3,382

 

 

$

3,642

 

Gavilon - Corn Oil & Distillers Grains

 

 

 

 

 

 

 

 

 

 

 

 

Three months revenues

 

$

3,633

 

 

$

3,656

 

 

 

 

 

Receivable balance at period end

 

 

181

 

 

 

337

 

 

$

323

 

Dakotaland Feeds - Distillers Grains

 

 

 

 

 

 

 

 

 

 

 

 

Three months revenues

 

$

2,747

 

 

$

2,907

 

 

 

 

 

Receivable balance at period end

 

 

454

 

 

 

453

 

 

$

470

 

 

11


6. Risk Management

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. The Company had entered into the following fixed price forward contracts at December 31, 2016:

 

Commodity

 

Type

 

Quantity

 

Amount

(in 000's)

 

 

Period

Covered

Through

Distillers grains

 

Sale

 

19,447 tons

 

$

1,086

 

 

January 31, 2017

Corn oil

 

Sale

 

470,000 lbs

 

 

108

 

 

January 31, 2017

Corn

 

Purchase

 

280,000 bushels

 

 

913

 

 

January 31, 2017

 

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.

7.  Parent Financial Statements

The following financial information represents the unconsolidated financial statements of Advanced BioEnergy, LLC (“ABE”) as of December 31, 2016 and September 30, 2016, and for the three months ended December 31, 2016 and 2015.  ABE’s ability to receive distributions from ABE South Dakota is based on the terms and conditions in 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.

12


Advanced BioEnergy, LLC (Unconsolidated)

Balance Sheets

(Dollars in thousands)

 

 

 

December 31,

 

 

September 30,

 

 

 

2016

 

 

2016

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

4,940

 

 

$

5,176

 

Restricted cash

 

 

1,000

 

 

 

1,000

 

Prepaids

 

 

74

 

 

 

-

 

Total current assets

 

 

6,014

 

 

 

6,176

 

Property and equipment, net

 

 

100

 

 

 

118

 

Other assets:

 

 

 

 

 

 

 

 

Investment in ABE South Dakota

 

 

26,642

 

 

 

20,420

 

Other assets

 

 

32

 

 

 

32

 

Total assets

 

$

32,788

 

 

$

26,746

 

LIABILITIES AND MEMBERS' EQUITY

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

35

 

 

$

5

 

Accrued expenses

 

 

156

 

 

 

179

 

Other liabilities

 

 

37

 

 

 

39

 

Total liabilities

 

 

228

 

 

 

223

 

Members' equity:

 

 

 

 

 

 

 

 

Members' capital, no par value, 25,410,851 units issued and outstanding

 

 

48,638

 

 

 

48,638

 

Accumulated deficit

 

 

(16,078

)

 

 

(22,115

)

Total members' equity

 

 

32,560

 

 

 

26,523

 

Total liabilities and members' equity

 

$

32,788

 

 

$

26,746

 

 

13


Advanced BioEnergy, LLC (Unconsolidated)

Statements of Operations

(Dollars in thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

 

December 31,

 

 

December 31,

 

 

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings (losses) of consolidated subsidiary

 

$

6,222

 

 

$

(1,141

)

 

Selling, general and administrative expenses

 

 

(188

)

 

 

(67

)

 

Operating income (loss)

 

 

6,034

 

 

 

(1,208

)

 

Other expense

 

 

-

 

 

 

(6

)

 

Interest income

 

 

3

 

 

 

36

 

 

Net income (loss)

 

$

6,037

 

 

$

(1,178

)

 

 

14


Advanced BioEnergy, LLC (Unconsolidated)

Statements of Cash Flows

(Dollars in thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

6,037

 

 

$

(1,178

)

Adjustments to reconcile net income (loss) to operating activities cash flows:

 

 

 

 

 

 

 

 

Depreciation

 

 

18

 

 

 

31

 

Equity in earnings (losses)  of consolidated subsidiaries

 

 

(6,222

)

 

 

1,141

 

Amortization of deferred revenue and rent

 

 

(2

)

 

 

(7

)

Change in working capital components:

 

 

 

 

 

 

 

 

Other receivable

 

 

-

 

 

 

(48

)

Prepaid expenses

 

 

(74

)

 

 

6

 

Accounts payable

 

 

30

 

 

 

-

 

Accrued expenses

 

 

(23

)

 

 

(2

)

Net cash (used in) operating activities

 

 

(236

)

 

 

(57

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Change in restricted cash

 

 

-

 

 

 

(30

)

Net cash (used in) investing activities

 

 

-

 

 

 

(30

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Distribution to subsidiary

 

 

-

 

 

 

(2,892

)

Net cash (used in) financing activities

 

 

-

 

 

 

(2,892

)

Net (decrease) in cash and cash equivalents

 

 

(236

)

 

 

(2,979

)

Beginning cash and cash equivalents

 

 

5,176

 

 

 

8,158

 

Ending cash and cash equivalents

 

$

4,940

 

 

$

5,179

 

 


15


8.  Subsequent Event

On February 1, 2017 Advanced BioEnergy, LLC’s Board of Directors declared a cash distribution of $0.15 per unit. Distribution checks were mailed on or around February 13, 2017 to all unit holders of record as of February 13, 2017.  

 

16


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

Information Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q 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 our Annual Report on Form 10-K for the year ended September 30, 2016 and in this Form 10-Q. These risks and uncertainties include, but are not limited to, the following:

 

our operational results are subject to fluctuations in the prices of grain, utilities and ethanol, which are affected by various factors including weather, production levels, supply, demand, changes in technology and government support and regulations;

 

our margins can have fluctuated in the past and could become negative, which may affect our ability to meet current obligations and debt service requirements at our ABE South Dakota entity;

 

our risk mitigation strategies could be unsuccessful and could materially harm our results;

 

our cash distributions depend upon our future financial and operational performance and will be affected by debt covenants, reserves and operating expenditures;

 

ethanol may trade at a premium to gasoline at times, as it is now, causing a disincentive for discretionary blending of ethanol beyond the rates required to comply with the RFS (as defined below). Consequently, there may be a negative impact on ethanol pricing and demand;

 

current government mandated standards such as the RFS may be reduced or eliminated, and legislative acts taken by state governments such as California related to low-carbon fuels that include the effects of indirect land use, may have an adverse effect on our business;

 

alternative fuel additives may be developed that are superior to, or cheaper than ethanol;

 

transportation, storage and blending infrastructure may become impaired, preventing ethanol from reaching markets;

 

our operating facilities may experience technical difficulties and not produce the gallons of ethanol expected;

 

our units are subject to a number of transfer restrictions, and although our units are now listed on an internet-based matching platform, we cannot ensure that a market will ever develop for our units;

 

the ability of our ABE South Dakota subsidiary to make distributions to ABE in light of restrictions in this subsidiary’s credit facility;

 

anti-dumping and countervailing duties investigations by the Chinese government into U.S. distillers grains exported to China could result in reduced export demand for distillers grains and have a negative impact on domestic distillers grain prices;

 

recent increases in ethanol tariffs from 5 to 30 percent imposed by the Chinese government could result in reduced export demand for ethanol and have a negative impact on domestic ethanol prices;

 

the supply of ethanol rail cars in the market has fluctuated in recent years and may affect our ability to obtain new tanker cars or negotiate new leases at a reasonable fee when our current leases expire; and

 

an increase in rail traffic congestion throughout the United States primarily due to the increase in cargo trains carrying shale oil, which, from time to time, has and may continue to affect our ability to return our tanker rail cars 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.

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

17


and in our other reports filed from time to time with the U.S. Securities and Exchange Commissions, which we refer to as the SEC, that advise interested parties of the risks and factors that may affect our business.

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 notes to the consolidated financial statements thereto.

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, 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 reporting segment.

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 hammer mill 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 start the process of converting 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 pumped into fermenters, where yeast is added to begin the batch-fermentation process. Fermentation is the process of the yeast converting 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 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.

18


FACILITIES

The table below provides a summary of our ethanol plants in operation as of December 31, 2016:

 

 

 

 

 

 

 

 

 

Estimated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

 

Annual

 

 

Estimated

 

 

Estimated

 

 

 

 

 

 

 

Annual

 

 

Distillers

 

 

Annual

 

 

Annual

 

 

 

 

 

 

 

Ethanol

 

 

Grains

 

 

Corn Oil

 

 

Corn

 

 

Primary

Location

 

Opened

 

Production (3)

 

 

Production(1)

 

 

Processed

 

 

Processed

 

 

Energy Source

 

 

 

 

(Million gallons)

 

 

(000's Tons)

 

 

(000's lbs)

 

 

(Million bushels)

 

 

 

Aberdeen, SD(2)

 

January 2008

 

 

48

 

 

 

134

 

 

 

11,561

 

 

 

15.7

 

 

Natural Gas

Huron, SD

 

September 1999

 

 

32

 

 

 

97

 

 

 

5,717

 

 

 

11.4

 

 

Natural Gas

Consolidated

 

 

 

 

80

 

 

 

231

 

 

 

17,278

 

 

 

27.1

 

 

 

 

(1)

Our plants produce and sell wet, modified and dried distillers’ grains. The stated quantities are on a fully dried basis operating at full production capacity.

 (2)

Our plant at Aberdeen consists of a single production facility that is represented in the table above. Prior to April 2016, we also operated a smaller, nine-million gallon Aberdeen facility.  We closed this smaller plant in April 2016 due to inefficiencies and the ongoing capital expenditures required to keep it in operating condition, coupled with the weak margin environment. We decided during our fiscal 2016 fourth quarter not to resume operations at this facility in the future and, accordingly, impaired the value of this asset on our financial statements to an estimated salvage value of $200,000.

(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 our 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.

Plan of Operations through December 31, 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 our plants, continuing emphasis on safety and environmental regulation, reducing our operating costs, and optimizing our margin opportunities through prudent risk-management policies.

Results of Operations for the Quarter Ended December 31, 2016 Compared to Quarter Ended December 31, 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 three months ended December 31, 2016 and 2015 for our South Dakota plants:

 

 

 

Three Months

 

 

Three Months

 

 

 

December 31, 2016

 

 

December 31, 2015

 

 

 

Quantity

 

 

Average Price

 

 

Quantity

 

 

Average Price

 

Product Sales Information

 

(In thousands)

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

Ethanol (gallons)

 

 

21,583

 

 

$

1.47

 

 

 

22,574

 

 

$

1.33

 

Distillers grains (tons)

 

 

82,861

 

 

$

100.41

 

 

 

61

 

 

$

106.17

 

Corn Oil (pounds)

 

 

5,188

 

 

$

0.24

 

 

 

2,755

 

 

$

0.17

 

 

Product Cost Information

 

Quantity

 

 

Average Cost

 

 

Quantity

 

 

Average Cost

 

Corn (bushels)

 

 

7,496

 

 

$

2.96

 

 

 

7,911

 

 

$

3.38

 

Natural Gas (therms)

 

 

562

 

 

$

3.42

 

 

 

617

 

 

$

2.50

 

 

19


Net Sales

Net sales for the quarter ended December 31, 2016 were $38.5 million, compared to $37.3 million for the quarter ending December 31, 2015, an increase of $1.7 million or 6%. Ethanol gallons sold decreased by 4%, while ethanol prices increased 11% for the quarter ended December 31, 2016, compared to the prior quarter ended December 31, 2015. As a percentage of net sales, ethanol sales were 83% and 81% and distillers’ sales were 14% and 17%, for the quarters ending December 31, 2016 and December 31, 2015, respectively.

Cost of Goods Sold

Cost of goods sold for the quarter ended December 31, 2016 was $31.1 million, compared to $37.9 million for the quarter ended December 31, 2015, a decrease of $6.8 million. Our primary costs in the production of ethanol and related co-products are corn and natural gas.  A $4.5 million decrease in corn costs offset by a $0.4 million increase in natural gas costs represented a majority of the decrease in cost of goods sold in the quarter ended December 31, 2016. Corn costs represented 71% and 70% of cost of sales for the quarters ended December 31, 2016 and 2015, respectively. Corn prices decreased 12% during the three-month period ending December 31, 2016 compared to the prior year quarter. We used 1% more corn in the three-month period ending December 31, 2016, compared to the three months ended December 31, 2015.

Natural gas costs represented 6% and 4% of total cost of sales for the quarters ending December 31, 2016 and 2015, respectively. The cost of natural gas per mmbtu increased by 37% to $3.42 for the quarter ended December 31, 2016 compared to the previous year quarter. Prices were lower in the prior year quarter due to record natural gas storage levels and limited demand due to warmer than average temperatures in the winter months. Natural gas stocks have dropped 11% year over year due to increased demand from colder weather and exports, resulting in higher prices in the current quarter versus last year. Our natural gas consumption decreased by 9% due to decreased production in the quarter ending December 31, 2016 versus the quarter ending December 31, 2015.

Selling, General, and Administrative Expenses

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

Overall selling, general and administrative costs for the quarter ended December 31, 2016 were $1.2 million compared to $0.8 million for the previous quarter.  The higher costs in the quarter ended December 31, 2016 were primarily related to retroactively applied state sales taxes on ethanol gallons shipped, contributions to industry trade organizations, and employee bonus compensation.  As a percentage of net sales, selling, general and administrative expenses were 3% and 2% of net sales, for the quarters ending December 31, 2016 and 2015, respectively.

Interest Expense

Interest expense for the quarter December 31, 2016 was $228,000 compared to $64,000 for the quarter ending December 31, 2015. The lower interest expense for the prior year quarter was the result of amortization of additional carrying value noted below. The interest expense for the quarter ending December 31, 2015 related to our long-term debt was $327,000 plus $44,000 of amortization of deferred waiver fees, which was offset by $307,000 of amortization of additional carrying value of long-term debt. The amortization of additional carrying value is netted against interest expense on our income statement, thereby significantly reducing the interest expense reported on our income statement.

As a result of the final payoff of the 2010 Senior Credit Agreement in December 2015, the carrying value of the debt exceeded the scheduled principal and interest payments remaining over the term of the loan.  Due to the prepayment made, a gain of approximately $323,000 was recognized as Other Income during the three months ended December 31, 2015.  

Changes in Financial Position for the Three Months ended December 31, 2016

Current Assets

The $7.4 million increase in current assets at December 31, 2016 compared to September 30, 2016 was primarily due to an increase in operating margins in the three months ended December 31, 2016 and a $3.8 million increase in trade receivables and inventory, mostly due to timing differences.

Property, Plant and Equipment

The $0.3 million increase in property, plant and equipment at December 31, 2016 compared to September 30, 2016, was primarily due to $1.2 million of capital expenditures offset by recognizing $0.9 million of depreciation expense in the fiscal year.

20


Current Liabilities

Accounts payable and accrued expenses increased by $1.6 million at December 31, 2016 compared to September 30, 2016 primarily due to timing of payments to vendors.

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

The current portion of long-term debt increased by $637,500 December 31, 2016 compared to September 30, 2016.  The decrease was due to the addition of the current portion of the 2016 Term Loan.

Long-term debt decreased by $535,000 at December 31, 2016 compared to September 30, 2016. This decrease was due to a $1.0 million debt payment made in October 2016, offset by $465,000 of the long-term portion of the 2016 Term Loan.

TRENDS AND UNCERTAINTIES AFFECTING THE ETHANOL INDUSTRY AND OUR FUTURE OPERATIONS

Overview

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. According to the Renewable Fuels Association (“RFA”), as of December 2016, current annualized U.S. ethanol production capacity was approximately 15.4 billion gallons per year. 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 134 billion gallons per year and a blend rate of 10% ethanol and 90% gasoline, the current blend wall is approximately 13.4 billion gallons of ethanol per year.

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 RFA, 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.

Our operations are highly dependent on commodity prices, especially prices for corn, ethanol, distillers’ grains and natural gas. As a result of price volatility for these commodities, our operating results may fluctuate substantially. The price and availability of corn are subject to significant fluctuations depending upon a number of factors that affect commodity prices in general, including crop conditions, weather, federal policy and foreign trade. Because the market price of ethanol is not always directly related to corn prices, at times ethanol prices may lag movements in corn prices and compress the overall margin structure at the plants. As a result, operating margins may become negative and we may be forced to shut down our plants.

We focus on locking in margins based on a cash flows model that continually monitors market prices of corn, natural gas and other input costs against prices for ethanol and distillers grains at each of our production facilities. We create offsetting positions by using a combination of derivative instruments, fixed-price purchases and sales, or a combination of strategies to manage risk associated with commodity price fluctuations. Our primary focus is not to manage general price movements, for example minimize the cost of corn consumed, but rather to lock in favorable margins whenever possible. In the quarter ended December 31, 2016, the average Chicago OPIS Spot Ethanol Assessment was $1.44 per gallon and the average NYMEX RBOB spot gasoline price was $1.67 per gallon, or approximately $0.23 per gallon above ethanol prices.

Federal policy has a significant impact on ethanol market demand. Ethanol blenders previously benefited from incentives that encouraged usage and a tariff on imported ethanol that supported the domestic industry, both of which have now expired. Additionally, the Environmental Protection Agency’s Renewable Fuels Standard (“RFS”) mandates increased level of usage of both corn-based and cellulosic ethanol. Any adverse ruling on, or legislation affecting, RFS mandates in the future could have an adverse impact on short-term ethanol prices and our financial performance in the future.

The ethanol industry and our business depend upon continuation of the federal and state ethanol supports such as the RFS. We believe the ethanol industry expanded due to these federal mandates, policies, and incentives. These government mandates have supported a market for ethanol that might disappear without these programs. Alternatively, the government mandates may be continued at lower levels than those at which they currently exist. In addition, state regulatory activity may also negatively affect the consumption of corn-based ethanol in certain domestic markets such as California, due to low-carbon fuel standards that take into consideration the effects caused by indirect land use.

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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 was 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.

On January 26, 2017, the EPA published a rule delaying the effective dates of 30 recent regulations published by the EPA between October 28, 2016 and January 17, 2017 to allow for additional review by the Trump administration.  The 2017 RFS rule, setting the 2017 RVOs, is among the 30 regulations that have been delayed until March 21, 2017; the RFS rule was originally scheduled to go into effect on February 10, 2017.  Industry organizations such as the Renewable Fuels