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EX-32.2 - EX-32.2 - Heron Lake BioEnergy, LLCc964-20170131ex32265773e.htm
EX-32.1 - EX-32.1 - Heron Lake BioEnergy, LLCc964-20170131ex3214e527e.htm
EX-31.2 - EX-31.2 - Heron Lake BioEnergy, LLCc964-20170131ex312ed9d25.htm
EX-31.1 - EX-31.1 - Heron Lake BioEnergy, LLCc964-20170131ex311fab8a3.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

 

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

For the quarterly period ended January 31, 2017

 

OR

 

 

 

Transition report under Section 13 or 15(d) of the Exchange Act.

 

For the transition period from                    to                  .

 

COMMISSION FILE NUMBER 000-51825

 

HERON LAKE BIOENERGY, LLC

(Exact name of Registrant as specified in its charter)

 

 

 

 

Minnesota

 

41-2002393

(State or other jurisdiction of organization)

 

(I.R.S. Employer Identification No.)

 

91246 390th Avenue, Heron Lake, MN 56137-1375

(Address of principal executive offices)

 

(507) 793-0077

(Issuer’s telephone number)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 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.

 

 

 

 

Large accelerated filer  ☐

 

Accelerated filer  ☐

 

 

 

Non-accelerated filer  ☒

 

Smaller reporting company ☐

(Do not check if a 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 March 17, 2017, there were 62,932,107 Class A units and 15,000,000 Class B units issued and outstanding.

 

 

 

 


 

 


 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

    

January 31, 2017

    

October 31, 2016

 

 

 

(unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

Cash

 

$

1,110,551

 

$

1,297,644

 

Accounts receivable

 

 

3,972,895

 

 

4,607,202

 

Inventory

 

 

6,764,127

 

 

5,864,545

 

Commodity derivative instruments

 

 

447,005

 

 

662,338

 

Prepaid expenses and other current assets

 

 

207,974

 

 

181,853

 

Total current assets

 

 

12,502,552

 

 

12,613,582

 

 

 

 

 

 

 

 

 

Property and Equipment, net

 

 

49,596,296

 

 

50,376,210

 

 

 

 

 

 

 

 

 

Other Assets

 

 

 

 

 

 

 

Other intangible assets, net

 

 

74,463

 

 

84,000

 

Other assets

 

 

697,254

 

 

697,254

 

Total other assets

 

 

771,717

 

 

781,254

 

 

 

 

 

 

 

 

 

Total Assets

 

$

62,870,565

 

$

63,771,046

 

 

 

 

 

 

 

 

 

LIABILITIES AND MEMBERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

Current maturities of long-term debt

 

$

462,086

 

$

490,057

 

Checks drawn in excess of bank balance

 

 

636,678

 

 

1,866,683

 

Accounts payable

 

 

2,363,114

 

 

4,878,210

 

Commodity derivative instruments

 

 

6,081

 

 

 —

 

Accrued expenses

 

 

449,709

 

 

397,407

 

Total current liabilities

 

 

3,917,668

 

 

7,632,357

 

 

 

 

 

 

 

 

 

Long-Term Debt, less current portion

 

 

1,292,753

 

 

1,393,669

 

 

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Members' Equity

 

 

 

 

 

 

 

Members' equity attributable to Heron Lake BioEnergy, LLC consists of 77,932,107 units issued and outstanding at both January 31, 2017 and October 31, 2016

 

 

56,332,009

 

 

53,499,596

 

Non-controlling interest

 

 

1,328,135

 

 

1,245,424

 

Total members' equity

 

 

57,660,144

 

 

54,745,020

 

 

 

 

 

 

 

 

 

Total Liabilities and Members' Equity

 

$

62,870,565

 

$

63,771,046

 

 

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

1


 

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

January 31, 2017

 

January 31, 2016

 

 

    

(unaudited)

    

(unaudited)

    

Revenues

 

$

27,390,074

 

$

26,588,565

 

 

 

 

 

 

 

 

 

Cost of Goods Sold

 

 

23,975,843

 

 

25,730,984

 

 

 

 

 

 

 

 

 

Gross Profit

 

 

3,414,231

 

 

857,581

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

(846,697)

 

 

(808,634)

 

 

 

 

 

 

 

 

 

Operating Income

 

 

2,567,534

 

 

48,947

 

 

 

 

 

 

 

 

 

Other Income (Expense)

 

 

 

 

 

 

 

Interest income

 

 

420

 

 

253

 

Interest expense

 

 

(31,387)

 

 

(58,674)

 

Other income, net

 

 

378,557

 

 

67,678

 

Total other income, net

 

 

347,590

 

 

9,257

 

 

 

 

 

 

 

 

 

Net Income

 

 

2,915,124

 

 

58,204

 

 

 

 

 

 

 

 

 

Less: Net Income Attributable to Non-controlling Interest

 

 

(82,711)

 

 

(83,759)

 

 

 

 

 

 

 

 

 

Net Income Attributable to Heron Lake BioEnergy, LLC

 

$

2,832,413

 

$

(25,555)

 

 

 

 

 

 

 

 

 

Weighted Average Units Outstanding—Basic and Diluted (Class A and B)

 

 

77,932,107

 

 

77,932,107

 

 

 

 

 

 

 

 

 

Net Income Per Unit Attributable to Heron Lake BioEnergy, LLC—Basic and Diluted (Class A and B)

 

$

0.04

 

$

0.00

 

 

 

 

 

 

 

 

 

Distributions Per Unit (Class A and B)

 

$

0.00

 

$

0.05

 

 

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

2


 

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

 

January 31, 2017

 

 

January 31, 2016

 

 

    

 

(unaudited)

    

 

(unaudited)

 

Cash Flow From Operating Activities

 

 

 

 

 

 

 

Net income

 

$

2,915,124

 

$

58,204

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,238,782

 

 

1,184,553

 

Gain on sale of asset

 

 

(45,000)

 

 

 —

 

Change in fair value of commodity derivative instruments

 

 

(219,629)

 

 

(253,684)

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Restricted cash

 

 

 —

 

 

(363,291)

 

Accounts receivable

 

 

634,307

 

 

924,164

 

Inventory

 

 

(899,582)

 

 

(233,176)

 

Commodity derivative instruments

 

 

441,043

 

 

(176,050)

 

Prepaid expenses and other current assets

 

 

(26,121)

 

 

(1,672,711)

 

Accounts payable

 

 

(2,578,869)

 

 

66,685

 

Accrued expenses

 

 

52,302

 

 

804,595

 

Net cash provided by operating activities

 

 

1,512,357

 

 

339,289

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

Capital expenditures

 

 

(385,558)

 

 

(718,062)

 

Proceeds from disposal of asset

 

 

45,000

 

 

 —

 

Net cash used in investing activities

 

 

(340,558)

 

 

(718,062)

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

 

Proceeds from long-term debt

 

 

 —

 

 

4,613,122

 

Proceeds from (payments on) checks drawn in excess of bank balance

 

 

(1,230,005)

 

 

3,505,086

 

Payments on long-term debt

 

 

(128,887)

 

 

(3,721,574)

 

Distributions to Heron Lake BioEnergy, LLC members

 

 

 —

 

 

(3,896,605)

 

Distribution to non-controlling interest

 

 

 —

 

 

(80,997)

 

Net cash provided by (used in) financing activities

 

 

(1,358,892)

 

 

419,032

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash

 

 

(187,093)

 

 

40,259

 

 

 

 

 

 

 

 

 

Cash—Beginning of period

 

 

1,297,644

 

 

1,126,283

 

 

 

 

 

 

 

 

 

Cash—End of period

 

$

1,110,551

 

$

1,166,542

 

 

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest expense

 

$

31,387

 

$

58,674

 

 

 

 

 

 

 

 

 

Supplemental Disclosure of Non-Cash Investing, Operating and Financing Activities

 

 

 

 

 

 

 

Capital expenditures included in accounts payable

 

$

63,773

 

$

164,491

 

 

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

 

 

3


 

Table of Contents

Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2017

 

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Business

 

Heron Lake BioEnergy, LLC owns and operates an ethanol plant near Heron Lake, Minnesota with a permitted capacity of approximately 72.3 million gallons per year of undenatured ethanol on a twelve-month rolling sum basis.  In addition, Heron Lake BioEnergy, LLC produces and sells distillers’ grains with solubles and corn oil as co-products of ethanol production. 

 

Heron Lake BioEnergy, LLC’s wholly owned subsidiary, HLBE Pipeline Company, LLC (“HLBE Pipeline Company”), owns 73% of Agrinatural Gas, LLC (“Agrinatural”).  Agrinatural operates a natural gas pipeline that provides natural gas to Heron Lake BioEnergy, LLC 's ethanol production facility and other customers.

 

Basis of Presentation and Principles of Consolidation

 

The condensed consolidated unaudited financial statements as of January 31, 2017 include the accounts of Heron Lake BioEnergy, LLC and its wholly owned subsidiary, HLBE Pipeline Company (collectively the “Company”). Given the Company’s control over the operations of Agrinatural and its majority voting interest, the Company consolidates the unaudited financial statements of Agrinatural with its consolidated unaudited financial statements, with the equity and earnings (loss) attributed to the remaining 27% noncontrolling interest identified separately in the accompanying condensed consolidated balance sheets and statements of operations.  All significant intercompany balances and transactions are eliminated in consolidation.

 

The condensed consolidated unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as permitted by such rules and regulations. These condensed consolidated unaudited financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the Company’s audited consolidated financial statements for the year ended October 31, 2016, contained in the Company’s annual report on Form 10-K.

 

In the opinion of management, the condensed consolidated unaudited financial statements reflect all adjustments consisting of normal recurring accruals that we consider necessary to present fairly the Company’s results of operations, financial position and cash flows. The results reported in these condensed consolidated unaudited financial statements should not be regarded as necessarily indicative of results that may be expected for any other fiscal period or for the fiscal year.

 

Accounting Estimates

 

Management uses estimates and assumptions in preparing these condensed consolidated unaudited 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. The Company uses estimates and assumptions in accounting for significant matters including, among others, the economic lives of property and equipment, the analysis of impairment of long-lived assets and valuation of commodity derivative instruments, inventory, and inventory purchase and sales commitments. The Company periodically reviews estimates and assumptions, and the effects of revisions are reflected in the period in which the revision is made. Actual results could differ from those estimates.

 

Non-controlling Interest

 

Amounts recorded as non-controlling interest on the balance sheets relate to the net investment by an unrelated party in Agrinatural. Income and losses are allocated to the members of Agrinatural based on their respective percentage of membership units held. Pursuant to the firm natural gas transportation agreement,  Agrinatural will provide natural gas to the plant with a specified price per MMBTU for a term ending on October 31, 2021, with one automatic renewal option to extend the term for an additional  five years. 

 

4


 

Table of Contents

Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2017

 

Revenue Recognition

 

The Company generally sells ethanol and related products pursuant to marketing agreements. Revenues from the production of ethanol and the related products are recorded when the customer has taken title and assumed the risks and rewards of ownership, prices are fixed or determinable and collectability is reasonably assured. Title is generally assumed by the buyer at the Company’s shipping point.

 

In accordance with the Company's agreements for the marketing and sale of ethanol and related products, marketing fees and commissions due to the marketers are deducted from the gross sales price as earned. These fees and commissions are recorded net of revenues as they do not provide an identifiable benefit that is sufficiently separable from the sale of ethanol and related products. Shipping costs incurred by the Company in the sale of ethanol are not specifically identifiable and as a result, are recorded based on the net selling price reported to the Company from the marketer. Shipping costs incurred by the Company in the sale of ethanol related products are included in cost of goods sold.

 

Agrinatural recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee for the arrangement is fixed or determinable and collectability is reasonably assured.

 

Inventory

 

Inventory is stated at the lower of cost or net realizable value in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2015-11 issued in July 2015.  Cost for all inventories is determined using the first in first out method (FIFO). Net realizable value is the estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation.  Inventory consists of raw materials, work in process, finished goods, and spare parts. Corn is the primary raw material along with other raw materials.  Finished goods consist of ethanol, distillers’ grains, and corn oil.

 

Reportable Operating Segments

 

Accounting Standards Codification (“ASC”) 280, “Segment Reporting,” establishes the standards for reporting information about segments in financial statements. 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 criteria set forth in ASC 280, the Company has two reportable operating segments for financial reporting purposes.

 

·

Ethanol Production.   Based on the nature of the products and production process and the expected financial results, the Company’s operations at its ethanol plant, including the production and sale of ethanol and its co-products, are aggregated into one financial reporting segment.

 

·

Natural Gas Pipeline. The Company has majority ownership in Agrinatural, through its wholly owned subsidiary, HLBE Pipeline, LLC, and operations of Agrinatural’s natural gas pipeline are aggregated into another financial reporting segment.

 

 

2.RISKS AND UNCERTAINTIES

 

The Company has certain risks and uncertainties that it experiences during volatile market conditions. These volatilities can have a severe impact on operations. The Company’s revenues are derived from the sale and distribution of ethanol and distillers’ grains to customers primarily located in the U.S. Corn for the production process is supplied to the plant primarily from local agricultural producers.  Ethanol sales average 75% to 85% of total revenues and corn costs average 75% to 90% of cost of goods sold.

 

5


 

Table of Contents

Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2017

 

The Company’s operating and financial performance is largely driven by the prices at which it sells ethanol and the net expense of corn. The price of ethanol is influenced by factors such as supply and demand, the weather, government policies and programs, unleaded gasoline prices and the petroleum markets as a whole. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol. The largest cost of production is corn. The cost of corn is generally impacted by factors such as supply and demand, the weather, government policies and programs, and a risk management program used to protect against the price volatility of these commodities. Market fluctuations in the price of and demand for these products may have a significant adverse effect on the Company’s operations, profitability and the availability and adequacy of cash flow to meet the Company’s working capital requirements.

 

The supply and demand for ethanol are impacted by federal and state legislation and regulation, most significantly the Renewable Fuels Standard (“RFS”), and any changes in 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.

 

On November 23, 2016, the U.S. Environmental Protection Agency (the “EPA”) announced the final rule for 2017 Renewable Volume Obligation (“RVO”) requirements, which is set at 15.0 billion gallons for corn-based ethanol, which equates to the original requirements set by the RFS. Comparatively, the EPA established RVOs requirements for the RFS for calendar years 2014, 2015, and 2016 were below the original requirements set by the RFS. In January 2017, the Trump administration imposed a government-wide freeze on new and pending regulations, which included the 2017 RVOs that were originally intended to go into effect on February 10, 2017. Industry organizations such as the Renewable Fuels Association and Growth Energy believe this action is simply procedural with a new administration, and do not expect it to result in any substantive changes to the rule itself. Additionally, 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 and/or continued political uncertainty under the new administration regarding the RFS could result in a significant decrease in ethanol demand. If demand for ethanol decreases, it could materially adversely affect our business, results of operations and financial condition.

 

Ethanol has historically traded at a discount to gasoline; however, due to a decline in oil and gasoline prices, ethanol traded at a premium to gasoline during much of the three months ended January 31, 2017, causing a disincentive for discretionary blending of ethanol. However, in January 2017, the oil and gasoline prices rose resulting in ethanol trading at a discount to gasoline since January 2017, which may encourage discretionary blending of ethanol beyond the required blend rate. Management anticipates that ethanol prices will continue to change in relation to changes in corn and energy prices. If corn, crude oil and gasoline prices decrease, that could have a negative impact on ethanol pricing and demand, which could result in a material adverse effect on our business, results of operations and financial condition.

 

 

3.INVENTORY

 

Inventory consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

January 31, 2017

 

October 31, 2016

 

 

    

(unaudited)

    

 

 

 

Raw materials

 

$

1,289,879

 

$

1,434,854

 

Work in process

 

 

711,838

 

 

696,013

 

Finished Goods

 

 

3,806,512

 

 

2,713,716

 

Supplies

 

 

955,898

 

 

1,019,962

 

Totals

 

$

6,764,127

 

$

5,864,545

 

 

The Company performs a lower of cost or net realizable value analysis on inventory to determine if the market values of certain inventories are less than their carrying value, which is attributable primarily to decreases in market prices of corn and ethanol. Based on the lower of cost or net realizable value analysis, as a component of cost of goods sold, the Company recorded a loss on ethanol inventories of approximately $191,000 and $261,000 for the three months ended January 31, 2017 and 2016, respectively.

 

 

6


 

Table of Contents

Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2017

 

4.DERIVATIVE INSTRUMENTS

 

As of January 31, 2017, the total notional amount of the Company’s outstanding corn derivative instruments was approximately 5,630,000 bushels, comprised of long corn positions on 3,250,000 bushels that were entered into to hedge forecasted ethanol sales through March 2017, and short corn positions on 2,380,000 bushels that were entered into to hedge forecasted corn purchases through December 2017. There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding. 

 

As of January 31, 2017, the total notional amount of the Company’s outstanding ethanol derivative instruments was approximately 1,260,000 gallons that were entered into to hedge forecasted ethanol sales through March 2017.

 

As of January 31, 2017, the Company had no cash collateral (restricted cash) related to corn derivatives held by a broker.

 

The following tables provide details regarding the Company’s derivative instruments at January 31, 2017, none of which are designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

    

Consolidated Balance Sheet Location

    

Assets

    

Liabilities

 

Corn contracts

 

Commodity derivative instruments

 

$

 —

 

$

6,081

 

Ethanol contracts

 

Commodity derivative instruments

 

 

447,005

 

 

 —

 

Totals

 

 

 

$

447,005

 

$

6,081

 

 

As of October 31, 2016, the total notional amount of the Company's outstanding corn derivative instruments was approximately 4,285,000 bushels, comprised of long corn positions on 3,100,000 bushels that were entered into to hedge forecasted ethanol sales through March 2017, and short corn positions on 1,185,000 bushels that were entered into to hedge forecasted corn purchases through August 2017.     There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding.  As of October 31, 2016, the Company had no cash collateral (restricted cash) related to corn derivatives held by a broker.

 

The following tables provide details regarding the Company’s derivative instruments at October 31, 2016, none of which were designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

    

Consolidated Balance Sheet Location

    

Assets

    

Liabilities

 

Corn contracts

 

Commodity derivative instruments

 

$

388,525

 

$

 —

 

Ethanol contracts

 

Commodity derivative instruments

 

 

273,813

 

 

 —

 

Totals

 

 

 

$

662,338

 

$

 —

 

 

The following tables provide detail regarding the gains (losses) from Company’s derivative financial instruments in its condensed consolidated unaudited statements of operations, none of which are designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

    

Statement of

 

Three Months Ended  January 31,

 

    

Operations location

 

2017

    

2016

Corn contracts

 

Cost of goods sold

 

$

(56,628)

 

$

187,387

Ethanol contracts

 

Revenues

 

 

276,257

 

 

44,747

Natural gas contracts

 

Cost of goods sold

 

 

 —

 

 

21,550

Total gain

 

 

 

$

219,629

 

$

253,684

 

7


 

Table of Contents

Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2017

 

5.FAIR VALUE

 

The following table provides information on those derivative assets and liabilities measured at fair value on a recurring basis at January 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement Using

 

 

 

Carrying Amount

 

    

 

 

Quoted Prices in

 

Significant Other

 

Significant

 

 

 

 in Balance Sheet

 

 

 

 

Active Markets

 

Observable Inputs

 

Unobservable inputs

 

Financial Assets

    

January 31, 2017

 

Fair Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

Commodity Derivative instruments - Ethanol

 

$

447,005

 

 

447,005

 

$

256,562

 

$

190,443

 

$

 —

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity Derivative instruments - Corn

 

$

6,081

 

$

6,081

 

$

6,081

 

$

 —

 

$

 —

 

 

The following table provides information on those derivative assets measured at fair value on a recurring basis at October 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement Using

 

 

 

Carrying Amount

 

    

 

 

Quoted Prices in

 

Significant Other

 

Significant

 

 

 

 in Balance Sheet

 

 

 

 

Active Markets

 

Observable Inputs

 

Unobservable inputs

 

Financial Assets

    

October 31, 2016

 

Fair Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

Commodity Derivative instruments - Corn

 

$

388,525

 

$

388,525

 

$

388,525

 

$

 —

 

$

 —

 

Commodity Derivative instruments - Ethanol

 

$

273,813

 

$

273,813

 

$

273,813

 

$

 —

 

$

 —

 

 

The Company determines the fair value of commodity derivative instruments by obtaining 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 market and New York Mercantile Exchange. We determine the fair value of ethanol Level 2 instruments by model-based techniques in which all significant inputs are observable in the markets noted above.

8


 

Table of Contents

Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2017

 

6.DEBT FINANCING

 

Long-term debt consists of the following:

 

 

 

 

 

 

 

 

 

 

 

January 31, 2017

 

October 31, 2016

 

 

 

(unaudited)

 

 

 

Revolving term note payable to lending institution, see terms below.

 

$

 —

 

$

 —

 

Assessment payable as part of water treatment agreement, due in semi-annual installments of $189,393 with interest at 6.55%, enforceable by statutory lien, with the final payment due in 2021. The Company made deposits for one years' worth of debt service payments of approximately $364,000, which is included with other assets that are held on deposit to be applied with the final payments of the assessment.

 

 

1,516,977

 

 

1,517,046

 

Assessment payable as part of water supply agreement, due in monthly installments of $3,942 with interest at 8.73%, enforceable by statutory lien, with the final payment due in 2019.

 

 

87,862

 

 

97,930

 

Note payable to electrical company with monthly payments of $6,250 with interest at 0.00% and a 1.00% maintenance fee due each October. The note is due September 2017. The electrical company is a member of the Company.

 

 

50,000

 

 

68,750

 

Note payable to non-controlling interest member of Agrinatural. Interest is at One Month LIBOR plus 4.0%, which was approximately 4.78% and 4.53% at January 31, 2017 and October 31, 2016, respectively. The note is considered due on demand with payments due at Agrinatural Board of Managers discretion.

 

 

100,000

 

 

200,000

 

Totals

 

 

1,754,839

 

 

1,883,726

 

Less amounts due within one year

 

 

462,086

 

 

490,057

 

Net long-term debt

 

$

1,292,753

 

$

1,393,669

 

 

Revolving Term Note

 

The Company has a revolving term note payable with a lender, under which the Company could initially borrow, repay, and re-borrow in an amount up to $28,000,000 at any time prior to the March 2, 2022 maturity date.  However, the amount available for borrowing under the revolving term note reduces by $3,500,000 annually, starting March 1, 2015 and continuing each anniversary thereafter until maturity. There was no outstanding balance on this facility at January 31, 2017, and October 31, 2016. Therefore, the aggregate principal amount available to the Company for borrowing at January 31, 2017, and October 31, 2016 was $21,000,000.  The amount available for borrowing under this facility was further reduced at March 1, 2017 to $17,500,000.

 

Interest on the revolving term loan accrues at a variable rate equal to 3.25% above the One-Month London Interbank Offered Rate (“LIBOR”) Index rate, which was 4.03% and 3.45% at January 31, 2017, and October 31, 2016, respectively. The Company may elect to enter into a fixed interest rate on this loan at various times throughout the term of the loan as provided in the loan agreements.

 

The Company also agreed to pay an unused commitment fee on the unused portion of the revolving term loan commitment at the rate of 0.50% per annum. The loan is secured by substantially all of the Company assets including a subsidiary guarantee. 

 

The credit facility contains customary covenants, including restrictions on the payment of dividends and loans and advances to Agrinatural,  and maintenance of certain financial ratios including minimum working capital, minimum net worth and a debt service coverage ratio as defined by the credit facility. Failure to comply with the protective loan covenants or maintain the required financial ratios may cause acceleration of the outstanding principal balances on the revolving term loan and/or the imposition of fees, charges or penalties. As of January 31, 2017 and October 31, 2016, the Company was in compliance with these financial covenants and expects to be in compliance throughout fiscal 2017.

 

As part of the credit facility closing, the Company entered into an administrative agency agreement with CoBank, ACP (“CoBank”). CoBank purchased a participation interest in the revolving term loan and was appointed the administrative agent for the purpose of servicing the loan.  As a result, CoBank will act as the agent for AgStar with respect to the credit facility. The Company agreed to pay CoBank an annual fee of $2,500 as the agent for AgStar.

9


 

Table of Contents

Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2017

 

Estimated annual maturities of long-term debt at January 31, 2017 are as follows based on the most recent debt agreements:

 

 

 

 

 

 

2018

    

$

462,086

 

2019

 

 

333,015

 

2020

 

 

307,467

 

2021

 

 

326,798

 

2022

 

 

325,473

 

Total debt

 

$

1,754,839

 

 

 

7.COMMITMENTS AND CONTINGENCIES

 

Corn Forward Contracts

 

At January 31, 2017, the Company had cash and basis contracts for forward corn purchase commitments totatling approximately 7,740,000 bushels of corn for various delivery periods through October 2017.

 

Ethanol Forward Contracts

 

At January 31, 2017, the Company had fixed and basis contracts to sell approximately $12,779,000 of ethanol for various delivery periods through March 2017.   

 

Distillers’ Grains Forward Contracts

 

At January 31, 2017, the Company had forward contracts to sell approximately $1,255,000 of distillers’ grains for various delivery periods  through March 2017.

 

Corn Oil Forward Contracts

 

At January 31, 2017, the Company had forward contracts to sell approximately $304,000 of corn oil for various delivery periods  through February 2017.

 

 

8.MEMBERS’ EQUITY

 

The Company is authorized to issue 80,000,000 capital units, of which 65,000,000 have been designated Class A units and 15,000,000 have been designated as Class B units. Members of the Company are holders of units who have been admitted as members and who hold at least 2,500 units. Any holder of units who is not a member will not have voting rights. Transferees of units must be approved by our Board of Governors to become members. Members are entitled to one vote for each unit held. Subject to the Member Control Agreement, all units share equally in the profits and losses and distributions of assets on a per unit basis.

 

The Company has a total of 62,932,107 Class A units and 15,000,000 Class B units issued and outstanding, for an aggregate total of 77,932,107 units issued and outstanding at both January 31,and October 31, 2016.  

 

9.LEASES

 

The Company leases equipment, primarily rail cars, under operating leases through 2026.  Rent expense for these leases was approximately $540,000 and $533,000 for the three months ended January 31, 2017 and 2016, respectively.

 

10


 

Table of Contents

Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2017

 

10.RELATED PARTY TRANSACTIONS

 

Granite Falls Energy, LLC

 

The Company has a management services agreement with GFE. Under the terms of the management services agreement, GFE supplies its own personnel to act as part-time officers and managers of the Company for the positions of Chief Executive Officer, Chief Financial Officer, and Commodity Risk Manager and the Company pays GFE 50% of the total salary, bonuses, and other expenses and costs incurred by GFE for the three management positions.  The management services agreement automatically renews for successive one-year terms unless and until the Company or GFE gives the other party 90-days written notice of termination prior to expiration of then current term. The management services agreement may also be terminated by either party for cause under certain circumstances. Total expenses under this agreement were approximately $108,000 and $114,000 for the three months ended January 31, 2017 and 2016, respectively.

 

Corn Purchases - Members

 

The Company purchased approximately $3,025,000 and $5,570,000 of corn from board members for the three months ended January 31, 2017 and 2016.

 

Agrinatural

 

During 2013, the Company borrowed $300,000 from the non-controlling interest member of Agrinatural.  Total interest paid in relation to this note payable amounted to approximately $2,000 and $3,000 during the three months ended January 31, 2017 and 2016, respectively.

 

Swan Engineering

 

On March 27, 2015, Agrinatural executed a new management and operating agreement with Swan Engineering, Inc. (“SEI”). SEI, together with an unrelated third party owns Rural Energy Solutions, LLC (“RES”), the 27% minority owner of Agrinatural. Under the new management and operating agreement, SEI will continue to provide Agrinatural with day-to-day management and operation of Agrinatural's pipeline distribution business. In exchange for these services, Agrinatural will pay SEI an aggregate management fee equal to the fixed monthly base fee plus the variable customer management fee based on the number of customers served on the pipeline less the agreed monthly fee reduction of $4,500. The Company paid approximately $48,000 and $44,000 for the monthly base fee and variable customer management fee for the three months ended January 31, 2017 and 2016, respectively. The new management and operating agreement with SEI expires July 1, 2019, unless earlier terminated for cause as defined in the agreement.

 

On March 27, 2015, Agrinatural also executed a new project management agreement with SEI. Pursuant to the new project management agreement, SEI will continue to supervise all of Agrinatural's pipeline construction projects. These projects are constructed by unrelated third-party pipeline construction companies. Under the new project management agreement, Agrinatural will pay SEI a total of 10% of the actual capital expenditures for construction projects approved by Agrinatural's Board of Directors, excluding capitalized marketing costs. The Company recorded project management fees of approximately $10,000 and $38,000 for the three months ended January 31, 2017 and 2016, respectively. The new project management with SEI expires June 30, 2019, unless earlier terminated for cause as defined in the agreement.

 

 

11.BUSINESS SEGMENTS

 

The Company groups its operations into the following two business segments:

 

 

 

Ethanol Production

Ethanol and co-product production and sales

Natural gas pipeline

Ownership and operations of natural gas pipeline

 

11


 

Table of Contents

Heron Lake BioEnergy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2017

 

Segment reporting is intended to give financial statement users a better view of how the Company manages and evaluates its businesses. The accounting policies for each segment are the same as those described in the summary of significant accounting policies. Segment income or loss does not include any allocation of shared-service costs.  Segment assets are those that are directly used in or identified with segment operations. Inter-segment balances and transactions have been eliminated.

 

The following tables summarize financial information by segment and provide a reconciliation of segment revenue, contribution to operating income, and total assets:

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

January 31, 2017

 

January 31, 2016

 

Revenue:

(unaudited)

 

(unaudited)

 

Ethanol production

$

26,964,891

 

$

26,248,829

 

Natural gas pipeline

 

868,635

 

 

788,959

 

Eliminations

 

(443,452)

 

 

(449,223)

 

Total Revenue

$

27,390,074

 

$

26,588,565

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

January 31, 2017

 

January 31, 2016

 

Operating Income:

(unaudited)

 

(unaudited)

 

Ethanol production

$

2,194,198

    

$

(332,118)

 

Natural gas pipeline

 

563,930

 

 

598,038

 

Eliminations

 

(190,594)

 

 

(216,973)

 

Operating Income

$

2,567,534

 

$

48,947

 

 

 

 

 

 

 

 

 

 

 

January 31, 2017

 

October 31, 2016

 

Total Assets:

(unaudited)

    

 

 

Ethanol production

$

50,260,611

 

$

51,080,443

 

Natural gas pipeline

 

12,609,954

 

 

12,690,603

 

Total Assets

$

62,870,565

 

$

63,771,046

 

 

 

 

 

 

 

 

 

 

 

 

12


 

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

 

We prepared the following discussion and analysis to help readers better understand our financial condition, changes in our financial condition, and results of operations for the three months ended January 31, 2017 and 2016. This section should be read in conjunction with the condensed consolidated unaudited financial statements and related notes in PART I - Item 1 of this report and the information contained in the Company’s annual report on Form 10-K for the fiscal year ended October 31, 2016.

 

Disclosure Regarding Forward-Looking Statements

 

The SEC encourages companies to disclose forward-looking information so investors can better understand future prospects and make informed investment decisions. As such, we have historical information, as well as forward-looking statements regarding our business, financial condition, results of operations, performance and prospects in this report.  All statements that are not historical or current facts are forward-looking statements. In some cases,  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. 

 

Forward-looking statements are subject to a number of known and unknown risks, uncertainties and other factors, many of which may be beyond our control, and may cause actual results, performance or achievements to differ materially from those projected in, expressed or implied by forward-looking statements. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us are described more particularly in the “Risk Factors” section of our annual report on Form 10-K for the year ended October 31, 2016 and of this report on Form 10-Q. These risks and uncertainties include, but are not limited to, the following:

·

Fluctuations in the price of ethanol as a result of a number of factors, including: the price and availability of competing fuels; the overall supply and demand for ethanol and corn; the price of gasoline, crude oil and corn; and government policies;

·

Fluctuations in the price of crude oil and gasoline and the impact of lower oil and gasoline prices on ethanol prices and demand;

·

Fluctuations in the availability and price of corn, resulting from factors such as domestic stocks, demand from corn-consuming industries, such as the ethanol industry, prices for alternative crops, increasing input costs, changes in government policies, shifts in global markets or damaging growing conditions, such as plant disease or adverse weather, including drought;

·

Fluctuations in the availability and price of natural gas, which is may be affected by by factors such as weather, drilling economics, overall economic conditions and government regulations;

·

Negative operating margins which may result from lower ethanol and/or high corn prices;

·

Changes in general economic conditions or the occurrence of certain events causing an economic impact in the agriculture, oil or automobile industries;

·

Overcapacity and oversupply in the ethanol industry;

·

Ethanol may trading at a premium to gasoline at times, resulting in a disincentive for discretionary blending of ethanol beyond the requirements of the Renewable Fuels Standard (“RFS”) and consequently negatively impacting ethanol prices and demand;

·

Changes in federal and/or state laws and environmental regulations including elimination, waiver or reduction of the corn-based ethanol use requirement in the RFS and legislative acts taken by state governments such as California related to low-carbon fuels, may have an adverse effect on our business; 

·

Any impairment of the transportation, storage and blending infrastructure that prevents ethanol from reaching markets;

·

Any effect on prices and demand for our products resulting from actions in international markets, particularly the Chinese government’s imposition of increased tariffs on ethanol exported to China and anti-dumping and countervailing duties on U.S. distillers’ grains exported to China;

·

Changes in our business strategy, capital improvements or development plans;

·

Effect of our risk mitigation strategies and hedging activities on our financial performance and cash flows;

·

Competition from alternative fuels and alternative fuel additives;

·

Changes or advances in plant production capacity or technical difficulties in operating the plant; and

·

Our reliance on key management personnel.

 

13


 

We believe our expectations regarding future events are based on reasonable assumptions; however, these assumptions may not be accurate or account for all risks and uncertainties. Consequently, forward-looking statements are not guaranteed. Actual results may vary materially from those expressed or implied in our forward-looking statements. In addition, we are not obligated and do not intend to update our forward-looking statements as a result of new information unless it is required by applicable securities laws. We caution investors not to place undue reliance on forward-looking statements, which represent management’s views as of the date of this report. We qualify all of our forward-looking statements by these cautionary statements.

 

Industry and Market Data

 

Much of the information in this report regarding the ethanol industry, including government regulation relevant to the industry is from information published by the Renewable Fuels Association (“RFA”), a national trade association for the United States (“U.S.”) ethanol industry, and information about the market for our products and competition is derived from publicly available information from governmental agencies or publications and other published independent sources. Although we believe our third-party sources are reliable, we have not independently verified the information.

 

Available Information

 

Our website address is www.heronlakebioenergy.com. Our annual report on Form 10-K, periodic reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available, free of charge, on our website under the link “SEC Filings”, as soon as reasonably practicable after we electronically file such materials with, or furnish such materials to, the Securities and Exchange Commission. The contents of our website are not incorporated by reference in this report on Form 10-Q.

 

Overview

 

Heron Lake BioEnergy, LLC (“Heron Lake BioEnergy” or  “HLBE”) is a Minnesota limited liability company that owns and operates a dry mill corn-based, natural gas fired ethanol plant near Heron Lake, Minnesota. Our business consists of the production and sale of our ethanol throughout the continental U.S. and sale of its co-products (wet, modified wet and dried distillers’ grains, corn oil and corn syrup) locally, and throughout the continental U.S. Additionally, through a wholly owned subsidiary, HLBE Pipeline Company, LLC (“HLBE Pipeline Company”), we own a controlling interest of Agrinatural Gas, LLC (“Agrinatural”).  Agrinatural operates a natural gas pipeline that provides natural gas to Heron Lake BioEnergy, LLC 's ethanol production facility and other customers. 

 

When we use the terms “we”, “us”, “our”, the “Company” or similar words in this Annual Report on Form 10‑Q, unless the context otherwise requires, we are referring to Heron Lake BioEnergy and its wholly owned and majority owned subsidiaries. 

 

Reportable Operating Segments

 

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 nature of the products, services and operations and the expected financial results, we review our operations within the following two separate operating segments: (1) ethanol production; and (2) natural gas pipeline operations. We currently do not have or anticipate we will have any other lines of business or other significant sources of revenue other than the sale of ethanol, distillers’ grains, corn oil and natural gas transportation.  Refer to Note 11, “Business Segments”, of the notes to the condensed consolidated unaudited financial statements for financial information about our financial reporting segments.

 

Ethanol Production

 

Our primary line of business is the Company’s operation of its ethanol plant, including the production and sale of ethanol and its co-products (distillers’ grains, non-edible corn oil and corn syrup). These operations are aggregated into one financial reporting segment. 

 

14


 

Our ethanol plant has a nameplate capacity of 50 million gallons per year and our permitted production capacity is approximately 72.3 million gallons of undenatured fuel-grade ethanol on a twelve-month rolling sum basis. We are currently operating above our stated nameplate capacity and intend to continue to do into the near future, taking advantage of the additional production allowed pursuant to our permit, as long as we believe it is profitable to do so.

 

We have entered into a management services agreement with Granite Falls Energy, LLC, a Minnesota limited liability company that operates an ethanol plant located in Granite Falls, Minnesota (“GFE”). GFE owns approximately 50.6% of our outstanding membership units. Pursuant to the management services agreement, GFE provides its chief executive officer, chief financial officer, and commodity risk manager to act in those positions as our part-time officers. The management services automatically renews for successive one-year terms until either party gives the other party written notice of termination prior to expiration of the then current term. The management services agreement may also be terminated by either party for cause under certain circumstances.

 

We market and sell our products primarily using third party marketers. The markets in which our products are sold may be local, regional, national, and international and depend primarily upon the efforts of third party marketers. We have contracted with Eco-Energy, LLC to market all of our ethanol, Gavilon Ingredients, LLC to market our distillers’ grains, and Renewable Products Marketing Group, LLC to market our corn oil. We also occasionally independently market and sell excess corn syrup from the distillation process to local livestock feeders. 

 

Our cost of our goods sold consists primarily of costs relating to the corn and natural gas supplies necessary to produce ethanol and distillers’ grains for sale at our ethanol plant. We generally do not have long-term, fixed price contracts for the purchase of corn. Typically, we purchase our corn directly from grain elevators, farmers, and local dealers within approximately 80 miles of Heron Lake, Minnesota.

 

We have a facilities agreement with Northern Border Pipeline Company, which allows us access to an existing interstate natural gas pipeline located approximately 16 miles north from our plant. We have entered into a firm natural gas transportation agreement with Agrinatural, our majority owned subsidiary. We also have an agreement with Constellation NewEnergy—Gas Division, LLC to supply the natural gas necessary to operate our plant.

 

Natural Gas Pipeline

 

We own a controlling 73% interest in Agrinatural, a natural gas distribution and sales company located in Heron Lake, Minnesota. Agrinatural owns approximately 187 miles of natural gas pipeline and provides natural gas to the Company's ethanol plant and other commercial, agricultural and residential customers through a connection with the natural gas pipeline facilities of Northern Border Pipeline Company. Agrinatural's revenues are generated through natural gas distribution fees and sales. The operations of Agrinatural's natural gas pipeline are aggregated into a separate financial reporting segment.

 

The Company has entered into two intercompany credit facilities with Agrinatural: the July 2014 credit facility, as amended (the “Orginal Credit Facility”) and the March 2015 credit facility, as amended (the “Additional Credit Facility”). Under the Orignal Credit Facility, the Company made a five-year term loan in the principal amount of $3.05 million and pursuant to the Additional Credit Facility, made a four-year term loan in the principal amount of $3.5 million to Agrinatural. Details of these credit facilities to Agrinatural are provided below in the section below entitled “PART I - Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources; Indebtedness”.

 

During the normal course of business, the Company enters into transactions between its two operating segments as a result of HLBE’s firm natural gas transportation agreement with Agrinatural. These intersegment activities are recorded by each segment at prices approximating market and treated as if they are third-party transactions. Consequently, these transactions impact segment performance. However, the revenues and corresponding costs are eliminated in consolidation and do not impact the Company’s unaudited condensed consolidated results.

 

15


 

Plan of Operations for the Next Twelve Months

 

Over the next twelve months, we will continue our focus on operational improvements at our ethanol plant. These operational improvements include exploring methods to improve ethanol yield per bushel and increasing production output at our plant to take full advantage of our permitted production capacity, reducing our operating costs, and optimizing our margin opportunities through prudent risk-management policies.

 

We expect to have sufficient cash generated by continuing operations and availability on our credit facility to fund our operations.  However, should we experience unfavorable operating conditions in the ethanol industry that prevent us from profitably operating our plant, we may need to seek additional funding.

 

Additionly, we expect to continue to conduct routine maintenance and repair activities at the ethanol plant. We anticipate using cash we generate from our operations and our revolving term loan to finance these plant upgrade projects.

 

Trends and Uncertainties Impacting Our Operations

 

The principal factors affecting our results of operations and financial conditions are the market prices for corn, ethanol, distillers’ grains and natural gas, as well as governmental programs designed to create incentives for the use of corn-based ethanol.  Other factors that may affect our future results of operation include those risks discussed below and in “PART II - Item 1A. Risk Factors” of this report and “PART I - Item 1. Business” and “PART I - Item 1A. Risk Factors” of our annual report on Form 10-K for the fiscal year ended October 31, 2016.

 

Our operations are highly dependent on commodity prices, especially prices for corn, ethanol, distillers’ grains and natural gas. As a result, our operating results can fluctuate substantially due to volatility in these commodity markets. The price and availability of corn is subject to significant fluctuations depending upon a number of factors that affect commodity prices in general, including crop conditions, yields, domestic and global stocks, weather, federal policy and foreign trade. Natural gas prices are influenced by severe weather in the summer and winter and hurricanes in the spring, summer and fall. Other factors include North American exploration and production, and the amount of natural gas in underground storage during injection and withdrawal seasons. Ethanol prices are sensitive to world crude oil supply and demand, domestic gasoline supply and demand, the price of crude oil, gasoline and corn, the price of substitute fuels and octane enhancers, refining capacity and utilization, government regulation and incentives and consumer demand for alternative fuels. Distillers’ grains prices are impacted by livestock numbers on feed, prices for feed alternatives and supply, which is associated with ethanol plant production. 

 

Because the market price of ethanol is not always directly related to corn, at times ethanol prices may lag price movements in corn prices and corn-ethanol price spread may be tightly compressed or negative. If the corn-ethanol spread is compressed or negative for sustained period, it is possible that our operating margins will decline or become negative and our ethanol plant may not generate adequate cash flow for operations. In such cases, we may reduce or cease production at our ethanol plant in order to minimize our variable costs and optimize cash flow.

 

The Renewable Fuels Standard

 

The RFS has been, and we expect will continue to be, a significant factor impacting ethanol usage. Under the provisions of the RFS, the Environmental Protection Agency (“EPA”) must publish an annual rule that establishes the number of gallons of different types of renewable fuels, including corn-based ethanol, that must be blended with gasoline in the U.S. by refineries, blenders, distributors and importers,  which affects the domestic market for ethanol. The EPA assigns individual refiners, blenders and importers the renewable volume obligations (“RVOs”) they are obligated to use based on their percentage of total fuel sales. The EPA has the authority to waive the RVO requirements, in whole or in part, if there is inadequate domestic renewable fuel supply or the requirement severely harms the economy or the environment.

 

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 statutory requirement for conventional ethanol, and is considered a favorable outcome by the industry.

 

16


 

In January 2017, the Trump administration imposed a government-wide freeze on new and pending regulations, which included the 2017 RVOs that were originally intended to go into effect on February 10, 2017. Industry organizations such as the Renewable Fuels Association and Growth Energy believe this action is simply procedural with a new administration, and do not expect it to result in any substantive changes to the rule itself.  However, to the extent federal laws or regulations are modified, the demand for ethanol may be reduced, which could negatively and materially affect our ability to operate profitably.

 

Obligated parties use RINs to show compliance with RFS-mandated volumes. RINs are attached to renewable fuels by producers and detached when the renewable fuel is blended with transportation fuel or traded in the open market. The market price of detached RINs affects the price of ethanol in certain markets and influences the purchasing decisions by obligated parties. In November 2016, the EPA also proposed denying a petition to change the point of obligation under the RFS to the parties that own the gasoline before it is sold. In December 2016, the EPA extended the comment period to February 22,  2017. Comments submitted are now under review by the EPA. 

 

The point of obligation does not directly impact ethanol producers; however, moving the point of obligation could indirectly affect ethanol producers.  On February 28, 2017, the RFA reported that the Trump administration was reportedly considering an executive order to direct the EPA to move the point of obligation. On March 1, 2017, the Trump Administration announced that an executive order to change the point of obligation under the RFS was not imminent.  However, the chaotic nature of the news on shifting the point of obligation and the White House response resulted in significant short-term fluctuations in the corn, ethanol and RIN markets.

 

Current ethanol production capacity exceeds the EPA’s 2017 RVO mandates which can be satisfied by corn based ethanol.  Future demand will be influenced by economic incentives to blend based on the relative value of gasoline versus ethanol, taking into consideration the octane value of ethanol, environmental requirements and the RFS RVO requirements. A significant increase in supply beyond the RFS RVO mandates could have an adverse impact on ethanol prices. Moreover, beyond the federal mandates, there are limited markets for ethanol. Further, 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. If such efforts are successful in further reducing or repealing the blending requirements of the RFS, a significant decrease in ethanol demand may result and could have a material adverse effect on our results of operations, cash flows and financial condition, unless additional demand from exports or discretionary blending develops.

 

Results of Operations for the three months ended January 31, 2017 and 2016 

 

The following table shows summary information from the results of our operations and the approximate percentage of revenues, costs of goods sold, operating expenses and other items to total revenues in our unaudited condensed consolidated statements of operations for the three months ended January 31, 2017 and 2016 (amounts in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended January 31, 2017

 

Three Months Ended January 31, 2016

Income Statement Data

    

(unaudited)

    

%

 

(unaudited)

    

%

Revenues

 

$

27,390

 

100.0

%  

 

$

26,589

 

100.0

%

Cost of Goods Sold

 

 

23,976

 

87.5

%  

 

 

25,731

 

96.8

%

Gross Profit

 

 

3,414

 

12.5

%  

 

 

858

 

3.2

%

Operating Expenses

 

 

(847)

 

(3.1)

%  

 

 

(809)

 

(3.0)

%

Operating Income

 

 

2,567

 

9.4

%  

 

 

49

 

0.2

%

Other Income, net

 

 

348

 

1.3

%  

 

 

9

 

0.0

%

Net Income

 

 

2,915

 

10.7

%  

 

 

58

 

0.2

%

Less: Net Income Attributable to Noncontrolling Interest

 

 

(83)

 

(0.3)

%  

 

 

(84)

 

(0.3)

%

Net Income (Loss) Attributable to Heron Lake BioEnergy, LLC

 

$

2,832

 

10.4

%  

 

$

(26)

 

(0.1)

%

 

17


 

Revenues

 

Our consolidated revenue is derived principally from revenues from our ethanol production segment, which consists primarily of sales of our three principal products: ethanol, distillers’ grains and corn oil, as well as incidental sales of corn syrup. Revenues from our ethanol production segment represented approximately 98.4%  and 98.7%  of our total revenues for the three months ended January 31, 2017 and 2016, respectively. Our remaining consolidated revenues are attributable to Agrinatural revenues, net of eliminations for distribution fees paid by HLBE to Agrinatural for natural gas transportation services. The revenues attributable to our natural gas pipeline segment represented approximately 1.6% and 1.3%  of our consolidated revenues for the three months ended January 31, 2017 and 2016, respectively.

 

The following table shows the sources of our consolidated revenue and the approximate percentage of revenues from those sources to total revenues in our unaudited condensed consolidated statements of operations for the three months ended January 31, 2017:

 

 

 

 

 

 

 

 

 

 

Three Months Ended January 31, 2017

 

 

Sales Revenue

    

% of Total Revenues

 

 

(in thousands)

 

 

 

Ethanol sales

 

$

21,890

 

79.9

%

Distillers' grains sales

 

 

3,729

 

13.6

%

Corn oil sales

 

 

1,184

 

4.3

%

Corn syrup sales

 

 

162

 

0.6

%

Agrinatural revenues (net of intercompany eliminations)

 

 

425

 

1.6

%

Total Revenues

 

$

27,390

 

100.0

%

 

The following table shows the sources of our consolidated revenue and the approximate percentage of revenues from those sources to total revenues in our unaudited condensed consolidated statements of operations for the three months ended January 31, 2016:

 

 

 

 

 

 

 

 

 

 

Three Months Ended  January 31, 2016

 

 

Sales Revenue

    

% of Total Revenues

 

 

(in thousands)

 

 

 

Ethanol sales

 

$

20,703

 

77.9

%

Distillers' grains sales

 

 

4,306

 

16.2

%

Corn oil sales

 

 

1,042

 

3.9

%

Corn syrup sales

 

 

198

 

0.7

%

Agrinatural revenues (net of intercompany eliminations)

 

 

340

 

1.3

%

Total Revenues

 

$

26,589

 

100.0

%

 

Our total consolidated revenues increased by approximately 3.0% for the three months ended January 31, 2017, as compared to the three months ended January 31, 2016 due to increases the average price received for our ethanol and corn oil.  The following table reflects quantities of our three primary products sold and the average net prices received for the three months ended January 31, 2017 and 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended  January 31, 2017

 

Three Months Ended  January 31, 2016

 

 

Quantity Sold

 

Avg. Net Price

 

Quantity Sold

 

Avg. Net Price

Product

 

(in thousands)

 

 

 

 

(in thousands)

 

 

 

Ethanol (gallons)

 

15,321

 

$

1.43

 

15,904

 

$

1.30

Distillers' grains (tons)

 

38

 

$

98.04

 

38

 

$

114.23

Corn oil (pounds)

 

4,314

 

$

0.27

 

4,639

 

$

0.22

 

Ethanol

 

Total revenues from sales of ethanol increased by approximately 5.7% for the three months ended January 31, 2017 compared to the three months ended January 31, 2016 due to an approximately 9.8%  increase in the average price per gallon we received for our ethanol, which was offset by a  decrease of approximately 3.7% in the volume of ethanol sold. 

 

18


 

This increase in average market price for the three months ended January 31, 2017 compared to the same period of 2016 is due to several factors. Strong domestic demand and export demand, as well as higher market prices for crude oil and gasoline, put upward pressure on ethanol prices.  In comparison, for the three months ended January 31, 2016, lower crude oil and gasoline prices and the reduction of the volume obligations set forth in the RFS by the EPA in November 2015 had a negative effect on ethanol prices.     

 

Ethanol exports have provided support for ethanol prices, especially as domestic ethanol stocks have grown.  A decrease in U.S. ethanol exports could contribute to higher ethanol stocks and additional decrease in domestic ethanol prices unless additional domestic demand due to discretionary blending develop. In January 2017, China increased its tariff on ethanol imported from the U.S to 30% as of January 1, 2017, up from a 5% tariff in 2016.  U.S. exports of ethanol to China were at a historical high in 2016, as China was one of the top buyers of U.S. ethanol.  Management cannot estimate the effect this tariff will have on the domestic ethanol market.  While ethanol exports to China continue, if ethanol prices increase, these exports to China may cease. Further, ethanol exports could potentially be higher without the higher Chinese tariff. However, it is possible that declines in domestic ethanol prices could result if export demand for U.S. ethanol by China decreases due to the higher tariff unless additional demand from domestic discretionary blending or other foreign markets develop.

 

Management anticipates that ethanol prices will continue to change in relation to changes in corn and energy prices. Declines in the price of corn or crude oil and wholesale gasoline markets could have a significant negative impact on the market price of ethanol and our profitability particularly if domestic ethanol stocks continue to build. The ethanol industry is currently experiencing growth in production capacity, predominantly through plant optimization and expansions versus new construction projects, which may result in oversupply that could negatively affecting prices unless additional domestic or export demand can be created.

 

We produced and sold fewer gallons of ethanol during the three months ended January 31, 2017 compared to the same period of 2016 primarily due to a slight decrease in production for the three months ended January 31, 2017.  We are currently operating above our nameplate capacity. Management anticipates relatively stable ethanol production and sales during our 2017 fiscal year.

 

From time to time, we engage in hedging activities with respect to our ethanol sales. At January 31, 2017, we had approximately 1.3 million gallons of fixed and basis contracts for forward ethanol sales valued at approximately $12.8 million for delivery periods through March 2017.  Separately, ethanol derivative instruments resulted in a gain of approximately $276,000 during the three months ended January 31, 2017.  In comparison, during the three months ended January 31, 2016,  our ethanol derivative instruments resulted in a gain of approximately $45,000.

 

Distillers’ Grains

 

Total revenues from sales of distillers’ grains decreased by approximately 13.4% for the three months ended January 31, 2017 compared to the three months ended January 31, 2016 due to an approximately 14.2% decline in the average price per ton we received for our distillers’ grains. Our total tons of distillers’ grains sold was relatively unchanged from period to period, increasing by approximately 0.9% during the three months ended January 31, 2017 compared to the same period of 2016 due to an increase in the amount of wet distillers’ grains produced and sold and decreases in the amount of corn oil produced at the plant.    Management anticipates relatively stable distillers’ grains production going forward.

 

Management believes the decline in the selling price results primarily from weaker imports of domestic dried distillers’ grains by China, a significant buyer of domestic distillers’ grains, as well as the increased grain supplies for corn and soybeans, resulting in lower market grain prices during the three months ended January 31, 2017.  The Chinese government commenced an anti-dumping investigation in January 2016 into distillers’ grains produced in the U.S. culminating in the imposition by China of anti-dumping and anti-subsidy duties on U.S. imports which has had a negative effect on export demand from China. Last fall, China issued a preliminary ruling imposing immediate anti-dumping and anti-subsidy duties on distillers grains that are produced in the United States. On January 10, 2017, China then announced a final ruling increasing anti-dumping and anti-subsidy duties, which were significantly higher than the anti-dumping duties and anti-subsidy tariffs imposed in its preliminary ruling. The imposition of these duties are expected to result in a further decline in demand from this top importer and distillers’ grains prices could remain low unless additional demand can be created from other foreign markets or domestically.

19


 

Management believes the local market for distillers grains was impacted less by the Chinese trade issues and as a result the decrease in modified distillers grains prices was less compared to the decrease in dried distillers grains prices. Management anticipates distillers grains prices will remain lower during the remaining quarters of our 2017 fiscal year as a result of the Chinese tariffs along with increased corn availability.  Domestic prices for distillers’ grains could also remain low due to expansion of production capacity in the ethanol industry or if corn prices decline and end-users switch to lower priced alternatives.

 

At January 31, 2017, we had forward distillers’ grains sales contracts valued at $1.3 million at for various delivery periods through March 2017.

 

Corn Oil

 

Total revenues from sales of corn oil increased by approximately 13.6% for the three months ended January 31, 2017 compared to the three months ended January 31, 2016 due to an approximately 22.2% increase in the average price per pound we received for our corn oil,  offset by an approximately 7.0%  decrease in pounds sold from period to period. The decrease in pounds sold from period to period was due reduced ethanol production and decreased oil extraction rates per bushel of corn for the three months ended January 31, 2017 compared to the same period of 2016.  

 

Management attributes the increase in the corn oil prices we experienced in the three months ended January 31, 2017 due to increased demand from the biodiesel industry in November and December 2016, as well as increased demand from the corn oil feed market throughout the three months ended January 31, 2017. Management anticipates that corn oil demand due to biodiesel production will decrease as the biodiesel blenders' tax credit expired on December 31, 2016.

 

Management expects corn oil prices will remain relatively steady in the near term. However, corn oil prices may also decrease if biodiesel plants switch to lower priced alternatives such as soybean oil. The production capacity increase that is occurring throughout the ethanol industry may also result in oversupply that may negatively affecting prices unless plants curtail corn oil production or additional demand can be created. Management expects our corn oil production will be relatively stable going forward.

 

At January 31, 2017, we had forward corn oil sales contracts valued at $304,000 at for various delivery periods through February 2017. 

 

Cost of Goods Sold

 

Our cost of goods sold decreased by approximately 6.8% for the three months ended January 31, 2017, compared to the three months ended January 31, 2016.  Likewise,  as a percentage of revenues, our cost of goods sold decreased to approximately 87.5% for the three months ended January 31, 2017, compared to approximately 96.8% for the same period in 2016 due to the widening of the margin between the price of ethanol and the price of corn. Approximately 90% of our total costs of goods sold is attributable to our ethanol production segment. As a result, the cost of goods sold per gallon of ethanol produced for the three months ended January 31, 2017 was approximately $1.41 per gallon of ethanol sold compared to approximately $1.46 per gallon of ethanol produced for the three months ended January 31, 2016. 

 

The following table shows the costs of corn and natural gas (our two largest single components of costs of goods sold), as well as all other components of cost of goods sold, which includes processing ingredients, electricity, and wages, salaries and benefits of production personnel, and the approximate percentage of costs of those components to total costs of goods sold in our unaudited condensed consolidated statements of operations for the three months ended January 31, 2017:

 

 

 

 

 

 

 

 

 

 

Three Months Ended  January 31, 2017

 

    

Amount

 

% of Cost of Goods Sold

 

 

(in thousands)

 

 

 

Corn costs

 

$

18,250

 

76.1

%

Natural gas costs

 

 

1,827

 

7.6

%

All other components of costs of goods sold

 

 

3,899

 

16.3

%

Total Cost of Goods Sold

 

$

23,976

 

100.0

%

 

20


 

The following table shows the costs of corn, natural gas and all other components of cost of goods sold and the approximate percentage of costs of those components to total costs of goods sold in our unaudited condensed consolidated statements of operations for the three months ended January 31, 2016:

 

 

 

 

 

 

 

 

 

 

Three Months Ended  January 31, 2016

 

    

Amount

 

% of Cost of Goods Sold

 

 

(in thousands)

 

 

 

Corn costs

 

$

20,310

 

79.0

%

Natural gas costs

 

 

1,399

 

5.4

%

All other components of costs of goods sold

 

 

4,022

 

15.6

%

Total Cost of Goods Sold

 

$

25,731

 

100.0

%

 

Corn

 

Our cost of goods sold related to corn was approximately 10.1% less for the three months ended January 31, 2017 compared to the same period of 2016,  due primarily to decrease of 2.4% in the number of bushels of corn processed coupled with an approximately 7.9%  decrease in the average price per bushel paid for corn from period to period. For the three months ended January 31, 2017 and 2016, we processed approximately 5.6 million and 5.7 million bushels of corn, respectively.  The corn-ethanol price spread (the difference between the price per gallon of ethanol and the price per bushel of grain divided by 2.8) for the three months ended January 31, 2017 was approximately 18.1%  greater than the corn-ethanol price spread we experienced for same period of 2016.

 

The decrease in corn prices was primarily due to lower market prices as a result of the strong 2016 harvest and the expected 2016 carryout. Corn supplies have been sufficient locally and we have had no difficulty sourcing corn during our first fiscal quarter. Management anticipates that corn supplies will remain favorable during our 2017 fiscal year which should result in relatively stable corn prices. However, lower corn prices could impact the amount of corn which is planted during 2017 which could result in higher corn prices as our 2017 fiscal year progresses. Additionally, corn prices and availability may be volatile in the future due to weather conditions, domestic and world supply and demand, current and anticipated stocks, agricultural policy and and other factors and could significantly impact our costs of production. If corn prices rise, it will have a negative effect on our operating margins unless the price of ethanol and distillers’ grains out paces rising corn prices.

 

From time to time we enter into forward purchase contracts for our commodity purchases and sales. At January 31, 2017, we had had approximately 7.7 million bushels of cash and basis contracts for forward corn purchase commitments for delivery periods through October 2017.  

 

Our corn derivative positions resulted in a loss of approximately $57,000 the three months ended January 31, 2017, which increased cost of goods sold, compared to a gain of approximately $187,000 for the three months ended January 31, 2016, which decreased cost of goods sold. We recognize the gains or losses that result from the changes in the value of our derivative instruments from corn in cost of goods sold as the changes occur.  As corn prices fluctuate, the value of our derivative instruments are impacted, which affects our financial performance. We anticipate continued volatility in our cost of goods sold due to the timing of the changes in value of the derivative instruments relative to the cost and use of the commodity being hedged. 

 

Natural Gas

 

Our cost of goods sold related to natural gas costs increased approximately 30.6% for the three months ended January 31, 2017, compared to the three months ended January 31, 2016.  This increase in cost of natural gas for the three months ended January 31, 2017 as compared to the same period in 2016 was primarily the result of an increase in the average price per MMBTU of natural gas due to increased demand and lower production which have used up natural gas stocks that built up in 2015. 

 

Management anticipates that natural gas prices may increase in the future if natural gas procedures continue to decrease production or shut down wells.  Natural gas prices will continue to be dependent upon major supply disruptions due to production problems or catastrophic weather events.

 

We had no gain or loss on natural gas derivative instruments during the three months ended January 31, 2017, compared to a gain of approximately $22,000 during the three months ended January 31, 2016.

21


 

Operating Expenses

 

Operating expenses include wages, salaries and benefits of administrative employees at the plant, insurance, professional fees and similar costs. Operating expenses for the three months ended January 31, 2017, increased approximately 4.7% compared to the three months ended January 31, 2016. This increase was primarily due to an increase in our property taxes which was a result of the expiration of the State of Minnesota’s JOBZ program, which expired on December 31, 2015. Under the JOBZ program, our plants were exempt from property tax. Our efforts to optimize efficiencies and maximize production may result in a decrease in our operating expenses on a per gallon basis. However, because these expenses generally do not vary with the level of production at the plant, we expect our operating expenses to remain relatively steady throughout the remainder of the 2017 fiscal year.

 

Operating Income

 

Our income from operations for the three months ended January 31, 2017 was approximately $2.6 million compared to approximately $49,000 for the same period 2016.  This increase resulted largely from increased prices for our ethanol and the widening of our net operating margin.

 

Other Income, Net

 

We had net other income of approximately $348,000 during the three months ended January 31, 2017 compared to net other income of approximately $9,000 the three months ended January 31, 2016.  We had more other income during the three months ended January 31, 2017 compared to the three months ended January 31, 2016 due to patronage income and decreased interest expense as a result of less borrowings under our credit facilities during the 2017 period

 

Changes in Financial Condition at January 31, 2017 and October 31, 2016

 

The following table highlights our financial condition at January 31, 2017 and October 31, 2016 (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

January 31, 2017

 

 

October 31, 2016

 

 

    

 

(unaudited)

    

 

 

 

Current Assets

 

$

12,503

 

$

12,614

 

Total Assets

 

$

62,871

 

$

63,771

 

Current Liabilities

 

$

3,918

 

$

7,632

 

Long-Term Debt, less current portion

 

$

1,293