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EX-32 - EX-32 - Advanced BioEnergy, LLCck0001325740-ex32_6.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 March 31, 2017

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

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 May 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

16

Item 3. Quantitative and Qualitative Disclosures About Market Risk

29

Item 4. Controls and Procedures

30

Part II. Other Information

 

Item 1. Legal Proceedings

31

Item 1A. Risk Factors

31

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

31

Item 3. Defaults Upon Senior Securities

31

Item 4. Mine Safety Disclosure

31

Item 5. Other Information

31

Item 6. Exhibits

31

Signatures

32

Exhibit Index

33

 

2


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ADVANCED BIOENERGY, LLC & SUBSIDIARIES

Consolidated Balance Sheets

(Dollars in thousands)

 

 

 

March 31,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

18,116

 

 

$

15,416

 

Accounts receivable:

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

2,546

 

 

 

4,492

 

Other receivables

 

 

518

 

 

 

584

 

Inventories

 

 

4,993

 

 

 

4,530

 

Prepaid expenses

 

 

1,017

 

 

 

712

 

Restricted cash

 

 

1,000

 

 

 

1,000

 

Total current assets

 

 

28,190

 

 

 

26,734

 

Property and equipment, net

 

 

32,086

 

 

 

32,231

 

Other assets

 

 

912

 

 

 

1,068

 

Total assets

 

$

61,188

 

 

$

60,033

 

LIABILITIES AND MEMBERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,396

 

 

$

3,634

 

Accrued expenses

 

 

2,177

 

 

 

2,243

 

Current portion of long-term debt (stated principal amount of $4,850

   and $4,000 at March 31, 2017 and September 30, 2016, respectively)

 

 

4,755

 

 

 

3,904

 

Total current liabilities

 

 

10,328

 

 

 

9,781

 

Other liabilities

 

 

35

 

 

 

40

 

Long-term debt (stated principal amount of $22,252 and $24,000 at

   March 31, 2017 and September 30, 2016, respectively)

 

 

21,989

 

 

 

23,689

 

Total liabilities

 

 

32,352

 

 

 

33,510

 

Members' equity:

 

 

 

 

 

 

 

 

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

 

 

44,826

 

 

 

48,638

 

Accumulated deficit

 

 

(15,990

)

 

 

(22,115

)

Total members' equity

 

 

28,836

 

 

 

26,523

 

Total liabilities and members' equity

 

$

61,188

 

 

$

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

 

 

Six Months Ended

 

 

 

 

March 31,

 

 

March 31,

 

 

March 31,

 

 

March 31,

 

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

Net sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ethanol and related products

 

$

33,786

 

 

$

36,102

 

 

$

72,294

 

 

$

73,180

 

 

Other

 

 

-

 

 

 

-

 

 

 

-

 

 

 

183

 

 

Total net sales

 

 

33,786

 

 

 

36,102

 

 

 

72,294

 

 

 

73,363

 

 

Cost of goods sold

 

 

32,835

 

 

 

38,325

 

 

 

63,953

 

 

 

76,268

 

 

Gross profit (loss)

 

 

951

 

 

 

(2,223

)

 

 

8,341

 

 

 

(2,905

)

 

Selling, general and administrative expenses

 

 

752

 

 

 

920

 

 

 

1,910

 

 

 

1,669

 

 

Operating income (loss)

 

 

199

 

 

 

(3,143

)

 

 

6,431

 

 

 

(4,574

)

 

Other income

 

 

106

 

 

 

18

 

 

 

135

 

 

 

389

 

 

Other expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(90

)

 

Interest income

 

 

3

 

 

 

5

 

 

 

7

 

 

 

41

 

 

Interest expense

 

 

(220

)

 

 

(313

)

 

 

(448

)

 

 

(377

)

 

Net income (loss)

 

$

88

 

 

$

(3,433

)

 

$

6,125

 

 

$

(4,611

)

 

Weighted average units outstanding - basic and diluted

 

 

25,411

 

 

 

25,411

 

 

 

25,411

 

 

 

25,411

 

 

Income (loss) per unit - basic and diluted

 

$

0.00

 

 

$

(0.14

)

 

$

0.24

 

 

$

(0.18

)

 

 

See notes to consolidated financial statements.

4


ADVANCED BIOENERGY, LLC & SUBSIDIARIES

Consolidated Statement of Changes in Members’ Equity

For the Six Months Ended March 31, 2017

(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

 

Distribution to unit holders

 

 

-

 

 

 

(3,812

)

 

 

-

 

 

 

(3,812

)

Net income

 

 

-

 

 

 

-

 

 

 

6,125

 

 

 

6,125

 

MEMBERS' EQUITY - March 31, 2017

 

 

25,410,851

 

 

$

44,826

 

 

$

(15,990

)

 

$

28,836

 

 

See notes to consolidated financial statements

5


ADVANCED BIOENERGY, LLC & SUBSIDIARIES

Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)

 

 

 

Six Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

6,125

 

 

$

(4,611

)

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

 

 

 

 

 

 

 

 

Depreciation

 

 

1,886

 

 

 

5,678

 

Amortization of deferred financing costs

 

 

49

 

 

 

35

 

Amortization of deferred rent

 

 

(5

)

 

 

(14

)

Amortization of additional carrying value of debt

 

 

-

 

 

 

(699

)

(Gain) loss on disposal of assets

 

 

(28

)

 

 

2

 

(Gain) on troubled debt restructuring

 

 

-

 

 

 

(322

)

Change in working capital components:

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

1,946

 

 

 

(1,198

)

Other receivables

 

 

66

 

 

 

(83

)

Inventories

 

 

(463

)

 

 

(54

)

Prepaid expenses

 

 

(305

)

 

 

(202

)

Accounts payable

 

 

(165

)

 

 

(1,787

)

Accrued expenses

 

 

(99

)

 

 

273

 

Net cash provided by (used in) operating activities

 

 

9,007

 

 

 

(2,982

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(1,753

)

 

 

(368

)

Proceeds from sale of assets

 

 

-

 

 

 

24

 

Change in other assets

 

 

156

 

 

 

116

 

Change in restricted cash

 

 

-

 

 

 

3,080

 

Net cash provided by (used in) investing activities

 

 

(1,597

)

 

 

2,852

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Payments on debt

 

 

(2,000

)

 

 

(32,069

)

Proceeds from debt

 

 

1,102

 

 

 

30,000

 

Distribution to unit holders

 

 

(3,812

)

 

 

-

 

Net cash (used in) financing activities

 

 

(4,710

)

 

 

(2,069

)

Net increase (decrease) in cash and cash equivalents

 

 

2,700

 

 

 

(2,199

)

Beginning cash and cash equivalents

 

 

15,416

 

 

 

16,566

 

Ending cash and cash equivalents

 

$

18,116

 

 

$

14,367

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

416

 

 

$

369

 

Supplemental disclosure of non-cash financing and investing activities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses related to fixed assets

 

$

44

 

 

$

-

 

 

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 March 31, 2017 and the results of operations for the three and six months ended March 31, 2017 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 March 31, 2017 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 to approximate 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 March 31, 2017 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 NRV. 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

Other equipment

 

1-5 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 $3.5 million, or $0.14 per unit, in the six months ended March 2017 than in the six months ended March 2016. 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

8


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.

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):

 

 

 

March 31,

 

 

September 30,

 

 

 

2017

 

 

2016

 

Chemicals

 

$

891

 

 

$

814

 

Work in process

 

 

694

 

 

 

705

 

Ethanol

 

 

1,373

 

 

 

1,180

 

Distillers grain

 

 

94

 

 

 

45

 

Supplies and parts

 

 

1,941

 

 

 

1,786

 

Total

 

$

4,993

 

 

$

4,530

 

 

9


3. Property and Equipment

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

 

 

 

March 31,

 

 

September 30,

 

 

 

2017

 

 

2016

 

Land

 

$

1,811

 

 

$

1,811

 

Buildings

 

 

8,107

 

 

 

8,097

 

Process equipment

 

 

108,550

 

 

 

105,713

 

Other equipment

 

 

64

 

 

 

-

 

Office equipment

 

 

1,757

 

 

 

1,600

 

Construction in process

 

 

239

 

 

 

1,571

 

 

 

 

120,528

 

 

 

118,792

 

Accumulated depreciation

 

 

(88,442

)

 

 

(86,561

)

Property and equipment, net

 

$

32,086

 

 

$

32,231

 

 

4. Long-term Debt

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

 

 

 

March 31,

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

March 31,

 

 

September 30,

 

 

 

Interest Rate

 

 

2017

 

 

2016

 

ABE South Dakota:

 

 

 

 

 

 

 

 

 

 

 

 

Senior debt principal - variable

 

 

4.27%

 

 

$

27,102

 

 

$

28,000

 

Deferred financing costs

 

N/A

 

 

 

(358

)

 

 

(407

)

Total outstanding

 

 

 

 

 

$

26,744

 

 

$

27,593

 

 

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

 

 

 

Senior Debt

 

 

Deferred

 

 

 

 

 

Due By March 31:

 

Principal

 

 

Financing Costs

 

 

Total

 

2018

 

$

4,850

 

 

$

(95

)

 

$

4,755

 

2019

 

 

4,252

 

 

 

(96

)

 

 

4,156

 

2020

 

 

4,000

 

 

 

(95

)

 

 

3,905

 

2021

 

 

14,000

 

 

 

(72

)

 

 

13,928

 

Total debt

 

$

27,102

 

 

$

(358

)

 

$

26,744

 

 

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 March 31, 2017 was 0.77%. 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 March 31, 2017, the balance of the Term Loan was $16.0 million.

10


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 March 31, 2017, 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.

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 began making quarterly principal payments of $212,500 on the 2016 Term Loan. As of March 31, 2017 $1.1 million had been drawn from this loan.  The Company does not plan to draw any further amounts from the 2016 Term 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 (as defined below) 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.

11


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

 

 

 

As of and for the Six Months Ending

 

 

As of and for the Six Months Ending

 

 

As Of

 

 

 

March 31,

 

 

March 31,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2016

 

NGL Energy - Ethanol

 

 

 

 

 

 

 

 

 

 

 

 

Six months revenues

 

$

59,580

 

 

$

58,685

 

 

 

 

 

Receivable balance at period end

 

 

1,874

 

 

 

4,250

 

 

$

3,642

 

Gavilon - Corn Oil & Distillers Grains

 

 

 

 

 

 

 

 

 

 

 

 

Six months revenues

 

$

6,651

 

 

$

7,670

 

 

 

 

 

Receivable balance at period end

 

 

192

 

 

 

276

 

 

$

323

 

Dakotaland Feeds - Distillers Grains

 

 

 

 

 

 

 

 

 

 

 

 

Six months revenues

 

$

5,578

 

 

$

6,020

 

 

 

 

 

Receivable balance at period end

 

 

444

 

 

 

490

 

 

$

470

 

 

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 March 31, 2017:

 

Commodity

 

Type

 

Quantity

 

Amount

(in 000's)

 

 

Period

Covered

Through

Ethanol

 

Sale

 

1,276,200 gallons

 

$

1,735

 

 

April 30, 2017

Distillers grains

 

Sale

 

19,857 tons

 

 

902

 

 

May 31, 2017

Corn oil

 

Sale

 

376,000 lbs

 

 

96

 

 

April 30, 2017

Corn

 

Purchase

 

423,655 bushels

 

 

1,257

 

 

May 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 March 31, 2017 and September 30, 2016, and for the six months ended March 31, 2017 and 2016.  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)

 

 

 

March 31,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

961

 

 

$

5,176

 

Restricted cash

 

 

1,000

 

 

 

1,000

 

Prepaids

 

 

49

 

 

 

-

 

Total current assets

 

 

2,010

 

 

 

6,176

 

Property and equipment, net

 

 

85

 

 

 

118

 

Other assets:

 

 

 

 

 

 

 

 

Investment in ABE South Dakota

 

 

26,892

 

 

 

20,420

 

Other assets

 

 

32

 

 

 

32

 

Total assets

 

$

29,019

 

 

$

26,746

 

LIABILITIES AND MEMBERS' EQUITY

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

-

 

 

$

5

 

Accrued expenses

 

 

148

 

 

 

179

 

Other liabilities

 

 

35

 

 

 

39

 

Total liabilities

 

 

183

 

 

 

223

 

Members' equity:

 

 

 

 

 

 

 

 

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

 

 

44,826

 

 

 

48,638

 

Accumulated deficit

 

 

(15,990

)

 

 

(22,115

)

Total members' equity

 

 

28,836

 

 

 

26,523

 

Total liabilities and members' equity

 

$

29,019

 

 

$

26,746

 

 

13


Advanced BioEnergy, LLC (Unconsolidated)

Statements of Operations

(Dollars in thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

 

March 31,

 

 

March 31,

 

 

March 31,

 

 

March 31,

 

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings (losses) of consolidated subsidiary

 

$

251

 

 

$

(3,212

)

 

$

6,472

 

 

$

(4,353

)

 

Selling, general and administrative expenses

 

 

(166

)

 

 

(226

)

 

 

(354

)

 

 

(293

)

 

Operating income (loss)

 

 

85

 

 

 

(3,438

)

 

 

6,118

 

 

 

(4,646

)

 

Other expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(6

)

 

Interest income

 

 

3

 

 

 

5

 

 

 

7

 

 

 

41

 

 

Net income (loss)

 

$

88

 

 

$

(3,433

)

 

$

6,125

 

 

$

(4,611

)

 

 

14


Advanced BioEnergy, LLC (Unconsolidated)

Statements of Cash Flows

(Dollars in thousands)

(Unaudited)

 

 

 

Six Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

6,125

 

 

$

(4,611

)

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

 

 

 

 

 

 

 

 

Depreciation

 

 

33

 

 

 

59

 

Equity in earnings (losses)  of consolidated subsidiaries

 

 

(6,472

)

 

 

4,353

 

Loss on disposal of fixed asset

 

 

-

 

 

 

2

 

Amortization of deferred revenue and rent

 

 

(4

)

 

 

(14

)

Change in working capital components:

 

 

 

 

 

 

 

 

Other receivable

 

 

-

 

 

 

6

 

Prepaid expenses

 

 

(49

)

 

 

-

 

Accounts payable

 

 

(5

)

 

 

14

 

Accrued expenses

 

 

(31

)

 

 

(4

)

Net cash (used in) operating activities

 

 

(403

)

 

 

(195

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

      Proceeds from sale of asset

 

 

-

 

 

 

25

 

Change in restricted cash

 

 

-

 

 

 

(32

)

Net cash (used in) investing activities

 

 

-

 

 

 

(7

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

      Distribution to unit holders

 

 

(3,812

)

 

 

-

 

Distribution to subsidiary

 

 

-

 

 

 

(2,892

)

Net cash (used in) financing activities

 

 

(3,812

)

 

 

(2,892

)

Net (decrease) in cash and cash equivalents

 

 

(4,215

)

 

 

(3,094

)

Beginning cash and cash equivalents

 

 

5,176

 

 

 

8,158

 

Ending cash and cash equivalents

 

$

961

 

 

$

5,064

 

 

15


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 have fluctuated in the past and could again 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 has been recently, 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 Brazilian government has recently postponed a decision to place a tariff of 16 to 20 percent on imported ethanol until June 2017.  If the decision to impose the tariff is ultimately made, it 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

16


reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future. Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed from time to time with the U.S. Securities and Exchange 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.

17


FACILITIES

The table below provides a summary of our ethanol plants in operation as of March 31, 2017:

 

 

 

 

 

 

 

 

 

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 March 31, 2018

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.

Closing of Smaller Aberdeen Plant

 

As discussed above, our Aberdeen plant consists of a single production facility.  Prior to April 2016, we also operated a smaller, nine-million gallon Aberdeen facility.  Therefore, our ethanol and distillers grain production and the quantity of corn and natural gas we consumed in the fiscal 2017 three-month and six-month periods were lower than in the comparable fiscal 2016 three-month and six-month periods.

 

18


Results of Operations for the Quarter Ended March 31, 2017 Compared to Quarter Ended March 31, 2016

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 March 31, 2017 and 2016 for our South Dakota plants:

 

 

 

Three Months

 

 

Three Months

 

 

 

March 31, 2017

 

 

March 31, 2016

 

 

 

Quantity

 

 

Average Price

 

 

Quantity

 

 

Average Price

 

Product Sales Information

 

(In thousands)

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

Ethanol (gallons)

 

 

20,992

 

 

$

1.32

 

 

 

23,479

 

 

$

1.22

 

Distillers grains (tons)

 

 

53

 

 

$

95.30

 

 

 

60

 

 

$

114.34

 

Corn Oil (pounds)

 

 

4,576

 

 

$

0.24

 

 

 

2,367

 

 

$

0.25

 

 

Product Cost Information

 

Quantity

 

 

Average Cost

 

 

Quantity

 

 

Average Cost

 

Corn (bushels)

 

 

7,333

 

 

$

3.19

 

 

 

8,202

 

 

$

3.27

 

Natural Gas (therms)

 

 

517

 

 

$

3.62

 

 

 

618

 

 

$

2.55

 

 

As discussed above, our Aberdeen plant consists of a single production facility. Prior to April 2016, we also operated a smaller, nine-million gallon Aberdeen facility.  Therefore, our ethanol and distillers grain production and the quantity of corn and natural gas we consumed in the fiscal 2017 three-month period were lower than in the comparable fiscal 2016 three-month period.

Net Sales

Net sales for the quarter ended March 31, 2017 were $27.6 million, compared to $28.6 million for the quarter ending March 31, 2016, a decrease of $1.0 million or 3%. Ethanol gallons sold decreased by 11%, while ethanol prices increased by 8% for the quarter ended March 31, 2017, compared to the prior quarter ended March 31, 2016. As a percentage of net sales, ethanol sales were 82% and 79% and distillers’ sales were 15% and 19%, for the quarters ending March 31, 2017 and March 31, 2016, respectively.

Cost of Goods Sold

Cost of goods sold for the quarter ended March 31, 2017 was $32.8 million, compared to $38.3 million for the quarter ended March 31, 2016, a decrease of $5.5 million. Our primary costs in the production of ethanol and related co-products are corn and natural gas.  A $3.4 million decrease in corn costs offset by a $0.3 million increase in natural gas costs represented a majority of the decrease in cost of goods sold in the quarter ended March 31, 2017. Corn costs represented 71% and 70% of cost of sales for the quarters ended March 31, 2017 and 2016, respectively. Corn prices decreased 2% during the three-month period ending March 31, 2017 compared to the prior year quarter. We used 11% less corn in the three-month period ending March 31, 2017, compared to the three months ended March 31, 2016.

Natural gas costs represented 6% and 4% of total cost of sales for the quarters ending March 31, 2017 and 2016, respectively. The cost of natural gas per mmbtu increased by 42% to $3.62 for the quarter ended March 31, 2017 compared to the previous year quarter. Prices were higher in the current year due to increased demand as a result of colder winter months. Natural gas stocks have dropped 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 16% due to lower production in the quarter ending March 31, 2017 versus the quarter ending March 31, 2016.

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 March 31, 2017 were $0.8 million compared to $0.9 million for the previous quarter.  As a percentage of net sales, selling, general and administrative expenses were 2.2% and 2.6% of net sales, for the quarters ending March 31, 2017 and 2016, respectively.

Interest Expense

Interest expense for the quarter March 31, 2017 was $220,000 compared to $313,000 for the quarter ending March 31, 2016. The lower interest expense was the result of less interest bearing debt outstanding compared to the prior year quarter.

 

 

 

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Results of Operations for the Six Months Ended March 31, 2017 Compared to Six Months Ended March 31, 2016

     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 the six months ended March 31, 2017 and 2016 for our South Dakota plants only:    

 

 

 

Six Months

 

 

Six Months

 

 

 

March 31, 2017

 

 

March 31, 2016

 

 

 

Quantity

 

 

Average Price

 

 

Quantity

 

 

Average Price

 

Product Sales Information

 

(In thousands)

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

Ethanol (gallons)

 

 

42,575

 

 

$

1.40

 

 

 

46,053

 

 

$

1.27

 

Distillers grains (tons)

 

 

107

 

 

$

97.89

 

 

 

121

 

 

$

110.21

 

Corn Oil (pounds)

 

 

9,763

 

 

$

0.24

 

 

 

5,122

 

 

$

0.21

 

 

Product Cost Information

 

Quantity

 

 

Average Cost

 

 

Quantity

 

 

Average Cost

 

Corn (bushels)

 

 

14,829

 

 

$

3.09

 

 

 

16,113

 

 

$

3.32

 

Natural Gas (therms)

 

 

1,080

 

 

$

3.52

 

 

 

1,235

 

 

$

2.52

 

 

As discussed above, our Aberdeen plant consists of a single production facility. Prior to April 2016, we also operated a smaller, nine-million gallon Aberdeen facility.  Therefore, our ethanol and distillers grain production and the quantity of corn and natural gas we consumed in the fiscal 2017 six-month period were lower than in the comparable fiscal 2016 six-month period.

Net Sales

Net sales for the six months ended March 31, 2017 were $72.3 million, compared to $73.4 million for the six months ending March 31, 2016 a decrease of $1.1 million or 2%. Ethanol gallons sold decreased by 8% for the six months ended March 31, 2017, compared to the prior six months ended March 31, 2016.  As a percentage of net sales, ethanol sales were 82% and 80% and distillers’ sales were 15% and 18%, for the six months ending March 31, 2017 and March 31, 2016, respectively.  Although ethanol gallons sold in the 2017 period were affected by the April 2016 closing of the smaller Aberdeen plant, increased efficiencies at both the Huron and Aberdeen plant partially offset the lost production from the smaller plant.

Cost of Goods Sold

Cost of goods sold for the six months ended March 31, 2017 was $64.0 million, compared to $76.3 million for the six months ended March 31, 2016, a decrease of $12.3 million. Our primary costs in the production of ethanol and related co-products are corn and natural gas.  A $7.7 million decrease in corn costs offset by a $0.7 million increase in natural gas costs represented a majority of the decrease in cost of goods sold in the six months ended March 31, 2017. Corn costs represented 72% and 70% of cost of sales for the six months ended March 31, 2017 and 2016, respectively.  Corn prices increased 2% during the six-month period ending March 31, 2017 compared to the prior year six months.  We used 14% less corn in the six month period ending March 31, 2017, compared to the six months ended March 31, 2016 as a result of increased production efficiencies and lower plant capacity.

Natural gas costs represented 6% and 4% of total cost of goods sold for the six months ended March 31, 2017 and 2016, respectively. The cost of natural gas per mmbtu increased by $1.00 per mmbtu, or 40% for the six months ending March 31, 2017 compared to the prior year period. Prices were higher in the current year due to increased demand as a result of colder winter months. Natural gas stocks have dropped year over year due to increased demand from colder weather and exports, resulting in higher prices in the current quarter versus last year.  Natural gas consumption decreased 13% for the six months ending March 31, 2017 compared to the prior year period.

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 remained consistent with the prior year period.  As a percentage of net sales, selling, general and administrative expenses for the six months ending March 31, 2017 increased to 2.6%, compared to 2.3% for the six months ended March 31, 2016.

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Interest Expense

Interest expense for the six months ending March 31, 2017 was $448,000, compared to $377,000 for the prior year period.  The interest expense for the six months ending March 31, 2016 related to our long-term debt was $618,000 plus $44,000 of amortization of deferred waiver fees and $21,000 of amortization of deferred financing costs, which was offset by $306,000 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 for the six months ending March 31, 2016.

As a result of the debt sweep payments made during fiscal year 2014 and 2015 and the final payoff of the 2010 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.  As a result of the prepayments made during the six months ending March 31, 2016, a gain of approximately $323,000 was recognized as Other Income during the six months ending March 31, 2016.  

Changes in Financial Position for the Six Months ended March 31, 2017

Current Assets

The $1.5 million increase in current assets at March 31, 2017 compared to September 30, 2016 was primarily due to an increase in operating margins in the six months ended March 31, 2017 and partially offset by a $1.5 million decrease in trade receivables and inventory, mostly due to timing differences.

Property, Plant and Equipment

The $0.1 million decrease in property, plant and equipment at March 31, 2017 compared to September 30, 2016, was primarily due to $1.7 million of capital expenditures offset by recognizing $1.9 million of depreciation expense in the fiscal year.

Current Liabilities

Accounts payable and accrued expenses decreased by $0.3 million at March 31, 2017 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 $850,000 March 31, 2017 compared to September 30, 2016.  The increase was due to the addition of the current portion of the 2016 Term Loan.

Long-term debt decreased by $1.7 million at March 31, 2017 compared to September 30, 2016. This decrease was due to $2.0 million of debt payments made in October 2016 and January 2017, offset by $0.3 million 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 April 2017, current annualized U.S. ethanol production capacity was approximately 15.6 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,

21


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 March 31, 2017, the average Chicago OPIS Spot Ethanol Assessment was $1.49 per gallon and the average NYMEX RBOB spot gasoline price was $1.58 per gallon, or approximately $0.09 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.

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, was among the 30 regulations that were delayed until March 21, 2017; the RFS rule was originally scheduled to go into effect on February 10, 2017.  On March 21, 2017, the 2017 RVOs went into effect and no further delays were imposed.

22


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

 

 

 

 

 

 

 

Cellulosic

 

 

 

 

 

 

 

 

 

 

RFS Requirement

 

 

 

Total Renewable

 

 

Ethanol

 

 

Biodiesel

 

 

 

 

 

 

That Can Be Met

 

 

 

Fuel

 

 

Minimum

 

 

Minimum

 

 

Advanced

 

 

With Corn-Based

 

Year

 

Requirement

 

 

Requirement

 

 

Requirement

 

 

Biofuel

 

 

Ethanol

 

2016 (1)

 

 

22.25

 

 

 

4.25

 

 

 

-

 

 

 

7.25

 

 

 

15.00

 

2016 (2)

 

 

18.11

 

 

 

0.23

 

 

 

1.90

 

 

 

3.61

 

 

 

14.50

 

2017 (1)

 

 

24.00

 

 

 

5.50

 

 

 

-

 

 

 

9.00

 

 

 

15.00

 

2017 (3)

 

 

19.28

 

 

 

0.31

 

 

 

2.00

 

 

 

4.28

 

 

 

15.00

 

2018

 

 

26.00

 

 

 

7.00

 

 

 

-

 

 

 

11.00

 

 

 

15.00

 

2019

 

 

28.00

 

 

 

8.50

 

 

 

-

 

 

 

13.00

 

 

 

15.00

 

2020

 

 

30.00

 

 

 

10.50

 

 

 

-

 

 

 

15.00

 

 

 

15.00

 

2021

 

 

33.00

 

 

 

13.50

 

 

 

-

 

 

 

18.00

 

 

 

15.00

 

2022

 

 

36.00

 

 

 

16.00

 

 

 

-

 

 

 

21.00

 

 

 

15.00

 

 

(1)

Original statutory volumes.

(2)

Final EPA Renewable Fuel Standards for 2016 issued November 2015.

(3)

Final EPA Renewable Fuel Standards for 2017 issued November 2016.

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

Ethanol Competition

The ethanol we produce is similar to ethanol produced by other plants. The RFA reports that as of April 2017, current annualized U.S. ethanol production was approximately 15.6 billion gallons per year. On a national level, there are numerous other production facilities with which we are in direct competition, many of whom have greater resources than we do. As of April 2017, South Dakota had 15 ethanol plants producing an aggregate of 1.0 billion gallons of ethanol per year.

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

Competition from Alternative Fuels

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

Ethanol Marketing

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

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CO-PRODUCTS

Sales of distillers’ grains have represented 15% and 18% of our revenues for the quarters ended March 31, 2017 and 2016, respectively. When the plants are operating at capacity, they produce approximately 231,000 tons of dried distillers’ grains equivalents per year, approximately 15-16 pounds per bushel of corn used.  Distillers’ grains are a high-protein, high-energy animal feed supplement primarily marketed to the dairy and beef industry, but also to the poultry and swine markets. Dry mill ethanol processing creates three forms of distillers’ grains: wet distillers’ grains with solubles, known as wet distillers’ grains; modified wet distillers’ grains with solubles, known as modified distillers’ grains; and dry distillers’ grains with solubles. Wet and modified distillers’ grains have been dried to approximately 65% and 50% moisture levels, respectively, and are predominately sold to nearby markets. Dried distillers’ grains have been dried to 11% moisture, have an almost indefinite shelf life and may be sold and shipped to more distant markets. In this Form 10-Q, we sometimes refer to these products as “distillers’ grains” or “distillers.”

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

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

Competition

In the sales of distillers’ grains, we compete with other ethanol producers, as well as a number of large and smaller suppliers of competing animal feed. We believe the principal competitive factors are price, proximity to purchasers and product quality. Currently we derive 58% of our distillers’ grain revenues from the sale of dried distillers’ grains, which have an indefinite shelf life and can be transported by truck or rail, and 42% from the sale of modified or wet distillers’ grains, which have a shorter shelf life and are typically sold in local markets via truck.

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

Co-Product Marketing

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

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

24


CAPITAL RESOURCES

During the quarter ended March 31, 2017, we conducted our business activities and plant operations through the parent company, Advanced BioEnergy, and its primary operating subsidiary, ABE South Dakota. ABE Fairmont has had minimal activity since the sale of the Fairmont facility. The liquidity and capital resources for each entity are based on the entity’s existing financing arrangements and capital structure. Advanced BioEnergy is highly restricted in its ability to use the cash and other financial resources of ABE South Dakota for the benefit of Advanced BioEnergy, with the exception of allowable distributions as defined under the 2015 Credit Agreement with AgCountry.

Advanced BioEnergy, LLC (“ABE”)

ABE had cash and cash equivalents of $1.0 million on hand at March 31, 2017. ABE did not have any debt outstanding as of March 31, 2017.  

From time to time, ABE may also receive certain allowable distributions from ABE South Dakota, subject to compliance with the terms and conditions of the 2015 Credit Agreement. ABE will not receive any distribution from ABE South Dakota for its fiscal 2016 financial results and has not received any in fiscal 2017.

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

ABE Fairmont

ABE Fairmont had no cash or cash equivalents on hand at March 31, 2017.

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

ABE South Dakota

ABE South Dakota had cash and cash equivalents of $17.2 million on hand at March 31, 2017. As of March 31, 2017, ABE South Dakota had interest-bearing term debt outstanding of $27.1 million.

2015 Senior Credit Agreement

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

The $20.0 million Term Loan has a variable interest rate (“Variable Rate”) equal to the one-month LIBOR rate plus a “Margin” of 350 basis points. The applicable LIBOR interest rate at March 31, 2017 was 0.77%. 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.

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

25


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.

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; the Company does not plan to draw any additional funds 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.

CASH FLOWS

The following table shows our cash flows for the six months ended March 31, 2017 and 2016:

 

 

 

Six Months Ended March 31

 

 

 

2017

 

 

2016

 

 

 

(In thousands)

 

Net cash provided by (used in) operating activities

 

$

9,007

 

 

$

(2,982

)

Net cash provided by (used in) investing activities

 

 

(1,597

)

 

 

2,852

 

Net cash (used in) financing activities

 

 

(4,710

)

 

 

(2,069

)

 

Cash Flow from Operations

Cash flows provided by operating activities for the six months ending March 31, 2017 were approximately $8.9 million compared to $3.0 million used in the prior year period, an increase of $11.9 million. Higher operating margins accounted for the majority of the overall increase in cash flows from operating activities.

Cash Flow from Investing Activities

Cash flows used in investing activities for the six months ending March 31, 2017 were approximately $1.5 million compared to $2.9 million provided by investing activities for the prior year period. The current year six months included a net of $1.7 million in additions to property and equipment offset by $0.2 million of patronage income. The prior year six months included a $3.1 million change in restricted cash in connection with the December 2015 debt refinancing; this cash was restricted under the prior credit agreement and became unrestricted at the time of the refinancing. This was partially offset by $0.4 million in additions to property and equipment and $0.1 million of patronage income.

26


Cash Flow from Financing Activities

Cash flows used in financing activities for the six months ending March 31, 2017 were $4.7 million compared to $2.1 million used in for the prior year period. The current year period included $1.1 million in debt proceeds in conjunction with the Huron corn oil project which was offset by long-term debt payments of $2.0 million and a distribution of $3.8 million to unit holders. Cash used in financing activities in the prior year period included long-term debt payments of $29.0 million and $3.1 million used for the payment of the restructuring and waiver fees in connection with the refinancing of the 2010 Senior Credit Agreement, offset by $30.0 million in proceeds from the 2015 Senior Credit Agreement.

CREDIT ARRANGEMENTS

Long-term debt consists of the following (in thousands, except percentages):

 

 

 

March 31,

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

March 31,

 

 

September 30,

 

 

 

Interest Rate

 

 

2017

 

 

2016

 

ABE South Dakota:

 

 

 

 

 

 

 

 

 

 

 

 

Senior debt principal - variable

 

 

4.27%

 

 

$

27,102

 

 

$

28,000

 

Deferred financing costs

 

N/A

 

 

 

(358

)

 

 

(407

)

Total outstanding

 

 

 

 

 

$

26,744

 

 

$

27,593

 

 

The estimated maturities of debt at March 31 are as follows (in thousands):

 

 

 

Senior Debt

 

 

Deferred

 

 

 

 

 

Due By March 31:

 

Principal

 

 

Financing Costs

 

 

Total

 

2018

 

$

4,850

 

 

$

(95

)

 

$

4,755

 

2019

 

 

4,252

 

 

 

(96

)

 

 

4,156

 

2020

 

 

4,000

 

 

 

(95

)

 

 

3,905

 

2021

 

 

14,000

 

 

 

(72

)

 

 

13,928

 

Total debt

 

$

27,102

 

 

$

(358

)

 

$

26,744

 

 

SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

Revenue Recognition

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

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 NRV. 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.

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

27


are not marked to market. These contracts provide for the sale or purchase of an item other than a financial instrument or derivative instrument that will be delivered in quantities expected to be sold or used over a reasonable period in the normal course of business.

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

 

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

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

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

Other equipment

  

  1-5 Years

Process equipment

 

15 Years

Buildings

 

40 Years

 

During the fourth quarter of fiscal 2016, the Company re-evaluated the estimated lives of process equipment.  Prior to June 30, 2016, the Company used an estimated useful life of 10 years for process equipment.  Based on the re-evaluation, the Company determined a change in estimate was necessary.  Accordingly, the Company increased the estimated useful life for process equipment from 10 to 15 years in the fourth quarter of fiscal 2016.  As a result of this change in estimate, depreciation expense was approximately $3.5 million lower in the six months ended March 31, 2017 than the six months ended March 31, 2016.  Depreciation in future periods will be lower, 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 on 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.

INTEREST RATE/FOREIGN EXCHANGE RISK

Our future earnings may be affected by changes in interest rates due to the impact those changes have on our interest expense on borrowings under our credit facility. As of March 31, 2017, we had $27.1 million of outstanding borrowings with variable interest rates. With each 1% increase in interest rates we will incur additional annual interest charges of $0.27 million.

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

IMPACT OF INFLATION

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

OFF-BALANCE SHEET ARRANGEMENTS

We have no off-balance sheet arrangements.

28


DISTRIBUTIONS

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.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

COMMODITY PRICE RISK

We consider market risk to be the impact of adverse changes in market prices on our results of operations. We are subject to significant market risk with respect to the price of ethanol and corn. For the quarter ended March 31, 2017, sales of ethanol represented 82% of our total revenues and corn costs represented 71% of total cost of goods sold. In general, ethanol prices are affected by the supply and demand for ethanol, the cost of ethanol production, the availability of other fuel oxygenates, the regulatory climate and the cost of alternative fuels such as gasoline. The price of corn is affected by weather conditions and other factors affecting crop yields, farmer planting decisions and general economic, market and regulatory factors. At March 31, 2017, the price per gallon of ethanol and the price per bushel of corn on the CBOT were $1.42 and $3.22 respectively.

We are also subject to market risk on the selling prices of our distillers’ grains, which represented 15% of our total revenues for the quarter ended March 31, 2017. These prices fluctuate seasonally when the price of corn or other cattle feed alternatives fluctuate in price. The average dried distillers’ grains spot price for local customers was $77 per ton at March 31, 2017.

We are also subject to market risk with respect to our supply of natural gas that we consume in the ethanol production process. Natural gas costs represented 5.7% of total cost of sales for the quarter ended March 31, 2017. The price of natural gas is affected by overall supply, weather conditions and general economic, market and regulatory factors. At March 31, 2017, the price of natural gas on the NYMEX was $3.45 per mmbtu.

To reduce price risk caused by market fluctuations in the cost and selling prices of related commodities, we have entered into forward purchase/sale contracts. We entered into forward sales contracts that guaranteed prices on 19% of our ethanol gallons sold. At March 31, 2017 we had entered into forward sale contracts representing 52% of our expected distillers’ grains production output through May 2017.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in

 

 

 

Estimated at

 

 

 

 

Hypothetical

 

 

 

 

 

 

Annual

 

 

 

Risk

 

 

 

 

Change in

 

 

Spot

 

 

Operating

 

 

 

Volume (1)

 

 

Units

 

Price

 

 

Price(2)

 

 

Income

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

Ethanol

 

 

72.0

 

 

gallons

 

 

10.0

%

 

$

1.42

 

 

$

10.2

 

Distillers grains

 

 

0.2

 

 

tons

 

 

10.0

%

 

 

77.00

 

 

 

1.5

 

Corn

 

 

27.1

 

 

bushels

 

 

10.0

%

 

 

3.22

 

 

 

8.7

 

Natural gas

 

 

2.1

 

 

mmbtus

 

 

10.0

%

 

 

3.45

 

 

 

0.7

 

 

(1)

The volume of ethanol at risk is based on the assumption that we will enter into contracts for 10% of our expected annual gallons capacity of 80 million gallons. The volume of distillers’ grains at risk is based on the assumption that we will enter into contracts for 9% of our expected annual distillers’ grains production of 231,000 tons. The volume of corn is based on the assumption that we will enter into forward contracts for none of our estimated current 27.1 million bushel annual requirement. The volume of natural gas is based on the assumption that we will continue to lock in none of our estimated gas usage.

(2)

Current spot prices include the CBOT price per gallon of ethanol, the local price per bushel of corn, the NYMEX price per mmbtu of natural gas and our listed local advertised dried distillers’ grains price per ton as of March 31, 2017.

29


INTEREST RATE/FOREIGN EXCHANGE RISK

Our future earnings may be affected by changes in interest rates due to the impact those changes have on our interest expense on borrowings under our credit facility. As of March 31, 2017, we had $27.1 million of outstanding borrowings with variable interest rates. With each 1% increase in interest rates we will incur additional annual interest charges of $0.27 million.

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our chief executive officer, who is also our chief financial officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on this evaluation, our chief executive officer, who is also our chief financial officer, concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and to ensure that information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officer, to allow timely decisions regarding required disclosures.

Changes in Internal Controls

There were no changes in our internal controls over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

30


PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

There are no material changes from risk factors as previously discussed in our September 30, 2016 Annual Report on Form 10-K, except as follows:

Tariffs imposed on ethanol exports to China have recently been increased by the Chinese government and could negatively affect the demand and pricing for ethanol.

The 2017 ethanol tariff for imports into China was increased to 30% as of January 1, 2017; the 2016 ethanol tariff was 5%.  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.  We cannot estimate the exact effect this tariff will have on the overall domestic ethanol market.  However, it is possible the higher tariff could reduce ethanol prices in the domestic market by decreasing export demand for U.S. ethanol.

The Brazilian government may impose tariffs on ethanol exports to Brazil.  If this happens, it could negatively affect the demand and pricing for ethanol.

The Brazilian government is currently contemplating a decision to impose tariffs on ethanol being imported into Brazil.  If imposed, tariffs are expected to be at levels of 16 to 20 percent.  U.S. ethanol producers exported over 140 million gallons of ethanol to Brazil in the first quarter of 2017, which is approximately 40 percent of U.S. ethanol exports this year.  The Brazilian government is expected to make a final decision on the potential tariff in June 2017.  We cannot estimate the exact effect this tariff would have on the overall domestic ethanol market.  However, it is possible a tariff at the levels contemplated could reduce ethanol prices in the domestic market by decreasing export demand for U.S. ethanol.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

None.

31


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

ADVANCED BIOENERGY, LLC  

 

 

 

Date: May 12, 2017

By:

/s/ Richard R. Peterson  

 

 

Richard R. Peterson 

 

 

Chief Executive Officer and President,

Chief Financial Officer

(Duly authorized signatory and Principal

Financial Officer)

 

32


EXHIBIT INDEX

 

Exhibit

 

 

 

 

No.

 

Description

 

Method of Filing

 

 

 

 

 

31

 

Rule 13a-14(a)/15d-14(a) Certification by Principal Executive Officer, Financial and Accounting Officer.

 

Filed Electronically

 

 

 

 

 

32

 

Section 1350 Certifications.

 

Filed Electronically

 

 

 

 

 

 

 

101

 

The following materials from Advanced BioEnergy’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, formatted in XBRL: (i) Consolidated Balance Sheets at March 31, 2017 and September 30, 2016 ; (ii) Consolidated Statements of Operations for the three and six months ended March 31, 2017 and March 31, 2016; (iii) Consolidated Statements of Changes in Member’s Equity for the six months ended March 31, 2017; (iv) Consolidated Statements of Cash Flows for the six months ended March 31, 2017 and 2016; and (v) Notes to the Consolidated Financial Statements.

 

Filed Electronically

 

33