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EX-32.2 - EXHIBIT 32.2 SIRE 09.30.2017 - SOUTHWEST IOWA RENEWABLE ENERGY, LLCsire-2017930ex322.htm
EX-32.1 - EXHIBIT 32.1 SIRE 09.30.2017 - SOUTHWEST IOWA RENEWABLE ENERGY, LLCsire-2017930ex321.htm
EX-31.2 - EXHIBIT 31.2 SIRE 09.30.2017 - SOUTHWEST IOWA RENEWABLE ENERGY, LLCsire-2017930ex312.htm
EX-31.1 - EXHIBIT 31.1 SIRE 09.30.2017 - SOUTHWEST IOWA RENEWABLE ENERGY, LLCsire-2017930ex311.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
(Mark one)
 
ý
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the fiscal year ended September 30, 2017
 
 
o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the transition period from _________ to __________
 
 
 
Commission file number 000-53041
 
 
SOUTHWEST IOWA RENEWABLE ENERGY, LLC
(Exact name of registrant as specified in its charter)
 
 
Iowa
20-2735046
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
10868 189 th Street, Council Bluffs, Iowa
51503
(Address of principal executive offices)
(Zip Code)
 
 
Registrant’s telephone number (712) 366-0392
 
 
Securities registered under Section 12(b) of the Exchange Act:
None.
 
 
Title of each class
Name of each exchange on which registered
 
 
Securities registered under Section 12(g) of the Exchange Act:
 
Series A Membership Units
(Title of class)
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o     No x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.  Yes o     No x
 
Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the 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 o  No o
 
Indicate by check mark whether the registrant has submitted electronically on its corporate Website, 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 x     No o
 
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x




Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  o       Accelerated filer o       Non-accelerated filer o       Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No x

As of March 31, 2017, the aggregate market value of the Membership Units held by non-affiliates (computed by reference to the last price at which the Membership Units were sold) was $46,763,600.
As of September 30, 2017, the Company had 8,993 Series A, 3,334 Series B and 1,000 Series C Membership Units outstanding.
DOCUMENTS INCORPORATED BY REFERENCE—None




 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 






PART I
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
 
This Annual Report on Form 10-K of Southwest Iowa Renewable Energy, LLC (the “Company,” “we,” or “us”)contains historical information, as well as forward-looking statements that involve known and unknown risks and relate to future events, our future financial performance, or our expected future operations and actions.  In some cases, you can identify forward-looking statements by terminology such as “may,” “will”, “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “future,” “intend,” “could,” “hope,”  “predict,” “target,” “potential,” or “continue” or the negative of these terms or other similar expressions.  These forward-looking statements are only our predictions based on current information and involve numerous assumptions, risks and uncertainties.  Our actual results or actions may differ materially from these forward-looking statements for many reasons, including the reasons described in this report.  While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include:
Changes in the availability and price of corn, natural gas, and steam;
Negative impacts resulting from the reduction in the renewable fuel volume requirements under the Renewable Fuel Standard issued by the Environmental Protection Agency
Our inability to comply with our credit agreements required to continue our operations;
Negative impacts that our hedging activities may have on our operations;
Decreases in the market prices of ethanol and distillers grains;
Ethanol supply exceeding demand; and corresponding ethanol price reductions;
Changes in the environmental regulations that apply to our plant operations;
Changes in plant production capacity or technical difficulties in operating the plant;
Changes in general economic conditions or the occurrence of certain events causing an economic impact in the agriculture, oil or automobile industries;

Changes in other federal or state laws and regulations relating to the production and use of ethanol;
Changes and advances in ethanol production technology;
Competition from larger producers as well as competition from alternative fuel additives;
Changes in interest rates and lending conditions of our loan covenants;
Volatile commodity and financial markets; and
Decreases in export demand due to the imposition of duties and tariffs by foreign governments on ethanol and distillers grains produced in the United States.
 
These forward-looking statements are based on management’s estimates, projections and assumptions as of the date hereof and include various assumptions that underlie such statements.  Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed below and in the section titled “Risk Factors.” Other risks and uncertainties are disclosed in our prior Securities and Exchange Commission (“SEC”) filings. These and many other factors could affect our future financial condition and operating results and could cause actual results to differ materially from expectations set forth in the forward-looking statements made in this document or elsewhere by Company or on its behalf.  We undertake no obligation to revise or update any forward-looking statements.  The forward-looking statements contained in this Form 10-K are included in the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended (the “1933 Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).


Item 1.   Business.
The Company is an Iowa limited liability company located in Council Bluffs, Iowa, formed in March, 2005. The Company is permitted to produce 140 million gallons of ethanol.  The Company historically was permitted to produce up to 125 million gallons under it's air permit; however, the Iowa Department of Natural Resources (IDNR) approved an increase in the Company's air permit to allow for production of 140 million gallons per rolling 12 months starting in March 2017.
We began producing ethanol in February, 2009 and sell our ethanol, distillers grains, and corn oil in the United States, Mexico and the Pacific Rim.  

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Our production facility (the “Facility”) is located in Pottawattamie County in southwestern Iowa, south of Council Bluffs. It is near two major interstate highways, I29 and I80, within a mile of the Missouri River and has access to five major rail carriers. This location is in close proximity to a significant amount of corn and has convenient product market access. The Facility receives corn and chemical deliveries primarily by truck and is able to utilize rail delivery if necessary.  Finished products are shipped by rail and truck.  The site has access to water from ground wells and from the Missouri River.  Additionally, in close proximity to the Facility’s primary energy source (steam), there are two natural gas providers available, both with infrastructure immediately accessible to the Facility.
Financial Information
Please refer to “Item 7-Management’s Discussion and Analysis of Financial Condition and Results of Operations” for information about our revenue, profit and loss measurements and total assets and liabilities, and “Item 8 – Financial Statements and Supplementary Data” for our financial statements and supplementary data.
 
Rail Access
We own a six mile loop railroad track for rail service to our Facility, which accommodates several unit trains.  We are party to an Industrial Track Agreement with CBEC Railway, Inc. (the “Track Agreement “), which governs our use of the loop railroad and requires, among other things, that we maintain the loop track.
We are a party to an Amended and Restated Railcar Lease Agreement (“Railcar Agreement”) with Bunge North America, Inc. (“Bunge”), a significant equity holder, for the lease of 323 ethanol cars and 298 hopper cars which are used for the delivery and marketing of our ethanol and distillers grains.  Under the Railcar Agreement, we leased railcars for terms lasting 120 months which continues on a month to month basis thereafter. The Railcar Agreement will terminate upon the expiration of all railcar leases. Pursuant to the terms of a side letter to the Railcar Agreement, we sublease cars back to Bunge or third parties from time to time when the cars are not in use in our operations. We work with Bunge to determine the most economic use of the available ethanol and hopper cars in light of current market conditions. During the fiscal year ended September 30, 2017, we subleased 96 hopper cars to Bunge, and maintained our lease agreement for 92 hopper cars to two separate third parties. In June 2017, we also entered into a second 36 month lease for an additional 30 non-insulated tank cars from an unrelated third party leasing company (this was in addition to the 30 non-insulated tank cars leased from that company signed December 2015).
Employees
We had 61 full time employees, as of September 30, 2017.  We are not subject to any collective bargaining agreements and we have not experienced any work stoppages.  Our management considers our employee relationships to be favorable.
Principal Products
The principal products we produce are ethanol, distillers grains, corn oil, and carbon dioxide ("CO2").
Ethanol
 
Our primary product is ethanol. Ethanol is ethyl alcohol, a fuel component made primarily from corn and various other grains, which can be used as: (i) an octane enhancer in fuels; (ii) an oxygenated fuel additive for the purpose of reducing ozone and carbon monoxide vehicle emissions; and (iii) a non-petroleum-based gasoline substitute.  More than 99% of all ethanol produced in the United States is used in its primary form for blending with unleaded gasoline and other fuel products.  The principal purchasers of ethanol are generally wholesale gasoline marketers or blenders.  Ethanol is shipped by truck in the local markets, and by rail in the regional, national and international markets.
We produced 124.1 million and 122.3 million gallons of ethanol for the fiscal years ended September 30, 2017 ("Fiscal 2017") and September 30, 2016 (“Fiscal 2016”), respectively, and approximately 80.9% and 77.4% of our revenue was derived from the sale of ethanol in Fiscal 2017 and 2016, respectively.
Distillers Grain
 The principal co-product of the ethanol production process is distillers grains, a high protein, high-energy animal feed marketed primarily to the beef and dairy industries.  Distillers grains contain by-pass protein that is superior to other protein supplements such as cottonseed meal and soybean meal..  We produce two forms of distillers grains: wet distillers grains with solubles (“WDGS”) and dried distillers grains with solubles (“DDGS”).  WDGS are processed corn mash that has been dried to approximately 50% to 65% moisture.  WDGS have a shelf life of approximately seven days and are sold to local markets.  DDGS

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are processed corn mash that has been dried to approximately 10% to 12% moisture.  It has a longer shelf life and may be sold and shipped to any market.

In Fiscal 2017, we sold 9.2% less tons of distillers grains compared to Fiscal 2016. Approximately 14.0% and 18.1% of our revenue was derived from the sale of distillers grains in Fiscal 2017 and 2016, respectively.
Corn Oil
 
Our system separates corn oil from the post-fermentation syrup stream as it leaves the evaporators of the ethanol plant. The corn oil is then routed to storage tanks, and the remaining concentrated syrup is routed to the plant’s syrup tank. Corn oil can be marketed as either a feed additive or a biodiesel feedstock.  We sold 5.2% more tons of corn oil in Fiscal 2017 than in Fiscal 2016, with approximately 4.6% and 3.9% of our revenue generated from corn oil sales, respectively.
Carbon Dioxide
In April 2013, we entered into a Carbon Dioxide Purchase and Sale Agreement (the “CO2 Agreement”) with Air Products and Chemicals, Inc., formerly known as EPCO Carbon Dioxide Products, Inc. ("Air Products") under which we agreed to supply, and Air Products agreed to purchase, a portion of raw CO2 gas produced by our Facility. In addition, we entered into a Non-Exclusive CO2 Facility Site Lease Agreement under which we granted Air Products a non-exclusive right of entry and license to construct, maintain and operate a carbon dioxide liquefaction plant (the “CO2 Plant”) on a site near our Facility. The term of the CO2 Agreement runs for ten (10) years from the startup of the CO2 Plant (the “Initial Term”) and then renews automatically for two (2) additional five (5) year periods thereafter, unless written notice of termination is submitted within six (6) months prior to the end of the then current term.

Air Products pays us a base price per ton, which acts as a floor price, Air Products will pay us an additional amount based on Air Products profits above a minimum targeted margin. The CO2 Agreement also contains a take or pay obligation pursuant to which Air Products agrees to pay us for a minimum number of tons each year. CO2 was 0.4% and 0.3% of our revenue generated in Fiscal 2017 and Fiscal 2016, respectively.

Principal Product Markets
As described below in “Distribution Methods,” we market and distribute all of our ethanol and distillers grains through Bunge.  Our ethanol, distillers grains and corn oil are primarily sold in the domestic market; however, as markets allow, our products can be, and have been, sold in the export markets. We expect Bunge to explore all markets for our ethanol and distillers grains, including export markets, and believe that there is some potential for increased international sales of our products. However, due to high transportation costs, and the fact that we are not located near a major international shipping port, we expect a majority of our products to continue to be marketed and sold domestically.
In the first half of 2017, ethanol exports experienced by the industry increased 29% as compared to the first six months of 2016. Exports of ethanol have increased with Brazil receiving the largest percentage of ethanol produced in the United States, and Canada and India in second and third place, respectively. These three countries constitute almost 75% of all ethanol exports. India, the Philippines, the United Arab Emirates, South Korea and Peru have also been other destinations for ethanol exports in the first half of 2017.

However, ethanol export demand is more unpredictable than domestic demand, and tends to fluctuate over time as it is subject to monetary and political forces in other nations. For instance, a strong U.S. Dollar is an example of a force that may negatively impact ethanol exports from the United States. In addition, during 2017 Brazil and China adopted import quotas and/or tariffs on the importation of ethanol which are expected to continue to negatively impact U.S. exports. China, the number three importer of U.S. ethanol in 2016, has imported negligible volumes year-to-date due to a 30% tariff imposed on U.S. and Brazil fuel ethanol, which took effect on January 1, 2017. However, on September 13, 2017, China’s National Development and Reform Commission, the National Energy Board and 15 other state departments issued a joint plan to expand the use and production of biofuels containing up to 10% ethanol by 2020. This joint plan may support increased exports to China; however, there is no guarantee that the joint plan will offset the adverse impacts of the tariff or that there will be any positive impact to domestic exports to China.

On September 1, 2017, Brazil’s Chamber of Foreign Trade, or CAMEX, issued an official written resolution, imposing a 20% tariff on U.S. ethanol imports in excess of 150 million liters, or 39.6 million gallons per quarter. The ruling is valid for two years. The export market is beginning to see the impact of the imposition of these tariffs. According to the Renewable Fuels Association, during September 2017, Brazil fell out of the top two customers of U.S. ethanol exports for the first time in 16 months

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which is most likely the result of the nation's implementation of the 20% tariff on imported ethanol. Exports to Brazil in September 2017 decreased by 20% compared to August 2017 exports and by 70% compared to the peak in May 2017. The Chinese and Brazil tariffs have had, and likely will continue to have, a negative impact on the export market demand and prices for ethanol produced in the United States.

Distillers grains have become more accepted as animal feed throughout the world and therefore, distillers grains exporting has increased and may continue to increase as worldwide acceptance grows. According to the Energy Information Administration (the “EIA”), U.S. distiller’s grains exports through August 30, 2017 were approximately 4% lower than distiller’s grains exports for the same eight-month period last year with Mexico, Turkey, South Korea, Canada, Thailand and Indonesia accounting for 62% of total U.S. distillers export volumes
Historically, the United States ethanol industry exported a significant amount of distillers grains to China; however, exports to China have significantly decreased as a result of the Chinese antidumping and countervailing investigations and the implementation of significant duties on importing into China distillers grains produced in the United States. In January 2017, China announced a final ruling which set the antidumping duties at a range between 42.2% and 53.7% and anti-subsidy duties at a range between 11.2% to 12%. The imposition of these duties resulted in plummeting demand from this top importer requiring United States producers to seek out alternatives markets, most notably in Mexico and Canada. On September 1, 2017, the Minister of Agriculture and Rural Development of Vietnam lifted the suspension which blocked imports of U.S. dried distiller’s grains which had been in place since December 2016. Prior to the implementation of the suspension, Vietnam had historically been a substantial export market for U.S. distiller’s grains representing the third largest export market for U.S. distillers grains. The lift of this suspension may result in increased exports to Vietnam; however, there is no guarantee that the Vietnamese export market will achieve significant growth
    
We sell carbon dioxide directly to Air Products and we market and distribute all of the corn oil we produce directly to end users in the domestic market.
Distribution Methods
On December 5, 2014, the Company entered into an Amended and Restated Ethanol Purchase Agreement (the “Ethanol Agreement”) with Bunge. Under the Ethanol Agreement, the Company has agreed to sell Bunge all of the ethanol produced by the Company, and Bunge has agreed to purchase the same.  The Company pays Bunge a percentage fee for ethanol sold by Bunge, subject to a minimum and maximum annual fee.  The initial term of the Ethanol Agreement expires on December 31, 2019, however it will automatically renew for one five-year term unless Bunge provides the Company with notice of election to terminate.
We entered into a Distillers Grain Purchase Agreement, as amended (“DG Agreement”) with Bunge, under which Bunge is obligated to purchase from us and we are obligated to sell to Bunge all distillers grains produced at our Facility.
The initial term of the DG Agreement runs until December 31, 2019, and will automatically renew for one additional five year terms unless Bunge provides the Company with notice of election to terminate.  Under the DG Agreement, Bunge pays us a purchase price equal to the sales price minus the marketing fee and transportation costs.  The sales price is the price received by Bunge in a contract consistent with the DG Marketing Policy or the spot price agreed to between Bunge and the Company. Bunge receives a marketing fee consisting of a percentage of the net sales price, subject to a minimum and maximum amount. Net sales price is the sales price less the transportation costs and rail lease charges.  The transportation costs are all freight charges, fuel surcharges, and other access charges applicable to delivery of distillers grains.  Rail lease charges are the monthly lease payment for rail cars along with all administrative and tax filing fees for such leased rail cars.
We market and distribute all of the corn oil we produce directly to end users within the domestic market.
Raw Materials
Corn Requirements    
                                                                                                                                                                                                                           
The principal raw material necessary to produce ethanol, distillers grain and corn oil is corn. We are significantly dependent on the availability and price of corn which are affected by supply and demand factors such as crop production, carryout, exports, government policies and programs, risk management and weather.  With the volatility of the weather and commodity markets, we cannot predict the future price of corn. Because the market price of ethanol is not directly related to corn prices, we, like most ethanol producers, are not able to compensate for increases in the cost of corn through adjustments in our prices for our ethanol although we do see increases in the prices of our distillers grain during times of higher corn prices. However, given that ethanol

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sales comprise a majority of our revenues, our inability to adjust our ethanol prices can result in a negative impact on our profitability during periods of high corn prices.

In November 2017, the United States Department of Agriculture (the “USDA”) revised their estimates for the 2017/2018 corn crop to increase its forecast to 14.6 billion bushels with yields averaging 175.4 bushels per acre. These projections are substantially lower than the 2016/2017 results for corn yield and production in the United States. The USDA also forecasted the area harvested for corn at 83.1 million acres which is 4% lower than the 86.6 million acres harvested in the USDA report for 2016/2017. Although the revised forecast for production and yield are lower than the prior crop year, if the USDA forecasts are realized, the 2017/2018 corn crop will be the second highest production and yield on record in the United States.
Our management expects that corn prices will continue to remain lower through the first two quarters of our fiscal year ended September 30, 2018 (“Fiscal 2018”) as a result of the high levels of production and yield forecasted by the USDA, as well as carryover levels from the prior year. However, if corn prices rise again, it will have an adverse impact on our operating margins unless the prices we receive for our ethanol and distillers grains are able to outpace the rising corn prices. Management continually monitors corn prices and the availability of corn near the Facility and also continually attempts to minimize the effects of the volatility of corn costs on profitability through its risk management strategies, including hedging positions taken in the corn market.

    Our Facility needs approximately 48.3 million bushels of corn annually, to produce 140 million gallons of ethanol, or approximately 132,300 bushels per day.  During Fiscal 2017 we purchased 0.4% less corn compared to Fiscal 2016, which was obtained entirely from local markets.  The Company and Bunge also entered into an Amended and Restated Grain Feedstock Agency Agreement on December 5, 2014 (the “Agency Agreement”).  The Agency Agreement provides that Bunge will procure corn for the Company and the Company will pay Bunge a per bushel fee, subject to a minimum and maximum annual fee.  The initial term of the Agency Agreement expires on December 31, 2019 and will automatically renew for one additional five year term unless Bunge provides notice of election to the Company to terminate.
Starting with the 2015 crop year, the Company began exploring using corn containing Syngenta Seeds, Inc.’s proprietary Enogen® technology (“Enogen Corn”) for a portion of its ethanol production needs. The Company contracts directly with growers to produce Enogen Corn for sale to the Company. Consistent with our Agency Agreement with Bunge, we also entered into a Services Agreement with Bunge regarding corn purchases (the “ Services Agreement ”). Under this Services Agreement, we originate all Enogen Corn contracts for our Facility and Bunge will assist us with certain administrative matters related to Enogen Corn, including facilitating delivery to our Facility. Fiscal year 2017 was our second full year of accepting Enogen, and deliveries constituted 14.9% of all corn deliveries, an increase from Fiscal 2016's initial level of 8.7%.

Energy Requirements
 
The production of ethanol is an energy intensive process which uses significant amounts of electricity and steam or natural gas as a heat source.  Presently, about 24,000 MMBTUs of energy are required to produce a gallon of ethanol.  It is our goal to operate the plant as safely and profitably as possible, optimizing the amount of energy consumed per gallon of ethanol produced, balanced with the relative values of WDGS as compared to DDGS.  
Steam
 
Unlike most ethanol producers in the United States which use natural gas as their primary energy source, we have access to steam as a one of our energy sources in addition to natural gas. Historically, we have changed between steam and natural gas depending on energy costs and other factors.  We believe our ability to utilize steam makes us more competitive, as under certain energy market conditions our energy costs will be lower than natural gas fired plants.  We have entered into a Steam Service Contract (“Steam Contract”) with MidAmerican Energy Company (“MidAm”), under which MidAm provides us the steam required by us, up to 475,000 pounds per hour.  Effective in January 2013, we amended the Steam Contract to link our net energy rates and charges for steam to certain specified energy indexes, subject to certain minimum and maximum rates, so that our steam costs remain competitive with the general energy market. Effective in August 2015, we amended the Steam Contract to extend the term until November 2024. During Fiscal 2017, we purchased approximately 23.2% more steam compared to Fiscal 2016. This increase in Fiscal 2017 was due to a much slower increase in the price of steam relative to natural gas for the Company. The increase in Fiscal 2017 was partially offset by the fact that the amount of available steam from MidAm was reduced as a result of MidAm’s increased utilization of wind energy rather than coal in Fiscal 2017, which generally reduces the amount of available steam produced.
Natural Gas
 

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Although steam has traditionally been considered our primary energy source, natural gas accounted for approximately 55.0% of our energy usage in Fiscal 2017, down from 65% in Fiscal 2016. This was influenced by the 30% increase in the natural gas cost per MMBTU during Fiscal 2017 combined with greater steam availability. We have two natural gas boilers for use when our steam service is temporarily unavailable. Natural gas is also needed for incidental purposes.  We entered into a natural gas supply agreement with Encore Energy in April of 2012 to fulfill our natural gas needs at the Gas Daily Midpoint pricing.  
Electricity
 
Our Facility requires a large continuous supply of electrical energy.  In Fiscal 2017 we used approximately 3.5% more electricity compared to Fiscal 2016. This was primarily due to higher production levels during the hot 2017 summer months as compared to 2016.
 
Water
 
We require a supply of water typical for the industry for our corn to ethanol process.  Our primary water source comes from the underground Missouri River aquifer via our three onsite wells. The majority of the water used in an ethanol plant is recycled back into the plant.  All our ground water is treated through our onsite water oxidation system.  This filtered water is used throughout our process.  We do treat (polish) some of this filtered water for boiler and cooling tower make-up with our Reverse Osmosis (RO) system to minimize any elements that will harm the boiler and steam systems.  We send some of our non-process (corn) contact water back to the Missouri River, including our Cooling Tower and Green Sand filtered backwash waters.  The makeup water requirements for the cooling tower are primarily a result of evaporation and cooling.  We also evaporate much of our water through our dryer system for dried corn distillers grains.  The rest of our process water is recycled back into the plant, which minimizes any waste of our water supply.  
Patents, Trademarks, Licenses, Franchises and Concessions
SIRE® and our SIRE® logo are registered trademarks of the Company in the United States. Other trademarks, service marks and trade names used in this report constitute common law trademarks and/or service marks of the Company. Other parties’ marks referred to in this report are the property of their respective owners. We were granted a perpetual license by ICM, Inc. (“ICM”) to use certain ethanol production technology necessary to operate our Facility.  There is no ongoing fee or definitive calendar term for this license.
Seasonality of Sales
We experience some seasonality of demand for our ethanol. Since ethanol is predominantly blended with conventional gasoline for use in automobiles, ethanol demand tends to shift in relation to gasoline demand. As a result, we experience some seasonality of demand for ethanol in the summer months related to increased driving. In addition, we experience some increased ethanol demand during holiday seasons related to increased gasoline demand.

Risk Management and Hedging Transactions
The profitability of our operations is highly dependent on the impact of market fluctuations associated with commodity prices.  We use various derivative instruments as part of an overall strategy to manage market risk and to reduce the risk that our ethanol production will become unprofitable when market prices among our principal commodities and products do not correlate.  In order to mitigate our commodity and product price risks, we enter into hedging transactions, including forward corn, ethanol, distillers grain and natural gas contracts, in an attempt to partially offset the effects of price volatility for corn and ethanol.  We also enter into over-the-counter and exchange-traded futures and option contracts for corn, ethanol and distillers grains, designed to limit our exposure to increases in the price of corn and manage ethanol price fluctuations.  Although we believe that our hedging strategies can reduce the risk of price fluctuations, the financial statement impact of these activities depends upon, among other things, the prices involved and our ability to physically receive or deliver the commodities involved.  Our hedging activities could cause net income to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged.  As corn and ethanol prices move in reaction to market trends and information, our income statement will be affected depending on the impact such market movements have on the value of our derivative instruments.
Hedging arrangements expose us to the risk of financial loss in situations where the counterparty to the hedging contract defaults or, in the case of exchange-traded contracts, where there is a change in the expected differential between the price of the commodity underlying the hedging agreement and the actual prices paid or received by us for the physical commodity bought or sold.  There are also situations where the hedging transactions themselves may result in losses, as when a position is purchased

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in a declining market or a position is sold in a rising market. Hedging losses may be offset by a decreased cash price for corn and natural gas and an increased cash price for ethanol and distillers grains.
We continually monitor and manage our commodity risk exposure and our hedging transactions as part of our overall risk management policy.  As a result, we may vary the amount of hedging or other risk mitigation strategies we undertake, and we may choose not to engage in hedging transactions.  Our ability to hedge is always subject to our liquidity and available capital.
Dependence on One or a Few Major Customers
As discussed above, we have marketing and agency agreements with Bunge, for the purpose of marketing and distributing our principal products.  We rely on Bunge for the sale and distribution of the majority of our products.  Currently,  we do not have the ability to market our ethanol and distillers grains internally should Bunge be unable or refuse to market these products at acceptable prices.  However, we anticipate that we would be able to very quickly secure competitive marketers should we need to replace Bunge for any reason.
Competition

Domestic Ethanol Competitors

The ethanol we produce is similar to ethanol produced by other domestic plants.  According to the Renewable Fuels Association, as of October 27, 2017 there were 214 ethanol production facilities in the United States capable of producing 16.1 billion gallons based on nameplate capacity and seven additional plants under expansion or construction with capacity to produce an additional 463 million gallons. Further, the Renewable Fuels Association estimates that virtually none of the ethanol production capacity in the United States is idled. The top five producers account for approximately 45% of domestic production.  We are in direct competition with many of these top five producers as well as other national producers, many of whom have greater resources and experience than we have and each of which is producing significantly more ethanol than we produce. In addition, we believe that the ethanol industry will continue to consolidate leading to a market where a small number of large ethanol producers with substantial production capacities will control an even larger portion of the U.S. ethanol production. In recent years, the ethanol industry has also seen increased competition from oil companies who have purchased ethanol production facilities. These oil companies are required to blend a certain amount of ethanol each year.

We may be at a competitive disadvantage compared to our larger competitors and the oil companies who are capable of producing a significantly greater amount of ethanol, have multiple ethanol plants that may help them achieve certain efficiencies and other benefits that we cannot achieve with one ethanol plant or are able to operate at times when it is unprofitable for us to operate. For instance, ethanol producers that own multiple plants may be able to compete in the marketplace more effectively, especially during periods when operating margins are unfavorable, because they have the flexibility to run certain production facilities while reducing production or shutting down production at other facilities. These large producers may also be able to realize economies of scale which we are unable to realize or they may have better negotiating positions with purchasers.  Further, new products or methods of ethanol production developed by larger and better-financed competitors could provide them competitive advantages over us.

Foreign Ethanol Competitors
 
In recent years, the ethanol industry has experienced increased competition from international suppliers of ethanol and although ethanol imports have decreased during the past few years, if competition from ethanol imports were to increase again, such increased imports could negatively impact demand for domestic ethanol which could adversely impact our financial results. Large international companies with much greater resources than ours have developed, or are developing, increased foreign ethanol production capacities.
Many international suppliers produce ethanol primarily from inputs other than corn, such as sugarcane, and have cost structures that may be substantially lower than U.S. based ethanol producers including us. Many of these international suppliers are companies with much greater resources than us with greater production capacities.
Brazil is the world’s second largest ethanol producer. Brazil makes ethanol primarily from sugarcane as opposed to corn, and depending on feedstock prices, may be less expensive to produce. Several large companies produce ethanol in Brazil, including affiliates of Bunge. In 2017, 15.0 billion gallons of corn based biofuels blending was mandated by the Renewable Fuel Standard, or RFS2, when U.S. ethanol production was 15.8 billion gallons. Many in the ethanol industry are concerned that certain provisions of RFS2 as adopted may disproportionately benefit ethanol produced from sugarcane. This could make sugarcane based ethanol, which is primarily produced in Brazil, more competitive in the United States ethanol market. If this were to occur, it could reduce demand for the ethanol that we produce. In recent years, sugarcane ethanol imported from Brazil has been one of the most

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economical means for certain obligated parties to comply with the RFS2 requirement to blend 4.3 billion gallons of advanced biofuels.
Effective March 16, 2015, the Brazilian government increased the required percentage of ethanol in vehicle fuel sold in Brazil to 27% from 25% which, along with more competitively priced ethanol produced from corn, significantly reduced U.S. ethanol imports from Brazil as compared to imports during 2015 and 2016. However, there has been an increase in U.S. ethanol imports from Brazil during calendar year 2017 as compared to calendar 2016. Brazil favored sugar production over ethanol production, as they were encouraged by the higher prices for the sweetener in the international market. Energy Information Administration (“EIA”) data shows ethanol imports from Brazil rose to 1,766 thousand barrels in the first eight months of calendar 2017 from 819 thousand barrels in the first eight months of calendar 2016. Based on the current strength of the United States Dollar compared to the Brazilian Reis along with very favorable prices for sugarcane based ethanol in the United States, specifically in California, it is possible that ethanol imports from Brazil may continue to increase in Fiscal 2018 which will further impact the level of ethanol supplies in the United States and may result in ethanol price decreases.
Depending on feedstock prices, ethanol imported from foreign countries, including Brazil, may be less expensive than domestically-produced ethanol.  However, foreign demand, transportation costs and infrastructure constraints may temper the market impact on the United States.
Local Ethanol Production
 
Because we are located on the border of Iowa and Nebraska, and because ethanol producers generally compete primarily with local and regional producers, the ethanol producers located in Iowa and Nebraska presently constitute our primary competition.  According to the Iowa Renewable Fuels Association, as of September, 2017, Iowa had 43 ethanol refineries in production, with a combined nameplate capacity to produce 4.05 billion gallons of ethanol.  The Nebraska Energy Office reports that as of September 2017, there are currently 22 existing ethanol plants in production inNebraska with a combined ethanol nameplate production capacity of approximately 1.94 billion gallons.

Competition from Alternative Renewable Fuels

We anticipate increased competition from renewable fuels that do not use corn as feedstock. Many of the current ethanol production incentives are designed to encourage the production of renewable fuels using raw materials other than corn, including cellulose. Cellulose is the main component of plant cell walls and is the most common organic compound on earth. Cellulose is found in wood chips, corn stalks, rice straw, amongst other common plants. Cellulosic ethanol is ethanol produced from cellulose. Research continues regarding cellulosic ethanol, and various companies are in various stages of developing and constructing some of the first generation cellulosic plants. Several companies have commenced pilot projects to study the feasibility of commercially producing cellulosic ethanol and are producing cellulosic ethanol on a small scale and at a few companies in the United States have begun producing on a commercial scale. Additional commercial scale cellulosic ethanol plants could be completed in the near future, although these cellulosic ethanol plants have faced some financial and technological issues, If this technology can be profitably employed on a commercial scale, it could potentially lead to ethanol that is less expensive to produce than corn based ethanol. Cellulosic ethanol may also capture more government subsidies and assistance than corn based ethanol. This could decrease demand for our product or result in competitive disadvantages for our ethanol production process.
Because our Facility is designed as single-feedstock facilities, we have limited ability to adapt the plant to a different feedstock or process system without additional capital investment and retooling.
A number of automotive, industrial and power generation manufacturers are developing alternative clean power systems using fuel cells, plug-in hybrids, electric cars or clean burning gaseous fuels. Like ethanol, the emerging fuel cell industry offers a technological option to address worldwide energy costs, the long-term availability of petroleum reserves and environmental concerns. Fuel cells have emerged as a potential alternative to certain existing power sources because of their higher efficiency, reduced noise and lower emissions. Fuel cell industry participants are currently targeting the transportation, stationary power and portable power markets in order to decrease fuel costs, lessen dependence on crude oil and reduce harmful emissions. If the fuel cell industry continues to expand and gain broad acceptance and becomes readily available to consumers for motor vehicle use, we may not be able to compete effectively. This additional competition could reduce the demand for ethanol, which would negatively impact our profitability.
Distillers Grain Competition

Ethanol plants in the Midwest produce the majority of distillers grains and primarily compete with other ethanol producers in the production and sales of distillers grains. According to the Renewable Fuels Association's Ethanol Industry Outlook 2017

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(the “RFA 2017 Outlook”), ethanol plants produced more than 42 million metric tons of distillers grains and other animal feed .  We compete with other producers of distillers grains products both locally and nationally.
The primary customers of distillers grains are dairy and beef cattle, according to the RFA 2017 Outlook. In recent years, an increasing amount of distillers grains have been used in the swine, poultry and fish markets. Numerous feeding trials show advantages in milk production, growth, rumen health, and palatability over other dairy cattle feeds. With the advancement of research into the feeding rations of poultry and swine, we expect these markets to expand and create additional demand for distillers grains; however, no assurance can be given that these markets will in fact expand, or if they do, that we will benefit from such expansion.
The market for distillers grains is generally confined to locations where freight costs allow it to be competitively priced against other feed ingredients. Distillers grains compete with three other feed formulations: corn gluten feed, dry brewers grain and mill feeds. The primary value of these products as animal feed is their protein content. Dry brewers grain and distillers grains have about the same protein content, and corn gluten feed and mill feeds have slightly lower protein contents. Distillers grains contain nutrients, fat content, and fiber that we believe will differentiate our distillers grains products from other feed formulations. However, producers of other forms of animal feed may also have greater experience and resources than we do and their products may have greater acceptance among producers of beef and dairy cattle, poultry and hogs.
Principal Supply & Demand Factors
Ethanol
 
Ethanol prices stayed low during Fiscal 2017, partially in response to lower corn and oil prices and the large supply of corn and oil.  The increased production of ethanol within the United States also impacted ethanol prices during Fiscal 2017. The increase in ethanol production resulted from the domestic producers responding to the consistently low corn prices during Fiscal 2017.
Management currently expects ethanol prices will continue to adjust to the supply and demand factors of ethanol and oil and will generally fluctuate with, but not be directly correlated to, the price of corn.  
Management believes the industry will need to grow both retail product delivery infrastructure and demand for ethanol in order to increase production margins in the near and long term.
Management also believes it is important that ethanol blending capabilities of the gasoline market be expanded to increase demand for ethanol.  Recently, there has been increased awareness of the need to expand retail ethanol distribution and blending infrastructure, which would allow the ethanol industry to supply ethanol to markets in the United States that are not currently selling significant amounts of ethanol.
The overall demand for transportation fuel also impacts the demand for ethanol. The demand for transportation fuel peaked in 2007, dropped dramatically during the recession, stabilized, and in 2016 has returned to 2007 levels. According to EIA data, there is a demand for approximately 143 billion gallons of total gasoline demand in the United States in 2016. The fuel efficiency of vehicles and the total number of miles traveled by consumers affects the overall demand for transportation fuel and thus also impacts the demand for ethanol. According to the EIA, in 2016, the increase in gasoline consumption reflects a forecasted 2.5% increase in highway travel (because of employment growth and lower retail prices), that is partially offset by increases in vehicle fleet fuel economy. Market acceptance of E15 and E85, as approved by the Environmental Protection Agency for use in passenger cars from the 2001 model year or later will continue the growth in ethanol sales in the near future.
Distillers Grains

Distillers grains compete with other protein-based animal feed products. In North America, over 80% of distillers grains are used in ruminant animal diets, and are also fed to poultry and swine.  Every bushel of corn used in the dry grind ethanol process yields approximately 17 pounds of dry matter distillers grains, which is an excellent source of energy and protein for livestock and poultry.  The price of distillers grains may decrease when the prices of competing feed products decrease. The prices of competing animal feed products are based in part on the prices of the commodities from which these products are derived. Downward pressure on commodity prices, such as soybeans and corn, will generally cause the price of competing animal feed products to decline, resulting in downward pressure on the price of distillers grains.
Historically, sales prices for distillers grains have correlated with prices of corn. However, there have been occasions when the price increase for this co-product has not been directly correlated to changes in corn prices. In addition, our distillers grains compete with products made from other feedstocks, the cost of which may not rise when corn prices rise. Consequently,

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the price we may receive for distillers grains may not rise as corn prices rise, thereby lowering our cost recovery percentage relative to corn.
Management expects that distillers grain prices will continue to generally follow the price of corn during Fiscal 2018.
Competition for Supply of Corn

During crop year 2017, according to the USDA November report, 83.1 million acres of corn were planted, which was down 4.0% from 2016. Although there were less acres planted, the expected yield is 175.4 bushels per acre, which is slightly above 2016's record results. Prices for corn are expected to stay low as a result of the high levels of production and yields forecasted by the USDA.
Competition for corn supply from other ethanol plants and other corn consumers exists around our Facility.  According to Iowa Renewable Fuels Association, as of September, 2017, there were 43 operational ethanol plants in Iowa. The plants are concentrated, for the most part, in the northern and central regions of the state where a majority of the corn is produced. The existence and development of other ethanol plants, if any, particularly those in close proximity to our Facility, may increase the demand for corn which may result in even higher costs for supplies of corn.
We compete with other users of corn, including ethanol producers regionally and nationally, producers of food and food ingredients for human consumption (such as high fructose corn syrup, starches, and sweeteners), producers of animal feed and industrial users. According to the USDA, for 2016/2017, 5.5 billion bushels of U.S. corn were used in ethanol production, with 6.9 billion bushels being used in food and other industrial uses, and 1.9 billion bushels used for export.  As of September 2017, the USDA has forecast the amount of corn to be used for ethanol production during the current marketing year at 5.4 billion bushels approximately the same as the prior year.
Federal Ethanol Support and Governmental Regulations
 
RFS and Related Federal Legislation
 
The ethanol industry is dependent on several economic incentives to produce ethanol, including ethanol use mandates. One significant federal ethanol support is the Federal Renewable Fuels Standard (the “RFS”) which has been and will continue to be a driving factor in the growth of ethanol usage. The RFS requires that in each year a certain amount of renewable fuels must be used in the United States. The RFS is a national program that does not require that any renewable fuels be used in any particular area or state, allowing refiners to use renewable fuel blends in those areas where it is most cost-effective.   The U.S. Environmental Protection Agency (the “EPA”) is responsible for revising and implementing regulations to ensure that transportation fuel sold in the United States contains a minimum volume of renewable fuel.  
The RFS2 requirements increase incrementally each year through 2022 when the mandate requires that the United States use 36 billion gallons of renewable fuels.  Starting in 2009, the RFS required that a portion of the RFS must be met by certain “advanced” renewable fuels. These advanced renewable fuels include ethanol that is not made from corn, such as cellulosic ethanol and biomass based biodiesel. The use of these advanced renewable fuels increases each year as a percentage of the total renewable fuels required to be used in the United States.
Annually, the EPA is supposed to pass a rule that establishes the number of gallons of different types of renewable fuels that must be used in the United States which is called the renewable volume obligations.On November 30, 2015, the EPA issued its final rules for the annual 2014, 2015 and 2016 renewable volume obligations (the “Final 2014 - 2016 Rules”). On May 18, 2016, the EPA released a proposed rule to set 2017 renewable volume requirements under RFS2 which set the annual volume requirement for renewable fuel at 18.8 billion gallons per year, of which 14.8 billion gallons may be met with corn-based ethanol. The EPA issued the final rule for 2017 and increased the total volume requirements from 18.8 billion gallons to 19.24 billion gallons (the “Final 2017 Rule”). Although the volume requirements set forth in the Final 2017 Rule are a significant increase over the 2016 volume requirements and the 2017 requirements originally proposed in May 2016, the 2017 volume requirements are still below the 2017 statutory mandate of 24 billion gallons per year. However, in connection with the issuance of the Final 2017 Rule, the EPA increased the number of gallons which may be met by corn-based ethanol from 14.8 billion gallons to 15 billion gallons. This brings the renewable volume obligations for conventional renewable fuels that can be met by corn-based ethanol back to the levels called for in the statutory mandate for 2017/
On July 5, 2017, the EPA released a proposed rule to set the 2018 renewable volume requirements which would set the annual volume requirement for renewable fuel at 19.24 billion gallons of renewable fuels per year (the “Proposed 2018 Rule”). On November 30, 2017, the EPA issued the final rule for 2018 which varied only slightly from the Proposed 2018 Rule with the

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annual volume requirement for renewable fuel set at 19.29 billion gallons of renewable fuels per year (the "Final 2018 Rule"). Although the volume requirements set forth in the Final 2018 Rule are slightly higher than the 19.28 billion gallons required under the Final 2017 Rule, the volume requirements are still significantly below the 26 billion gallons statutory mandate for 2018 with significant reductions in the volume requirements for advanced biofuels. However, the Final 2018 Rule does maintain the number of gallons which may be met by conventional renewable fuels such as corn-based ethanol at 15.0 billion gallons.

The following chart sets forth (in billion gallons) the statutory volumes, the Final 2014-2016 Rule volumes, the Final 2017 Rule volumes and the Final 2018 Rule volumes.

 
 
Total Renewable Fuel Volume Requirement
Portion of Volume Requirement That Can Be Met By Corn-based Ethanol
2014
Statutory
18.15
14.10
Final 2014-2016 Rules
16.28
13.61
2015
Statutory
20.50
15.00
Final 2014-2016 Rules
16.93
14.05
2016
Statutory
22.25
15.00
Final 2014-2016 Rules
18.11
14.50
 
Statutory
24.00
15.00
2017
Final 2017 Rule
19.28
15.00
2018
Statutory
26.00
15.00
Final 2018 Rule
19.29
15.00

Under RFS, if mandatory renewable fuel volumes are reduced by at least 20% for two consecutive years, the EPA is required to modify, or reset, statutory volumes through 2022. Since 2018 is the first year the total volume requirements are more than 20% below statutory levels, the EPA Administrator directed his staff to initiate the required technical analysis to perform any future reset consistent with the reset rules. If 2019 volume requirements are also more than 20% below statutory levels, the reset will be triggered under RFS and the EPA will be required to modify statutory volumes through 2022 within one year of the trigger event, based on the same factors used to set the volume requirements post-2022.

The volume requirements mandated in the Final 2014-2016 Rules, the 2017 Final Rule and the Final 2018 Rule are still below the volume requirements statutorily mandated by Congress. These reduced volume requirements, combined with the potential elimination of such requirements by the exercise of the EPA waiver authority or by Congress, could decrease the market price and demand for ethanol which will negatively impact our financial performance.
    However, in connection with the issuance of the Final 2017 Rule and the Final 2018 Rule, the EPA maintained the renewable volume obligations for conventional renewable fuels that can be met by corn-based ethanol back to the levels called for in the statutory mandate. Although this signals a sign of support of the RFS by the EPA and a rejection of arguments by the oil industry relating to the “blend wall,” there is no guarantee that for future years the EPA will adhere to the statutory mandate for conventional renewable fuels.
    

Beginning in January 2016, various ethanol and agricultural industry groups petitioned a federal appeals court to hear a legal challenge to the EPA Final Rule. In addition, various representatives of the oil industry have also filed challenges to the EPA Final Rule. If the EPA's decision to reduce the volume requirements under the RFS is allowed to stand, or if the volume requirements are further reduced, it could have an adverse effect on the market price and demand for ethanol which would negatively impact our financial performance.

The U.S. Federal District Court for the D.C. Circuit ruled on July 28, 2017, in favor of the Americans for Clean Energy and its petitioners against the EPA related to its decision to lower the volume requirements as set forth in the Final 2016 Rule. The Court concluded the EPA erred in how it interpreted the “inadequate domestic supply” waiver provision of RFS, which authorizes

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the EPA to consider supply-side factors affecting the volume of renewable fuel available to refiners, blenders, and importers to meet the statutory volume requirements. The waiver provision does not allow the EPA to consider the volume of renewable fuel available to consumers or the demand-side constraints that affect the consumption of renewable fuel by consumers. As a result, the Court vacated the EPA’s decision to reduce the total renewable fuel volume requirements for 2016 through its waiver authority, which the EPA is expected to address according to Administrator Pruitt's letter. The Company currently believes this decision will benefit the industry overall with the EPA's waiver analysis now limited to supply considerations only.

Management anticipates that there will be further legal challenges to the EPA's reduction in the volume requirements, including the Final 2017 Rule. However, if the EPA's decision to reduce the volume requirements under the RFS is allowed to stand, or if the volume requirements are further reduced, it could have an adverse effect on the market price and demand for ethanol which would negatively impact our financial performance.

On October 19, 2017, EPA Administrator Pruitt issued a letter to several U.S. Senators representing states in the Midwest reiterating his commitment to the text and spirit of the RFS. He stated that the EPA will meet the November 30, 2017 deadline for issuing final 2018 volume requirements, that the EPA’s preliminary analysis suggests that final volume requirements should be set at amounts at or greater than those provided in the Proposed 2018 Rule which is consistent with the requirements set forth in the Final 2018. Rule, The letter also stated that the EPA would soon finalize a decision to deny the request to change the point of obligation for renewable identification numbers, or RINs, from refiners and importers to blenders, that the EPA is actively exploring its authority to remove arbitrary barriers to the year-rounds use of E15 and other mid-level ethanol blends so that E15 may be sold throughout the year without disruption and that the EPA will be not pursue regulations to allow ethanol exports to generate RINs. All of these statements represent actions that would likely have a positive impact on the ethanol industry either directly or indirectly.

Although the release of the Final 2018 Rule and the maintenance of the 15 billion gallon threshold for volume requirements that may be met with corn-based ethanol together with the letter issued by Administrator Pruitt signals support from the EPA and the Trump administration for domestic ethanol production, the Trump administration could still elect to materially modify, repeal or otherwise invalidate the RFS2 and it is unclear what regulatory framework and renewable volume requirements, if any, will emerge as a result of such reforms; however, any such reform could adversely affect the demand and price for ethanol and the Company's profitability.

On February 3, 2010, the EPA implemented new regulations governing the RFS which are referred to as "RFS2". The most controversial part of RFS2 involves what is commonly referred to as the lifecycle analysis of greenhouse gas emissions. Specifically, the EPA adopted rules to determine which renewable fuels provided sufficient reductions in greenhouse gases, compared to conventional gasoline, to qualify under the RFS program. RFS2 establishes a tiered approach, where regular renewable fuels are required to accomplish a 20% greenhouse gas reduction compared to gasoline, advanced biofuels and biomass-based biodiesel must accomplish a 50% reduction in greenhouse gases, and cellulosic biofuels must accomplish a 60% reduction in greenhouse gases. Any fuels that fail to meet this standard cannot be used by fuel blenders to satisfy their obligations under the RFS program. Our ethanol plant was grandfathered into the RFS due to the fact that it was constructed prior to the effective date of the lifecycle greenhouse gas requirement and is not required to prove compliance with the lifecycle greenhouse gas reductions.
Based on the final regulations, we believe our Facility, at its current operating capacity, was grandfathered into the RFS given it was constructed prior to the effective date of the lifecycle greenhouse gas requirement and therefore is not required to prove compliance with the lifecycle greenhouse gas reductions.   However, expansion of our Facility will require us to meet a threshold of a 20% reduction in greenhouse gas, or GHG emissions to produce ethanol eligible for the RFS2 mandate. In order to expand capacity at our Facility, we may be required to obtain additional permits, install advanced technology, or reduce drying of certain amounts of distillers grains. 
Many in the ethanol industry are concerned that certain provisions of RFS2 as adopted may disproportionately benefit ethanol produced from sugarcane. This could make sugarcane based ethanol, which is primarily produced in Brazil, more competitive in the United States ethanol market. If this were to occur, it could reduce demand for the ethanol that we produce.

Due primarily in response to the drought conditions experienced in 2012, claims that blending of ethanol into the motor fuel supply will be constrained by unwillingness of the market to accept greater than 10% ethanol blends, or the blend wall, and other industry factors, new legislation aimed at reducing or eliminating renewable fuel use required by RFS2 has been introduced. The Renewable Fuel Standard Elimination Act, originally introduced in April 2013 and reintroduced as H.R. 703 in February 2015, targeted the repeal of the renewable fuel program of the EPA. Also introduced in April 2013, and reintroduced as H.R. 704 in February 2015, was the RFS Reform Bill which tried to prohibit more than ten percent (10%) ethanol in gasoline and reduce the RFS2 mandated volume of renewable fuel. Both of these bills failed to make it out of congressional committee and were not enacted into law.


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Recently, similar legislation aimed at reducing or eliminating the renewable fuel use required by the RFS has been introduced in the United States Congress. On January 3, 2017, the Leave Ethanol Volumes at Existing Levels (LEVEL) Act (H.R. 119) was introduced in the House of Representatives. The bill would freeze renewable fuel blending requirements under the RFS at 7.5 billion gallons per year, prohibit the sale of gasoline containing more than 10% ethanol, and revoke the EPA’s approval of E15 blends. On January 31, 2017, a bill (H.R. 777) was introduced in the House of Representatives that would require the EPA and National Academies of Sciences to conduct a study on “the implications of the use of mid-level ethanol blends”. A mid-level ethanol blend is an ethanol-gasoline blend containing 10-20% ethanol by volume, including E15 and E20, that is intended to be used in any conventional gasoline-powered motor vehicle or non-road vehicle or engine. Also on January 31, 2017, a bill (H.R. 776) was introduced in the House of Representatives that would limit the volume of cellulosic biofuel required under the RFS to what is commercially available. On March 2, 2017, a bill (H.R. 1315) was introduced in the House of Representatives that would cap the volume of ethanol in gasoline at 10%. On the same day, a new version of the RFS Elimination Act (H.R. 1314), which was originally introduced in April 2013, was introduced and seeks to fully repeal the RFS.

All of these bills were assigned to a congressional subcommittee, which will consider them before possibly sending any of them on to the House of Representatives as a whole. The enactment of any of these bills or similar legislation aimed at eliminating or reducing the RFS mandates could have a material adverse impact on the ethanol industry as a whole and our business operations.

On April 17, 2015, the U.S. Department of Transportation, or DOT, announced rail safety changes for transportation of ethanol and other liquids. Effective immediately, transportation of Class 3 flammable liquids, such as ethanol, are subject to new safety advisories, notices and an emergency order issued by the DOT, Federal Railroad Administration and Pipeline and Hazardous Materials Safety Administration. The emergency order limits trains to a maximum authorized operating speed limit when passing through highly populated areas and carrying large amounts of ethanol or other Class 3 flammable liquids.

On May 1, 2015, the DOT, in coordination with Transport Canada, announced the final rule, “Enhanced Tank Car Standards and Operational Controls for High-Hazard Flammable Trains.” The rule calls for an enhanced tank car standard known as the DOT specification 117 tank car and establishes a schedule that began in May 2017 to retrofit or replace older tank cars carrying crude oil and ethanol. U.S. and Canadian shippers have until May 1, 2023, to phase out or upgrade older DOT111 tank cars servicing ethanol. Shippers have until July 1, 2023, to retrofit or replace non-jacketed CPC-1232 tank cars, and until May 1, 2025, to retrofit or replace jacketed CPC-1232 tank cars, transporting ethanol in the U.S. and Canada. The rule also establishes new braking standards intended to reduce the severity of accidents and “pile-up effect.” New operational protocols are also applicable, which include reduced speed, routing requirements and local government notifications. In addition, companies that transport hazardous materials must develop more accurate classification protocols.

    

State Initiatives and Mandates
 
In 2006, Iowa passed legislation promoting the use of renewable fuels in Iowa.  One of the most significant provisions of the Iowa renewable fuels legislation is a renewable fuels standard encouraging 10% of the gasoline sold in Iowa to consist of renewable fuels.  This renewable fuels standard increases incrementally to 25% of the gasoline sold in Iowa by 2020. To reach that goal, the use of E85 will have to climb dramatically. Gas stations that embrace E85 will be in line for state tax credits and also incentives. To qualify under the bill, ethanol must be agriculturally-derived. 
E85
 
Demand for ethanol has been affected by moderately increased consumption of E85 fuel, a blend of 85% ethanol and 15% gasoline.  In addition to use as a fuel in flexible fuel vehicles, E85 can be used as an aviation fuel, as reported by the National Corn Growers Association, and as a hydrogen source for fuel cells. According to the Renewable Fuels Association, there are currently more than 21 million flexible fuel vehicles capable of operating on E85 in the United States and nearly all of the major automakers have available flexible fuel modes and have indicated plans to produce several million more flexible fuel vehicles per year.  The Renewable Fuels Association reports that there are more than 3,700 retail gasoline stations supplying E85 with 1,200 new stations scheduled to open in the next 18 months.  While the number of retail E85 suppliers has increased each year, this remains a relatively small percentage of the total number of U.S. retail gasoline stations, which is approximately 170,000.  In order for E85 fuel to increase demand for ethanol, it must be available for consumers to purchase it.  As public awareness of ethanol and E85 increases along with E85’s increased availability, management anticipates some growth in demand for ethanol associated with increased E85 consumption.The USDA provides financial assistance to help implement “blender pumps” in the United States in order to increase demand for ethanol and to help offset the cost of introducing mid-level ethanol blends into the United States retail gasoline market. A blender pump is a gasoline pump that can dispense a variety of different ethanol/gasoline blends. Blender pumps typically can dispense E10, E20, E30, E40, E50 and E85. These blender pumps accomplish these different ethanol/gasoline

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blends by internally mixing ethanol and gasoline which are held in separate tanks at the retail gas stations. Many in the ethanol industry believe that increased use of blender pumps will increase demand for ethanol by allowing gasoline retailers to provide various mid-level ethanol blends in a cost effective manner and allowing consumers with flex-fuel vehicles to purchase more ethanol through these mid-level blends.
Changes in Corporate Average Fuel Economy (“CAFE”) standards have also benefited the ethanol industry by encouraging use of E85 fuel products. CAFE provides an effective 54% efficiency bonus to flexible-fuel vehicles running on E85. This variance encourages auto manufacturers to build more flexible-fuel models, particularly in trucks and sport utility vehicles that are otherwise unlikely to meet CAFE standards.
E15
 
E15 is a blend of higher octane gasoline and up to 15% ethanol.  E15 was approved for use in model year 2001 and newer cars, light-duty trucks, medium-duty passenger vehicles (SUVs) and all flex-fuel vehicles by the U.S. Environmental Protection Agency in 2012, This approved group of vehicles includes 80% of the cars, trucks and SUVs on the road today According to the Renewable Fuel Association, this higher octane fuel is available in 23 states at retail fueling stations. Sheetz, Kum & Go, Murphy USA, MAPCO Express, Protec Fuel, Minnoco, Thornton's and Hy-Vee all offer E15 to 2001 and newer vehicles today at several stations. According to Growth Energy, as of October 5, 2017, there were 1,043 retail stations selling E15 which is a substantial increase from the 431 stations selling E15 as of December 31, 2016.

In May 2015, the USDA announced that the agency will make significant investments in a biofuels infrastructure partnership to double the number of renewable fuel blender pumps that can supply consumers with higher ethanol blends, like E15 and E85. The program provides competitive grants, matched by states, to help implement “blender pumps” in the United States in order to increase demand for ethanol and to help offset the cost of introducing mid-level ethanol blends into the United States retail gasoline market. A blender pump is a gasoline pump that can dispense a variety of different ethanol/gasoline blends. Blender pumps typically can dispense E10, E15, E20, E30, E40, E50 and E85. These blender pumps accomplish these different ethanol/gasoline blends by internally mixing ethanol and gasoline which are held in separate tanks at the retail gas stations. Many in the ethanol industry believe that increased use of blender pumps will increase demand for ethanol by allowing gasoline retailers to provide various mid-level ethanol blends in a cost effective manner and allowing consumers with flex-fuel vehicles to purchase more ethanol through these mid-level blends. However, the expense of blender pumps has delayed their availability in the retail gasoline market. As of March 2017, the USDA biofuels infrastructure partnership program had provided $210 million to fund the installation of new ethanol infrastructure at more than 1,400 stations in 20 states. Installations began in 2016 and will continue into 2017, which will significantly increase the number of stations selling both E15 and E85.
Cellulosic Ethanol
 
The Energy Independence and Security Act provided numerous funding opportunities in support of cellulosic ethanol. In addition, RFS2 mandates an increasing level of production of biofuels which are not derived from corn. These policies suggest an increasing policy preference away from corn ethanol and toward cellulosic ethanol.
Environmental and Other Regulations and Permits
Ethanol production involves the emission of various airborne pollutants, including particulate matters, carbon monoxide, oxides of nitrogen, volatile organic compounds and sulfur dioxide.  Ethanol production also requires the use of significant volumes of water, a portion of which is treated and discharged into the environment.  We are required to maintain various environmental and operating permits.  Even though we have successfully acquired the permits necessary for our operations, any retroactive change in environmental regulations, either at the federal or state level, could require us to obtain additional or new permits or spend considerable resources on complying with such regulations.  In addition, if we sought to expand the Facility’s capacity in the future, above our current 140 million gallons, we would likely be required to acquire additional regulatory permits and could also be required to install additional pollution control equipment.   Our failure to obtain and maintain any environmental and/or operating permits currently required or which may be required in the future could force us to make material changes to our Facility or to shut down altogether.  
The U.S. Supreme Court has classified carbon dioxide as an air pollutant under the Clean Air Act in a case seeking to require the EPA to regulate carbon dioxide in vehicle emissions. As stated above, we believe the final RFS2 regulations grandfather our plant at its current operating capacity, though expansion of our plant will need to meet a threshold of a 20% reduction in greenhouse gas (“GHG”) emissions from a baseline measurement to produce ethanol eligible for the RFS2 mandate. In order to

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expand capacity at our plant above our current permitted 140 million gallons, we will be required to obtain additional permits and install improved technology.
Separately, the California Air Resources Board ("CARB") has adopted a Low Carbon Fuel Standard (the "LCFS") requiring a 10% reduction in GHG emissions from transportation fuels by 2020 using a lifecycle GHG emissions calculation. On December 29, 2011, a federal district court in California ruled that the California LCFS was unconstitutional which halted implementation of the California LCFS. CARB appealed this court ruling and on September 18, 2013, the federal appellate court reversed the federal district court finding the LCFS constitutional and remanding the case back to federal district court to determine whether the LCFS imposes a burden on interstate commerce that is excessive in light of the local benefits. On June 30, 2014, the United States Supreme Court declined to hear the appeal of the federal appellate court ruling and CARB recently re-adopted the LCFS with some slight modifications. The LCFS could have a negative impact on the overall market demand for corn-based ethanol and result in decreased ethanol prices.
Part of our business is regulated by environmental laws and regulations governing the labeling, use, storage, discharge and disposal of hazardous materials. Other examples of government policies that can have an impact on our business include tariffs, duties, subsidies, import and export restrictions and outright embargos.
We also employ maintenance and operations personnel at our Facility. In addition to the attention that we place on the health and safety of our employees, the operations at our Facility are governed by the regulations of the Occupational Safety and Health Administration, or OSHA.
We have obtained all of the necessary permits to operate the plant. Although we have been successful in obtaining all of the permits currently required, any retroactive change in environmental regulations, either at the federal or state level, could require us to obtain additional or new permits or spend considerable resources in complying with such regulations.
.

Available Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge on our website at www.sireethanol.com as soon as reasonably practicable after we file or furnish such information electronically with the SEC.  The information found on our website is not incorporated by reference into this report or any other report we file with or furnish to the SEC.
The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC.  The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.
Item 1A.   Risk Factors.
You should carefully read and consider the risks and uncertainties below and the other information contained in this
report. The risks and uncertainties described below are not the only ones we may face. The following risks, together with additional risks and uncertainties not currently known to us or that we currently deem immaterial, could impair our financial condition and results of operation.
 
Risks Associated With Our Capital Structure
 
Our units have no public trading market and are subject to significant transfer restrictions which could make it difficult to sell units and could reduce the value of the units.
 
There is not an active trading market for our membership units. To maintain our partnership tax status, our units may not be publicly traded.  Within applicable tax regulations, we utilize a qualified matching service (“QMS”) to provide a limited market to our members, but we have not and will not apply for listing of the units on any stock exchange.  Finally, applicable securities laws may also restrict the transfer of our units.  As a result, while a limited market for our units may develop through the QMS, members may not sell units readily, and use of the QMS is subject to a variety of conditions and limitations.  The transfer of our units is also restricted by our Fourth Amended and Restated Operating Agreement dated March 21, 2015 (the “Operating Agreement”) unless the Board of Directors (the “Board” or “Board of Directors”) approves such a transfer. Furthermore, the Board

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will not approve transfer requests which would cause the Company to be characterized as a publicly traded partnership under the regulations adopted under the Internal Revenue Code of 1986, as amended (the “Code”).  The value of our units will likely be lower because they are illiquid. Members are required to bear the economic risks associated with an investment in us for an indefinite period of time.    


Our current indebtedness require us to comply with certain restrictive loan covenants which may limit our ability to operate our business.
 
Under the terms of our Credit Agreement, we have made certain customary representations and we are subject to customary affirmative and negative covenants, including restrictions on our ability to incur additional debt that is not subordinated, create additional liens, transfer or dispose of assets, make distributions, consolidate, dissolve or merge, and customary events of default (including payment defaults, covenant defaults, cross defaults and bankruptcy defaults).  The Credit Agreement also contains financial covenants including a minimum working capital amount, minimum local net worth (as defined) and a minimum debt service coverage ratio.

We can provide no assurance that, if we are unable to comply with these covenants in the future, we will be able to obtain the necessary waivers or amend our loan agreements to prevent a default.

A breach of any of these covenants or requirements could result in a default under our Credit Agreement. If we default under our Credit Agreement and we are unable to cure the default or obtain a waiver, we will not be able to access the credit available under our Credit Agreement and there can be no assurance that we would be able to obtain alternative financing. Our Credit Agreement also includes customary default provisions that entitle our lenders to take various actions in the event of a default, including, but not limited to, demanding payment for all amounts outstanding. If this occurs, we may not be able to repay such indebtedness or borrow sufficient funds to refinance. Even if new financing is available, it may not be on terms that are acceptable to us. No assurance can be given that our future operating results will be sufficient to achieve compliance with the covenants and requirements of our Credit Agreement.

We operate in capital intensive businesses and rely on cash generated from operations and external financing. Limitations on access to external financing could adversely affect our operating results.

Increases in liquidity requirements could occur due to, for example, increased commodity prices. Our operating cash flow is dependent on our ability to profitably operate our businesses and overall commodity market conditions. In addition, we may need to raise additional financing to fund growth of our businesses. In this market environment, we may experience limited access to incremental financing. This could cause us to defer or cancel growth projects, reduce our business activity or, if we are unable to meet our debt repayment schedules, cause a default in our existing debt agreements. These events could have an adverse effect on our operations and financial position.

Risks Associated With Operations

Decreasing oil and gasoline prices resulting in ethanol trading at a premium to gasoline could negatively impact our ability to operate profitably.

Ethanol has historically traded at a discount to gasoline; however, with the recent fluctuations in gasoline prices, at times ethanol may trade at a premium to gasoline, causing a financial disincentive for discretionary blending of ethanol beyond the rates required to comply with the RFS2. Discretionary blending is an important secondary market which is often determined by the price of ethanol versus the price of gasoline. In periods when discretionary blending is financially unattractive, the demand for ethanol may be reduced. In recent years, the price of ethanol has been less than the price of gasoline which increased demand for ethanol from fuel blenders. However, recently, low oil prices have driven down the price of gasoline which has reduced the spread between the price of gasoline and the price of ethanol which could discourage discretionary blending, dampen the export market and result in a downward market adjustment in the price of ethanol. Any extended period where oil and gasoline prices remain lower than ethanol prices for a significant period of time could have a material adverse effect on our business, results of operation and financial condition which could decrease the value of our units.


Declines in the price of ethanol or distillers grain would significantly reduce our revenues.


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The sales prices of ethanol and distillers grains can be volatile as a result of a number of factors such as overall supply and demand, the price of gasoline and corn, levels of government support, and the availability and price of competing products. We are dependent on a favorable spread between the price we receive for our ethanol and distiller' grains and the price we pay for corn and natural gas. Any lowering of ethanol and distillers grains prices, especially if it is associated with increases in corn and natural gas prices, may affect our ability to operate profitably. We anticipate the price of ethanol and distillers grains to continue to be volatile in our 2018 fiscal year as a result of the net effect of changes in the price of gasoline and corn and increased ethanol supply offset by increased ethanol demand. Declines in the prices we receive for our ethanol and distillers grains will lead to decreased revenues and may result in our inability to operate the ethanol plant profitably for an extended period of time which could decrease the value of our units.

One of the most significant factors influencing the price of ethanol has been the substantial increase in ethanol production in recent years. According to the Renewable Fuels Association, domestic ethanol production capacity increased from an annualized rate of 1.5 billion gallons per year in 1999 to a record 16.0 billion gallons in 2016. In addition, if ethanol production margins improve, owners of ethanol production facilities may increase production levels, thereby resulting in further increases in domestic ethanol inventories. Any increase in the demand for ethanol may not be commensurate with increases in the supply of ethanol, thus leading to lower ethanol prices. Also, demand for ethanol could be impaired due to a number of factors, including regulatory developments and reduced United States gasoline consumption. Reduced gasoline consumption has occurred in the past and could occur in the future as a result of increased gasoline or oil prices or other factors such as increased automobile fuel efficiency. Any of these outcomes could have a material adverse effect on our results of operations, cash flows and financial condition.

Increased demand for ethanol may require an increase in higher percentage blends for conventional automobiles.

Currently, ethanol is blended with conventional gasoline for use in standard (non-flex fuel) vehicles to create a blend which is 10% ethanol and 90% conventional gasoline. In order to expand demand for ethanol, higher percentage blends of ethanol must be utilized in conventional automobiles. Such higher percentage blends of ethanol have become a contentious issue with automobile manufacturers and environmental groups having fought against higher percentage ethanol blends. E15 is a blend which is 15% ethanol and 85% conventional gasoline. Although there have been significant developments towards the availability of E15 in the marketplace, there are still obstacles to meaningful market penetration by E15. As a result, the approval of E15 may not significantly increase demand for ethanol

Reduced ethanol exports to Brazil could have a negative impact on ethanol prices.

Brazil has historically been a top destination for ethanol produced in the United States. However, earlier this year, Brazil imposed a tariff on ethanol which is produced in the United States and exported to Brazil. This tariff has resulted in a decline in demand for ethanol from Brazil and could negatively impact the market price of ethanol in the United States and our ability to profitably operate the ethanol plant.

Our business is not diversified.

Our success depends largely on our ability to profitably operate our ethanol plant. We do not have any other lines of business or other sources of revenue if we are unable to operate our ethanol plant and manufacture ethanol, distillers grains, corn oil and carbon dioxide. If economic or political factors adversely affect the market for ethanol, distillers grains, corn oil or carbon dioxide, we have no other line of business to fall back on. Our business would also be significantly harmed if the ethanol plant could not operate at full capacity for any extended period of time.
 
We are dependent on MidAm for our steam supply and any failure by it may result in a decrease in our profits or our inability to operate.
 
Under the Steam Contract, MidAm provides us with steam to operate our Facility until November 30, 2024.  We expect to face periodic interruptions in our steam supply under the Steam Contract.  For this reason, we installed boilers at the Facility to provide a backup natural gas energy source.  We also have entered into a natural gas supply agreement with Encore Energy for our long term natural gas needs, but this does not assure availability at all times.  In addition, our current environmental permits limit the annual amount of natural gas that we may use in operating our gas-fired boiler.
As with natural gas and other energy sources, our steam supply can be subject to immediate interruption by weather, strikes, transportation, conversion to wind turbines and production problems that can cause supply interruptions or shortages.  While we anticipate utilizing natural gas as a temporary heat source in the event of MidAm’s plant outages, an extended interruption in

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the supply of both steam and natural gas backup could cause us to halt or discontinue our production of ethanol, which would damage our ability to generate revenues.  
Any site near a major waterway system presents potential for flooding risk.
 
While our site is located in an area designated as above the 100-year flood plain, it does exist within an area at risk of a "500-year flood".  Even though our site is protected by levee systems, its existence next to a major river and major creeks present a risk that flooding could occur at some point in the future.  During the last half of our fiscal year ended September 30, 2011, the Missouri River experienced significant flooding, as a result of unprecedented amounts of rain and snow in the Missouri River basin.  This produced a sustained flood lasting many weeks at a "500-year flood" level (a level which has a 0.2 percent chance of occurring).  While there were levee failures elsewhere, the levees held around our facility.  We did experience minimal rail disruption due to flooding in the surrounding areas to the north and south of the Facility, but our operations were not significantly impacted.
                We have procured flood insurance as a means of risk mitigation; however, there is a chance that such insurance will not cover certain costs in excess of our insurance associated with flood damage or loss of income during a flood period.  Our current insurance may not be adequate to cover the losses that could be incurred in a flood of a 500-year magnitude.  
               
    
We may experience delays or disruption in the operation of our rail line and loop track, which may lead to decreased
revenues.
 
We have entered into the Track Agreement to service our track and railroad cars.  There may be times when we have to slow production at our ethanol plant due to our inability to ship all of the ethanol and distillers grains we produce, or getting rail cars returned on a timely basis.  Due to increased rail traffic nationally because of shipments of crude oil, rail shipment delays have been experienced from time to time, especially during severe winter conditions. If we cannot operate our plant at full capacity, we may experience decreased revenues which may affect the profitability of the Facility.
We may have conflicting financial interests with Bunge and ICM that could cause them to put their financial interests ahead of ours.
 
ICM and Bunge appoint three of our directors and have been, and are expected to be, involved in substantially all material aspects of our financing and operations and we have entered into a number of material commercial arrangements with Bunge, as described elsewhere in this report.  
ICM, Bunge and their respective affiliates may have conflicts of interest because ICM, Bunge and their respective employees or agents are involved as owners, creditors and in other capacities with other ethanol plants in the United States.  We cannot require ICM or Bunge to devote their full time or attention to our activities.  As a result, ICM and/or Bunge may have, or come to have, a conflict of interest in allocating personnel, materials and other resources to our Facility. Such conflicts of interest may reduce our profitability and the value of the units and could result in reduced distributions to investors.
Hedging transactions, which are primarily intended to stabilize our corn costs, may be ineffective and involve risks and costs that could reduce our profitability and have an adverse impact on our liquidity.
 
We are exposed to market risk from changes in commodity prices.  Exposure to commodity price risk results principally from our dependence on corn in the ethanol production process.  In an attempt to minimize the effects of the volatility of corn costs on our operating profits, we enter into forward corn, ethanol, and distillers grain contracts and engage in other hedging transactions involving over-the-counter and exchange-traded futures and option contracts for corn; provided, we have sufficient working capital to support such hedging transactions.  Hedging is an attempt to protect the price at which we buy corn and the price at which we will sell our products in the future and to reduce profitability and operational risks caused by price fluctuation.  The effectiveness of our hedging strategies, and the associated financial impact, depends upon, among other things, the cost of corn and our ability to sell sufficient amounts of ethanol and distillers grains to utilize all of the corn subject to our futures contracts.  Our hedging activities may not successfully reduce the risk caused by price fluctuations which may leave us vulnerable to high corn prices. We have experienced hedging losses in the past and we may experience hedging losses again in the future.  We may vary the amount of hedging or other price mitigation strategies we undertake, or we may choose not to engage in hedging transactions in the future and our operations and financial conditions may be adversely affected during periods in which corn prices increase. 

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Hedging arrangements also expose us to the risk of financial loss in situations where the other party to the hedging contract defaults on its contract or, in the case of over-the-counter or exchange-traded contracts, where there is a change in the expected differential between the underlying price in the hedging agreement and the actual prices paid or received by us.
Our attempts to reduce market risk associated with fluctuations in commodity prices through the use of over-the-counter or exchange-traded futures results in additional costs, such as brokers’ commissions, and may require cash deposits with brokers or margin calls.  Utilizing cash for these costs and to cover margin calls has an impact on the cash we have available for our operations which could result in liquidity problems during times when corn prices fall significantly. Depending on our open derivative positions, we may require additional liquidity with little advance notice to meet margin calls.  We have had to in the past, and in the future will likely be required to, cover margin calls.  While we continuously monitor our exposure to margin calls, we cannot guarantee that we will be able to maintain adequate liquidity to cover margin calls in the future.
 
Ethanol production is energy intensive and interruptions in our supply of energy, or volatility in energy prices, could have a material adverse impact on our business.
 
Ethanol production requires a constant and consistent supply of energy.  If our production is halted for any extended period of time, it will have a material adverse effect on our business.  If we were to suffer interruptions in our energy supply, our business would be harmed.  We have entered into the Steam Contract for our primary energy source.  We also are able to operate at full capacity using natural gas-fired boilers, which mitigates the risk of disruption in steam supply.  However, the amount of natural gas we are permitted to use for this purpose is currently limited and the price of natural gas may be significantly higher than our steam price.  In addition, natural gas and electricity prices have historically fluctuated significantly. Increases in the price of steam, natural gas or electricity would harm our business by increasing our energy costs.  The prices which we will be required to pay for these energy sources will have a direct impact on our costs of producing ethanol and our financial results.
Our ability to successfully operate depends on the availability of water.
 
To produce ethanol, we need a significant supply of water, and water supply and quality are important requirements to operate an ethanol plant.  Our water requirements are supplied by our wells, but there are no assurances that we will continue to have a sufficient supply of water to sustain the Facility in the future, or that we can obtain the necessary permits to obtain water directly from the Missouri River as an alternative to our wells.  
We have executed an output contract for the purchase of all of the ethanol we produce, which may result in lower revenues because of decreased marketing flexibility and inability to capitalize on temporary or regional price disparities.
 
Bunge is the exclusive purchaser of our ethanol and markets our ethanol in national, regional and local markets. We do not plan to build our own sales force or sales organization to support the sale of ethanol.  As a result, we are dependent on Bunge to sell our principal product.  When there are temporary or regional disparities in ethanol market prices, it could be more financially advantageous to have the flexibility to sell ethanol ourselves through our own sales force.  We have decided not to pursue this route.
Tank cars used to transport crude oil and ethanol may need to be retrofitted or replaced to meet proposed new rail safety regulations.
The U.S. ethanol industry has long relied on railroads to deliver its product to market. We have leased 383 ethanol cars. These leased cars may need to be retrofitted or replaced to comply with final regulations adopted by the U.S. Department of Transportation, or DOT, to address concerns related to safety are adopted, which could in turn cause a shortage of compliant tank cars. The proposed regulations call for a phase out within four years of the use of legacy DOT-111 tank cars for transporting highly-flammable liquids, including ethanol. According to the proposed rule, the DOT expects about 66,000 tank cars to be retrofitted and about 23,000 cars to be shifted to transporting other liquids. The Canadian government also adopted new tank car standards which align with the new DOT standard and requires that its nation’s rail shippers use sturdier tank cars for transportation of crude oil and ethanol. Compliance with these final could require upgrades or replacements of the Company's tank cars, and could have an adverse effect on the Company's operations as lease costs for tank cars may increase. Additionally, existing tank cars could be out of service for a period of time while such upgrades are made, tightening supply in an industry that is highly dependent on such railcars to transport its product.
    We are increasingly dependent on information technology and disruptions, failures or security breaches of our information technology infrastructure could have a material adverse effect on our operations.
            Information technology is critically important to our business operations. We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic and financial information, to manage a variety of

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business processes and activities, including production, manufacturing, financial, logistics, sales, marketing and administrative functions. We depend on our information technology infrastructure to communicate internally and externally with employees, customers, suppliers and others. We also use information technology networks and systems to comply with regulatory, legal and tax requirements. These information technology systems, many of which are managed by third parties or used in connection with shared service centers, may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components thereof, power outages, hardware failures, computer viruses, attacks by computer hackers or other cybersecurity risks, telecommunication failures, user errors, natural disasters, terrorist attacks or other catastrophic events. If any of our significant information technology systems suffer severe damage, disruption or shutdown, and our disaster recovery and business continuity plans do not effectively resolve the issues in a timely manner, our product sales, financial condition and results of operations may be materially and adversely affected, and we could experience delays in reporting our financial results.
            In addition, if we are unable to prevent physical and electronic break-ins, cyber-attacks and other information security breaches, we may encounter significant disruptions in our operations including our production and manufacturing processes, which can cause us to suffer financial and reputational damage, be subject to litigation or incur remediation costs or penalties. Any such disruption could materially and adversely impact our reputation, business, financial condition and results of operations.
Such breaches may also result in the unauthorized disclosure of confidential information belonging to us or to our partners, customers, suppliers or employees which could further harm our reputation or cause us to suffer financial losses or be subject to litigation or other costs or penalties. The mishandling or inappropriate disclosure of non-public sensitive or protected information could lead to the loss of intellectual property, negatively impact planned corporate transactions or damage our reputation and brand image. Misuse, leakage or falsification of legally protected information could also result in a violation of data privacy laws and regulations and have a negative impact on our reputation, business, financial condition and results of operations.
Risks Associated With the Ethanol Industry

Recent reductions in the renewable volume obligations for corn-based ethanol under the RFS which are lower than the statutory requirements has had, and will continue to have, a negative impact on the market price or demand for ethanol.
 
In November 2015, the EPA issued its Final 2014-2016 Rules for the 2014, 2015 and 2016 renewable volume obligations which reflected significant reductions in the total renewable fuel volume requirements from the statutory mandates initially set by Congress. In May 2016, the EPA released its proposed rule to set 2017 renewable volume requirements under RFS2 which set the annual volume requirement for renewable fuels at 18.8 billion gallons per year, of which 14.8 billion gallons could be met with corn-based ethanol but in November 2016, the EPA issued the Final 2017 Rule which increased the total volume requirements from 18.8 billion gallons to 19.28 billion gallons. The 2017 volume requirements are still below the 2017 statutory mandate of 24 billion gallons per year. However, in connection with the issuance of the Final 2017 Rule, the EPA increased the number of gallons which may be met by corn-based ethanol from 14.8 billion gallons to 15 billion gallons. This brings the renewable volume obligations for conventional renewable fuels that can be met by corn-based ethanol back to the levels called for in the statutory mandate for 2017.

On July 5, 2017, the EPA released the Proposed 2018 Rule which proposed an annual volume requirement for renewable fuel of 19.24 billion gallons of renewable fuels per year. On November 30, 2017, the EPA issued the Final 2018 Rule which varied only slightly from the Proposed 2018 Rule with the annual volume requirement for renewable fuel set at 19.29 billion gallons of renewable fuels per year. Although the volume requirements set forth in the Final 2018 Rule are slightly higher than the 19.28 billion gallons required under the Final 2017 Rule, the final volume requirements are still significantly below the 26 billion gallons statutory mandate for 2018 with significant reductions in the volume requirements for advanced biofuels. However, the Final 2018 Rule does maintain the number of gallons which may be met by conventional renewable fuels such as corn-based ethanol at 15.0 billion gallons.
    
The release of the Final 2018 Rule and the maintenance of the 15 billion gallon threshold for volume requirements that may be met with corn-based ethanol together with the letter issued by Administrator Pruitt may signal a rejection of arguments by the oil industry relating to the “blend wall” and support from the EPA and the Trump administration for domestic ethanol production; however, there is no guarantee that for future years the EPA will adhere to the statutory mandate for conventional renewable fuels. The Trump administration could still elect to materially modify, repeal or otherwise invalidate the RFS and it is unclear what regulatory framework and renewable volume requirements, if any, will emerge as a result of such reforms; however,

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any such reform could adversely affect the demand and price for ethanol and our profitability. In addition, due to the lower price of gasoline, we do not anticipate that renewable fuel blenders will use more ethanol than is required by the RFS which may result in a significant decrease in ethanol demand.

Furthermore, there have also been recent proposals in Congress to reduce or eliminate the RFS. The EPA's reduction of the volume requirements under the RFS set forth in the EPA’s final rules combined with any further reduction to or elimination of the RFS requirements, could materially decrease the market price and demand for ethanol which will negatively impact our financial performance.

The volume requirements mandated in the Final 2014 - 2016 Rules, the Final 2017 Rule and the Final 2018 Rule remain below the volume requirements statutorily mandated by Congress. These reduced volume requirements, combined with the potential elimination of such requirements by the exercise of the EPA waiver authority or by Congress, could decrease the market price and demand for ethanol which will negatively impact our financial performance.


    
If exports to Europe are decreased due to the imposition by the European Union of a tariff on U.S. ethanol, ethanol prices may be negatively impacted.

The European Union imposed a tariff on ethanol which is produced in the United States and exported to Europe. As a result of such tariff, exports of ethanol to Europe have decreased which has negatively impacted the market price of ethanol in the United States. The European Union tariff is scheduled to expire in 2018 which could result in increased demand for domestic ethanol from the European Union. Additional demand for ethanol from the European Union could help offset decreased demand from China and Brazil and have a positive impact on domestic ethanol prices. However, it will take time for ethanol prices to reflect any positive impact resulting from the expiration of the European Union tariff and there is no guarantee that any positive impact will result.


Decreases in exports of distillers grains to China have had, and could continue to have, a negative effect on the price of distillers grains in the U.S. and negatively affect our profitability.

Historically, the United States ethanol industry exported a significant amount of distillers grains to China. However, on January 12, 2016, the Chinese government began an antidumping and countervailing duty investigation related to distillers grains imported from the United States which has significantly reduced exports of distillers grains to China. China issued a preliminary ruling on the anti-dumping investigation imposing an immediate duty on distillers grains that are produced in the United States and implemented an anti-subsidy duty on September 30, 2016. In January 2017, China announced a final ruling which set the antidumping duties at a range between 42.2% and 53.7% and established anti-subsidy duties at a range between 11.2% and 12%. The imposition of these duties resulted in plummeting demand from this top importer requiring United States producers to seek out alternatives markets, most notably in Mexico and Canada. The imposition of these duties create significant trade barriers and have significantly decreased demand from China and the prices for distiller’s grains produced in the United States. Continued reduction in demand from China, if alternative markets are not found, combined with lower domestic corn prices could negatively impact our ability to profitably operate its ethanol plant.

 
 
Continued price volatility and fluctuations in the price of corn may adversely impact our operating results and profitability.
 
Our operating results and financial condition are significantly affected by the price and supply of corn.  Because ethanol competes with non-corn derived fuels, we generally are unable to readily pass along increases in corn costs to our customers. At certain levels, corn prices may make the production of ethanol uneconomical.  There is significant price pressure on local corn markets caused by nearby ethanol plants, livestock industries and other corn consuming enterprises.
Additionally, local corn supplies and prices could be adversely affected by rising prices for alternative crops, increasing input costs, changes in government policies, shifts in global markets, or damaging growing conditions such as plant disease or adverse weather conditions, including but not limited to drought.

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Decreased prices for ethanol could adversely affect our results of operations and our ability to operate at a profit
 
Our revenues are dependent on market prices for ethanol and prices for ethanol products can vary significantly over time and decreases in price levels could adversely affect our profitability and viability.   Market prices for ethanol can be volatile as a result of a number of factors, including, but not limited to, the availability and price of competing fuels, the overall supply and demand for ethanol and corn, the price of gasoline and corn, and the level of government support. The price for ethanol has some relation to the price for oil and gasoline. The price of ethanol tends to increase as the price of gasoline increases, and the price of ethanol tends to decrease as the price of gasoline decreases, although this may not always be the case.  Any lowering of gasoline prices will likely also lead to lower prices for ethanol and adversely affect our operating results.  Increased production of ethanol may lead to lower prices.  Any downward change in the price of ethanol may decrease our prospects for profitability.
Ethanol is marketed as a fuel additive to reduce vehicle emissions from gasoline, as an octane enhancer to improve the octane rating of the gasoline with which it is blended and as a replacement for gasoline. As a result, ethanol prices are influenced by the supply of and demand for gasoline. Our results of operations may be adversely impacted if the demand for, or the price of gasoline decreased dramatically without a similar price reduction in corn. Market prices for ethanol produced in the United States are also influenced by the supply of and demand for imported ethanol. Imported ethanol is not subject to an import tariff and under RFS2 sugarcane ethanol imported from Brazil has been one of the most economical means for obligated parties to meet the advanced biofuel standards.

Decreased prices for distillers grains could adversely affect our results of operations and our ability to operate at a profit.

Distillers grains compete with other protein-based animal feed products. The price of distillers grains may decrease when the prices of competing feed products decrease. The prices of competing animal feed products are based in part on the prices of the commodities from which these products are derived. Downward pressure on commodity prices, such as soybeans, will generally cause the price of competing animal feed products to decline, resulting in downward pressure on the price of distillers grains.

Historically, sales prices for distillers grains have been correlated with prices of corn. However, there have been occasions when the price increase for this co-product has lagged behind increases in corn prices. In addition, our distillers grains co-product competes with products made from other feedstocks, the cost of which may not have risen as corn prices have risen. Consequently, the price we may receive for distillers grains may not rise as corn prices rise, thereby lowering our cost recovery percentage relative to corn.

Due to industry increases in U.S. dry mill ethanol production, the production of distillers grains in the United States has increased dramatically, and this trend may continue. This may cause distillers grains prices to fall in the United States, unless demand increases or other market sources are found. To date, demand for distillers grains in the United States has increased roughly in proportion to supply. We believe this is because U.S. farmers use distillers grains as a feedstock, and distillers grains are slightly less expensive than corn, for which it is a substitute. However, if prices for distillers grains in the United States fall, it may have an adverse effect on our business.  

We compete with larger, better financed entities, which could negatively impact our ability to operate profitably.
There is significant competition among ethanol producers with numerous producers and privately-owned ethanol plants planned and operating throughout the Midwest and elsewhere in the United States.  Our business faces a competitive challenge from larger plants, from plants that can produce a wider range of products than we can, and from other plants similar to ours.  Large ethanol producers such as Archer Daniels Midland, Flint Hills Resources LP, Green Plains Renewable Energy, Inc., Valero Renewable Fuels and POET Biorefining, among others, are capable of producing a significantly greater amount of ethanol than we produce. Further, many believe that there will be further consolidation occurring in the ethanol industry in the near future which will likely lead to a few companies who control a significant portion of the ethanol production market. We may not be able to compete with these larger entities. These larger ethanol producers may be able to affect the ethanol market in ways that are not beneficial to us which could affect our financial performance.
Increased ethanol industry penetration by oil companies may adversely impact our margins.
    
The ethanol industry is a highly competitive environment and it is principally comprised of smaller entities that engage exclusively in ethanol production and large integrated grain companies that produce ethanol along with their base grain businesses. We have historically always faced competition with other small independent producers as well as larger, better financed producers for capital, labor, corn and other resources. Until recently, oil companies, petrochemical refiners and gasoline retailers have not

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been engaged in ethanol production to a large extent. These companies, however, form the primary distribution networks for marketing ethanol through blended gasoline. During the past few years, several large oil companies have begun to penetrate the ethanol production market. If these companies increase their ethanol plant ownership or other oil companies seek to engage in direct ethanol production, there may be a decrease in the demand for ethanol from smaller independent ethanol producers like us which could result in an adverse effect on our operations, cash flows and financial condition.

Changes and advances in ethanol production technology could require us to incur costs to update our Facility or could otherwise hinder our ability to compete in the ethanol industry or operate profitably.
 
Advances and changes in the technology of ethanol production are expected to occur.  Such advances and changes may make the ethanol production technology installed in our plant less desirable or obsolete.  These advances could also allow our competitors to produce ethanol at a lower cost than us.  If we are unable to adopt or incorporate technological advances, our ethanol production methods and processes could be less efficient than our competitors, which could cause our plant to become uncompetitive or completely obsolete.  If our competitors develop, obtain or license technology that is superior to ours or that makes our technology obsolete, we may be required to incur significant costs to enhance or acquire new technology so that our ethanol production remains competitive.  Alternatively, we may be required to seek third-party licenses, which could also result in significant expenditures.  We cannot guarantee or assure that third-party licenses will be available or, once obtained, will continue to be available on commercially reasonable terms, if at all.  These costs could negatively impact our financial performance by increasing our operating costs and reducing our net income.
Competition from the advancement of alternative fuels may decrease the demand for ethanol and negatively impact our profitability.
 
Alternative fuels, gasoline oxygenates and ethanol production methods are continually under development.  A number of automotive, industrial and power generation manufacturers are developing alternative clean power systems using fuel cells or clean burning gaseous fuels.  Like ethanol, the emerging fuel cell industry offers a technological option to address increasing worldwide energy costs, the long-term availability of petroleum reserves and environmental concerns.  Fuel cells have emerged as a potential alternative to certain existing power sources because of their higher efficiency, reduced noise and lower emissions.  Fuel cell industry participants are currently targeting the transportation, stationary power and portable power markets in order to lower fuel costs, decrease dependence on crude oil and reduce harmful emissions.  If the fuel cell and hydrogen industries continue to expand and gain broad acceptance, and hydrogen becomes readily available to consumers for motor vehicle use, we may not be able to compete effectively.  This additional competition could reduce the demand for ethanol, which would negatively impact our profitability.
Corn-based ethanol may compete with cellulose-based ethanol in the future, which could make it more difficult for us to produce ethanol on a cost-effective basis.
 
Most ethanol produced in the U.S. is currently produced from corn and other raw grains, such as milo or sorghum - especially in the Midwest.  The current trend in ethanol production research is to develop an efficient method of producing ethanol from cellulose-based biomass, such as agricultural waste, forest residue, municipal solid waste and energy crops.  This trend is driven by the fact that cellulose-based biomass is generally cheaper than corn, and producing ethanol from cellulose-based biomass would create opportunities to produce ethanol in areas which are unable to grow corn.  The Energy Independence and Security Act of 2007 and the 2008 Farm Bill offer a very strong incentive to develop commercial scale cellulosic ethanol. The statutory volume requirement in the RFS requires that 16 billion gallons per year of advanced bio-fuels be consumed in the United States by 2022. Additionally, state and federal grants have been awarded to several companies who are seeking to develop commercial-scale cellulosic ethanol plants. As a result, at least three companies have reportedly already begun producing on a commercial scale and a handful of other companies have begun construction on commercial scale cellulosic ethanol plants some of which may be completed in the near future. If an efficient method of producing ethanol from cellulose-based biomass is developed, we may not be able to compete effectively.  It may not be practical or cost-effective to convert our Facility into a plant which will use cellulose-based biomass to produce ethanol.  If we are unable to produce ethanol as cost-effectively as cellulose-based producers, our ability to generate revenue will be negatively impacted.
Depending on commodity prices, foreign producers may produce ethanol at a lower cost than we can, which may result in lower ethanol prices which would adversely affect our financial results.

We face competition from foreign ethanol producers with Brazil currently the second largest ethanol producer in the world. Brazil’s ethanol production is sugarcane based, as opposed to corn based, and, depending on feedstock prices, may be less expensive to produce. Under RFS2 certain parties are obligated to meet an advanced biofuel standard and sugarcane ethanol imported from Brazil has historically been one of the most economical means for obligated parties to meet this standard. Other

23



foreign producers may be able to produce ethanol at lower input costs, including costs of feedstock, facilities and personnel, than we can.

While foreign demand, transportation costs and infrastructure constraints may temper the market impact throughout the United States, competition from imported ethanol may affect our ability to sell our ethanol profitably, which may have an adverse effect on our operations, cash flows and financial position.

If significant additional foreign ethanol production capacity is created, such facilities could create excess supplies of ethanol on world markets, which may result in lower prices of ethanol throughout the world, including the United States. Such foreign competition is a risk to our business. Any penetration of ethanol imports into the domestic market may have a material adverse effect on our operations, cash flows and financial position.

Risks Associated With Government Regulation and Subsidization
 
The ethanol industry is highly dependent on government mandates relating to the production and use of ethanol and changes to such mandates and related regulations could adversely affect the market for ethanol and our results of operations.

The domestic market for ethanol is largely dictated by federal mandates for blending ethanol with gasoline. Future demand for ethanol will be largely dependent upon the economic incentives to blend based upon the relative value of gasoline versus ethanol, taking into consideration the relative octane value of ethanol, environmental requirements and the RFS mandate. The RFS mandate helps support a market for ethanol that might disappear without this incentive. Annually, the EPA is supposed to pass a rule that establishes the number of gallons of different types of renewable fuels that must be used in the United States which is called the renewable volume obligations. In November 2015, the EPA issued its Final 2014-2016 Rules for the 2014, 2015 and 2016 renewable volume obligations which reflected significant reductions in the total renewable fuel volume requirements from the statutory mandates initially set by Congress. In May 2016, the EPA released its proposed rule to set 2017 renewable volume requirements under RFS2 which set the annual volume requirement for renewable fuels at 18.8 billion gallons per year, of which 14.8 billion gallons could be met with corn-based ethanol but in November 2016, the EPA issued the Final 2017 Rule which increased the total volume requirements from 18.8 billion gallons to 19.28 billion gallons. The 2017 volume requirements are still below the 2017 statutory mandate of 24 billion gallons per year. However, in connection with the issuance of the Final 2017 Rule, the EPA increased the number of gallons which may be met by corn-based ethanol from 14.8 billion gallons to 15 billion gallons. This brings the renewable volume obligations for conventional renewable fuels that can be met by corn-based ethanol back to the levels called for in the statutory mandate for 2017.


On July 5, 2017, the EPA released the Proposed 2018 Rule which proposed an annual volume requirement for renewable fuel of 19.24 billion gallons of renewable fuels per year. On November 30, 2017, the EPA issued the Final 2018 Rule which varied only slightly from the Proposed 2018 Rule with the annual volume requirement for renewable fuel set at 19.29 billion gallons of renewable fuels per year. Although the volume requirements set forth in the Final 2018 Rule are slightly higher than the 19.28 billion gallons required under the Final 2017 Rule, the final volume requirements are still significantly below the 26 billion gallons statutory mandate for 2018 with significant reductions in the volume requirements for advanced biofuels. However, the Final 2018 Rule does maintain the number of gallons which may be met by conventional renewable fuels such as corn-based ethanol at 15.0 billion gallons.

The release of the Final 2018 Rule and the maintenance of the 15 billion gallon threshold for volume requirements that may be met with corn-based ethanol together with the letter issued by Administrator Pruitt may signal a rejection of arguments by the oil industry relating to the “blend wall” and support from the EPA and the Trump administration for domestic ethanol production; however, there is no guarantee that for future years the EPA will adhere to the statutory mandate for conventional renewable fuels. The Trump administration could still elect to materially modify, repeal or otherwise invalidate the RFS and it is unclear what regulatory framework and renewable volume requirements, if any, will emerge as a result of such reforms; however, any such reform could adversely affect the demand and price for ethanol and our profitability. In addition, due to the lower price of gasoline, we do not anticipate that renewable fuel blenders will use more ethanol than is required by the RFS which may result in a significant decrease in ethanol demand.
.

Furthermore, there have also been recent proposals in Congress to reduce or eliminate the RFS. The EPA's reduction of the volume requirements under the RFS set forth in the EPA's final rules combined with any further reduction to or elimination of the RFS requirements, could materially decrease the market price and demand for ethanol which will negatively impact our financial performance. Additionally, under the provisions of the Energy Independent and Security Act, the EPA has the authority

24



to waive the mandated RFS requirements in whole or in part. Although the EPA has not granted any waiver, we cannot guarantee that if future waiver requests are filed that the EPA will deny such requests.  Our operations could be adversely impacted if such a waiver is ever granted and any reversal or waiver in federal policy on the RFS could have a significant impact on the ethanol industry.    The volume requirements mandated in the Final 2014 - 2016 Rules, the Final 2017 Rule and the Final 2018 Rule remain below the volume requirements statutorily mandated by Congress. These reduced volume requirements, combined with the potential elimination of such requirements by the exercise of the EPA waiver authority or by Congress, could decrease the market price and demand for ethanol which will negatively impact our financial performance.
    
The compliance mechanism for RFS2 is the generation of renewable identification numbers, or RINs, which are generated and attached to renewable fuels such as the ethanol we produce and detached when the renewable fuel is blended into the transportation fuel supply. Detached RINs may be retired by obligated parties to demonstrate compliance with RFS2 or may be separately traded in the market. The market price of detached RINs may affect the price of ethanol in certain U.S. markets as obligated parties may factor these costs into their purchasing decisions. Moreover, at certain price levels for various types of RINs, it becomes more economical to import foreign sugarcane ethanol. If changes to RFS2 result in significant changes in the price of various types of RINs, it could negatively affect the price of ethanol, and our operations could be adversely impacted.

Federal law mandates the use of oxygenated gasoline in the winter in areas that do not meet Clean Air Act standards for carbon monoxide. If these mandates are repealed, the market for domestic ethanol could be significantly reduced. Additionally, flexible-fuel vehicles receive preferential treatment in meeting corporate average fuel economy, or CAFE, standards. However, high blend ethanol fuels such as E85 result in lower fuel efficiencies. Absent the CAFE preferences, it may be unlikely that auto manufacturers would build flexible-fuel vehicles. Any change in these CAFE preferences could reduce the growth of E85 markets and result in lower ethanol prices, which could adversely impact our operating results.

To the extent that such federal or state laws or regulations are modified, the demand for ethanol may be reduced, which could negatively and materially affect our ability to operate profitably.

 
We are subject to extensive environmental regulation and operational safety regulations that impact our expenses and could reduce our profitability.
 
Ethanol production involves the emission of various airborne pollutants, including particulate matters, carbon monoxide, oxides of nitrogen, volatile organic compounds and sulfur dioxide. We are subject to regulations on emissions from the EPA and the IDNR (Iowa Department of Natural Resources). The EPA’s and IDNR’s environmental regulations are subject to change and often such changes are not favorable to industry.  Consequently, even if we have the proper permits now, we may be required to invest or spend considerable resources to comply with future environmental regulations.
Our failure to comply or the need to respond to threatened actions involving environmental laws and regulations may adversely affect our business, operating results or financial condition. We must follow procedures for the proper handling, storage, and transportation of finished products and materials used in the production process and for the disposal of waste products.  In addition, state or local requirements also restrict our production and distribution operations. We could incur significant costs to comply with applicable laws and regulations.  Changes to current environmental rules for the protection of the environment may require us to incur additional expenditures for equipment or processes.
We could be subject to environmental nuisance or related claims by employees, property owners or residents near the Facility arising from air or water discharges.  Ethanol production has been known to produce an odor to which surrounding residents could object.  We believe our plant design mitigates most odor objections.  However, if odors become a problem, we may be subject to fines and could be forced to take costly curative measures.  Environmental litigation or increased environmental compliance costs could significantly increase our operating costs.
We are subject to federal and state laws regarding operational safety.  Risks of substantial compliance costs and liabilities are inherent in ethanol production.  Costs and liabilities related to worker safety may be incurred.  Possible future developments-including stricter safety laws for workers or others, regulations and enforcement policies and claims for personal or property damages resulting from our operation could result in substantial costs and liabilities that could reduce the amount of cash that we would otherwise have to distribute to members or use to further enhance our business.
Carbon dioxide may be regulated by the EPA in the future as an air pollutant, requiring us to obtain additional permits and install additional environmental mitigation equipment, which may adversely affect our financial performance.
 

25



Our Facility emits carbon dioxide as a by-product of the ethanol production process and we sell a portion of our carbon dioxide by-product to Air Products and Chemicals, Inc., formerly known as EPCO Carbon Dioxide Products, Inc. pursuant to a Carbon Dioxide Purchase and Sale Agreement. The United States Supreme Court has classified carbon dioxide as an air pollutant under the Clean Air Act in a case seeking to require the EPA to regulate carbon dioxide in vehicle emissions.  Similar lawsuits have been filed seeking to require the EPA to regulate carbon dioxide emissions from stationary sources such as our ethanol plant under the Clean Air Act.  While there are currently no regulations applicable to us concerning carbon dioxide, if Iowa or the federal government, or any appropriate agency, decides to regulate carbon dioxide emissions by plants such as ours, we may have to apply for additional permits or we may be required to install carbon dioxide mitigation equipment or take other steps unknown to us at this time in order to comply with such law or regulation.  Compliance with future regulation of carbon dioxide, if it occurs, could be costly and may prevent us from operating the Facility profitably.
The California Low Carbon Fuel Standard may decrease demand for corn based ethanol which could negatively impact our profitability.

California passed a Low Carbon Fuels Standard ("LCFS") which requires that renewable fuels used in California must accomplish certain reductions in greenhouse gases which reductions are measured using a lifecycle analysis. Management believes that the California LCFS and other state regulations aimed at reducing greenhouse gas emissions could impact the price of corn-based ethanol which could have an adverse impact on the market for corn-based ethanol produced in the Midwest. California represents a significant ethanol demand market. This could result in a reduction of our revenues and negatively impact our ability to profitably operate the ethanol plant.

Our site borders nesting areas used by endangered bird species, which could impact our ability to successfully maintain or renew operating permits.  The presence of these species, or future shifts in its nesting areas, could adversely impact future operating performance.
 
The Piping Plover ( Charadrius melodus ) and Least Tern ( Sterna antillarum ) use the fly ash ponds of the existing MidAm power plant for their nesting grounds.  The birds are listed on the state and federal threatened and endangered species lists.  The IDNR determined that our rail operation, within specified but acceptable limits, does not interfere with the birds’ nesting patterns and behaviors.  However, it was necessary for us to modify our construction schedules, plant site design and track maintenance schedule to accommodate the birds’ patterns.  We cannot foresee or predict the birds’ future behaviors or status.  As such, we cannot say with certainty that endangered species related issues will not arise in the future that could negatively affect the plant’s operations.
Item 2.   Properties.
We own the Facility site located near Council Bluffs, Iowa, which consists of three parcels totaling nearly 275 acres.  This property is encumbered under the mortgage agreement with Lenders.  We lease a building on the Facility site to an unrelated third party, and lease 45 acres on the south end of the property to an unrelated third party for farming, and grow corn for our own use on ten acres.

Item 3.   Legal Proceedings.
On August 25, 2010, the Company entered into a Tricanter Purchase and Installation Agreement (the “Tricanter Agreement”) with ICM, pursuant to which ICM sold the Company a tricanter corn oil separation system (the “Tricanter Equipment”). Under the Tricanter Agreement, ICM has agreed to indemnify the Company from any and all lawsuit and damages with respect to the Company's installation and use of the Tricanter Equipment.
On August 5, 2013, GS Cleantech Corporation (“GS Cleantech”) filed a suit in United States District Court for the Southern District of Iowa, Western Division (Case No. 2:13-CV-00021-JAJ-CFB), naming the Company as a defendant (the “Lawsuit”). The Lawsuit alleges infringement of patents assigned to GS Cleantech with respect to the corn oil separation technology used in the Tricanter Equipment. The Lawsuit seeks preliminary and permanent injunctions against the Company to prevent future infringement on the patents owned by GS CleanTech and damages in an unspecified amount adequate to compensate GS CleanTech for the alleged patent infringement, plus attorney's fees. The Lawsuit became part of multidistrict litigation against numerous parties and was transferred to the Federal District Court for the Southern District of Indiana (the “Court”). 

On October 23, 2014, the patents owned by GS CleanTech in the Lawsuit were found to be invalid by the SD of Indiana District Court. On January 15, 2015, the Company received a partial summary judgment finding in the Lawsuit by the SD of Indiana District Court consistent with the October 23, 2014 ruling. In September 2016, the Court issued an opinion rendering

26



the CleanTech patents unenforceable due to inequitable conduct.This ruling is in addition to the prior favorable court decisions on non-infringement.  GS Cleantech has asked the Court to reconsider its decision regarding inequitable conduct. In addition, GS Cleantech and its attorneys filed a Notice of Appeal appealing the rulings on summary judgment.
Under the Tricanter Agreement, ICM is obligated to, and has retained counsel at its expense to defend the Company in this Lawsuit. The Company is not currently able to predict the final outcome of this Lawsuit with any degree of certainty. The Company expects ICM to continue to vigorously defend the Company in further proceedings. However, in the event that damages are awarded as a result of this Lawsuit and, if ICM is unable to fully indemnify the Company for any reason, the Company could be liable for such damages. In addition, the Company may need to cease use of its current oil separation process and seek out a replacement or execute a license with GS CleanTech.



Item 4.   Mine Safety Disclosures.
Not applicable.
 
PART II
 
Item 5.   Market for Registrant’s Common Equity, Related Member Matters, and Issuer Purchases of Equity Securities.
As of September 30, 2017, we had (i) 8,993 Series A Units issued and outstanding held by 846 persons, (ii) 3,334 Series B Units issued and outstanding held by Bunge, and (iii) 1,000 Series C Units issued and outstanding held by ICM.  We do not have any established trading market for its units, nor is one contemplated.  However, we do provide access to a Qualified Matching Service for our members, which provides a system for limited transfers of our Units.
To date, we have made distributions totaling $22.2 million to our members, with distributions during Fiscal 2017 and Fiscal 2016 in the amount of $4.5 million and $3.3 million, respectively; however, we cannot be certain if or when we will be able to make additional distributions.  Further, our ability to make distributions is restricted under the terms of the Credit Agreement.
Item 6.     Selected Financial Data.
The following table presents selected financial and operating data as of the dates and for the periods indicated. The selected balance sheet financial data for the years ended September 30, 2017 and 2016 and the selected income statement data and other financial data for such years have been derived from the audited financial statements included elsewhere in this Form 10-K. You should read the following table in conjunction with "Item 7- Management Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and the accompanying notes included elsewhere in this Form 10-K. Among other things, those financial statements include more detailed information regarding the basis of presentation for the following financial data.
 
September 30, 2017
 
September 30, 2016
 
Amounts
 
Amounts
 
in 000's
 
in 000's
Balance Sheet Data
 
 
 
Cash and cash equivalents
$
1,487

 
$
3,139

Total current assets
28,460

 
27,241

Total assets
$
148,829

 
$
151,963

Total current liabilities
$
18,112

 
$
17,932

Total long term liabilities
18,726

 
30,954

Total liabilities
36,838

 
48,886

Total members' equity
111,991

 
103,077

Total liabilities and members' equity
$
148,829

 
$
151,963

 

27



    
 
Fiscal 2017
 
Fiscal 2016
 
Amounts
 
Amounts
 
in 000's
 
in 000's
Income Statement
 
 
 
Revenues
$
219,768

 
$
223,326

Cost of Goods Sold
200,986

 
212,163

Gross Margin
18,782

 
11,163

General and Administrative Expenses
4,787

 
4,588

Interest expense and other income, net
950

 
1,022

Change in fair value of put option liability
(400
)
 
460

Net Income
$
13,445

 
$
5,093

Income per Unit:
 
 
 
Income per unit -basic
$
1,008.85

 
$
382.16

Income per unit -diluted
$
906.28

 
$
382.16


Modified EBITDA
Modified EBITDA is defined as net income plus interest expense net of interest income, plus depreciation and amortization, or EBITDA, then adjusted for unrealized hedging losses, and other non-cash credits and charges to net income.  Modified EBITDA is not required by or presented in accordance with generally accepted accounting principles in the United States of America (“GAAP”), and should not be considered as an alternative to net income, operating income or any other performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities or as a measure of our liquidity.
We present Modified EBITDA because we consider it to be an important supplemental measure of our operating performance and it is considered by our management and Board of Directors as an important operating metric in their assessment of our performance.
We believe Modified EBITDA allows us to better compare our current operating results with corresponding historical periods and with the operational performance of other companies in our industry because it does not give effect to potential differences caused by variations in capital structures (affecting relative interest expense, including the impact of write-offs of deferred financing costs when companies refinance their indebtedness), the amortization of intangibles (affecting relative amortization expense), unrealized hedging losses and other items that are unrelated to underlying operating performance.  We also present Modified EBITDA because we believe it is frequently used by securities analysts and investors as a measure of performance.   There are a number of material limitations to the use of Modified EBITDA as an analytical tool, including the following:
Modified EBITDA does not reflect our interest expense or the cash requirements to pay our interest.  Because we have borrowed money to finance our operations, interest expense is a necessary element of our costs and our ability to generate profits and cash flows.  Therefore, any measure that excludes interest expense may have material limitations.
Although depreciation and amortization are non-cash expenses in the period recorded, the assets being depreciated and amortized may have to be replaced in the future, and Modified EBITDA does not reflect the cash requirements for such replacement.   Because we use capital assets, depreciation and amortization expense is a necessary element of our costs and ability to generate profits.  Therefore, any measure that excludes depreciation and amortization expense may have material limitations.

We compensate for these limitations by relying primarily on our GAAP financial measures and by using Modified EBITDA only as supplemental information.  We believe that consideration of Modified EBITDA, together with a careful review of our GAAP financial measures, is the most informed method of analyzing our operations.  Because Modified EBITDA is not a measurement determined in accordance with GAAP and is susceptible to varying calculations, Modified EBITDA, as presented, may not be comparable to other similarly titled measures of other companies.  The following table provides a reconciliation of Modified EBITDA to net income:
  

28



 
Fiscal 2017
 
Fiscal 2016
 
Amounts
 
Amounts
 
in 000's (except per unit)
 
in 000's (except per unit)
 
 
 
 
Net Income
$
13,445

 
$
5,093

Interest Expense, Net
1,118

 
1,393

Depreciation
12,058

 
11,785

EBITDA
26,621

 
18,271

 
 
 
 
Unrealized Hedging (gain)
(363
)
 
(1,016
)
Change in fair value of put option liability
(400
)
 
460

Modified EBITDA
$
25,858

 
$
17,715

 
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operation.
General Overview and Recent Developments
The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our financial condition and results of operations. This discussion should be read in conjunction with the financial statements included herewith and notes to the financial statements thereto and the risk factors contained herein.
The Company is an Iowa limited liability company located in Council Bluffs, Iowa, formed in March, 2005. The Company is permitted to produce 140 million gallons of ethanol.  The Company historically was permitted to produce up to 125 million gallons under it's air permit; however, the Iowa Department of Natural Resources (IDNR) approved an increase in the Company's air permit to allow for production of 140 million gallons per rolling 12 months starting in March 2017 We began producing ethanol in February, 2009 and sell our ethanol, distillers grains, and corn oil in the United States, Mexico and the Pacific Rim.  

    
 
Industry Factors Affecting our Results of Operations
 
For Fiscal 2017 compared to Fiscal 2016, the average price per gallon of ethanol sold increased 3.6%. Although there has been an increased supply of ethanol, we have also seen increased prices for crude oil and gasoline in Fiscal 2017 compared to Fiscal 2016 on relatively flat consumption.

Management currently believes that despite the ethanol price changes, the ethanol outlook for the first quarter of Fiscal 2018 will be relatively flat due to the following factors.

The latest estimates of supply and demand provided by the U.S. Department of Agriculture (the "USDA") estimate the 2017/18 ending corn stocks of 2.49 billion bushels, the highest level in 30 years. The USDA held corn consumption for ethanol and co-products steady at 5.5 billion bushels and increased their forecast for the 2017/18 corn supply to 14.6 billion bushels, suggesting lower corn prices into the first half of Fiscal 2018.

Gasoline demand increased slightly in 2017 over 2016 levels. The U.S. Energy Information Administration (the "EIA")released in its Short Term Energy Outlook report of November 7, 2017 that U.S. gasoline demand maintained last years record levels of ~9.3MMbpd in 2017 versus 2016.

However, corn prices trended upward during the first half of Fiscal 2017 became more volatile and fluctuated downward during the last quarter of Fiscal 2017. Weather, world supply and demand, current and anticipated stocks, agricultural policy and other factors can contribute to volatility in corn prices. If corn prices rise, it will have a negative effect on our operating margins unless the price of ethanol and distillers grains out paces rising corn prices.

Management anticipates that ethanol prices will continue to change in relation to changes in corn and energy prices. If corn, crude oil and gasoline prices remain low or further decrease, that could have a significant negative impact on the market price of ethanol and our profitability particularly should ethanol stocks remain high. A decline in U.S. ethanol exports due to the premium on the price of ethanol as compared to unleaded gasoline, or other factors may contribute to higher ethanol stocks unless

29



additional demand can be created from other foreign markets or domestically. In addition, the EPA's reduction of the renewable volume obligations set forth in the RFS may limit demand for ethanol negatively impacting ethanol prices.

In addition, market forces may continue to have a negative impact on distiller grain prices including lower export demand as a result of the imposition of an anti-dumping duties and anti-subsidy duties by the Chinese government on the import of distillers grains produced in the U.S in January 2017. These duties have adversely impacted export volume to China and decreased market prices. We cannot forecast how much demand from China will come back into the marketplace and distillers grains prices could remain low unless additional demand can be created from other foreign markets or domestically. Domestic demand for distillers grains could also remain low if corn prices decline and end-users switch to lower priced alternatives.



Results of Operations
The following table shows our results of operations, stated as a percentage of revenue for Fiscal 2017 and 2016.
 
Fiscal 2017
 
Fiscal 2016
 
Amounts
 
% of Revenues
 
Amounts
 
% of Revenues
 
in 000's
 
 
 
in 000's
 
 
Income Statement Data
 
 
 
 
 
 
 
Revenues
$
219,768

 
100.0
%
 
$
223,326

 
100.0
%
Cost of Goods Sold
 
 
 
 
 
 
 
Material Costs
140,877

 
64.1
%
 
154,153

 
69.0
%
Variable Production Expense
31,350

 
14.3
%
 
29,805

 
13.3
%
Fixed Production Expense
28,759

 
13.1
%
 
28,205

 
12.6
%
Gross Margin
18,782

 
8.5
%
 
11,163

 
5.0
%
General and Administrative Expenses
4,787

 
2.2
%
 
4,588

 
2.1
%
Other Expenses
550

 
0.2
%
 
1,482

 
0.7
%
Net Income
$
13,445

 
6.1
%
 
$
5,093

 
2.3
%
  
Revenues

Our revenue from operations is derived from three primary sources: sales of ethanol, distillers grains, and corn oil.  The chart at the bottom of this section displays statistical information regarding our revenues. The decrease in revenue from Fiscal 2016 to Fiscal 2017 was due to a decrease of 9.20% in the volume of distillers grains sold coupled with a decrease in the average price per ton of distillers grains of approximately 16.7%.  The decrease in distillers grain revenue was partially offset by an increase in the average price per gallon of ethanol of approximately 3.6% in Fiscal 2017 as compared to Fiscal 2016 (which was partially offset by a 0.6% decrease in the volume of ethanol sold during Fiscal 2017 over Fiscal 2016). Corn oil revenue also increased 16.9% in Fiscal 2017 compared to Fiscal 2016 due to an increase of 11.0% in the price of corn oil received as compared to the price of corn oil received during Fiscal 2016.

The increase in the price of ethanol was due in part to domestic demand as relatively low fuel prices resulted in increased consumers driving and increased export demand. The price of ethanol has also seen positive impact from the rising ethanol blend rates at the pump. In addition, because ethanol prices are typically directionally consistent with changes in corn and energy prices, lower corn prices were offset by rising crude oil and gasoline prices throughout the fiscal year which had a favorable effect on ethanol prices.

The 16.7% decrease in the average price of distillers grains, which represents almost a 25% drop to this revenue category, resulted principally from lower domestic and export demand during the Fiscal 2017 as compared to Fiscal 2016.

During Fiscal 2017, corn oil prices increased 11.0% compared to Fiscal 2016 primarily due to increased demand from the biodiesel industry and due to the expansion of the RFS advanced biofuel mandate increasing the demand for biodiesel. However,

30



in light of the EPA's reduction of the volume requirements for advanced biofuels in the Final 2018 Rule as compared to the statutory mandate , this increased demand for corn oil may not continue during the fiscal year ending September 30, 2018.Although management believes that corn oil prices will remain relatively steady at the increased price levels, prices may decrease if there is an oversupply of corn oil production resulting from increased production rates at ethanol plants or if biodiesel producers begin to utilize lower-priced alternatives such as soybean oil unless an alternative demand for corn oil can be found.

 
Fiscal 2017
 
Fiscal 2016
 
Amounts in 000's
 
% of Revenues
 
Amounts in 000's
 
% of Revenues
Product Revenue Information
 
 
 
 
 
 
 
Ethanol
$
177,840

 
80.9
%
 
$
172,767

 
77.4
%
Distiller's Grains
30,692

 
14.0
%
 
40,570

 
18.1
%
Corn Oil
10,162

 
4.6
%
 
8,696

 
3.9
%
Other
1,074

 
0.5
%
 
1,293

 
0.6
%
 
Cost of Goods Sold
 
Our cost of goods sold as a percentage of our revenues was 91.5% and 95.0% for Fiscal 2017 and 2016, respectively, and decreased due to the average price per gallon of ethanol increasing by approximately 3.6% in Fiscal 2017 as compared to Fiscal 2016.  Our two primary costs of producing ethanol and distillers grains are corn and energy, with steam and natural gas as our primary energy sources.   Cost of goods sold also includes net (gains) or losses from derivatives and hedging relating to corn.   Material costs decreased as a result of the average price of corn used in ethanol production per bushel decreasing 6.8% in Fiscal 2017 from 2016. Corn used in ethanol production decreased by 1.1% in Fiscal 2017 from 2016 as we continue to operate more efficiently and increase our yield of ethanol from corn ground. 
Realized and unrealized (gains) or losses related to our derivatives and hedging related to corn resulted in an decrease of $(0.4) million in our cost of goods sold for Fiscal 2017, compared to an increase of $0.5 million in our cost of goods sold for Fiscal 2016.  We recognize the gains or losses that result from the changes in the value of our derivative instruments related to corn in cost of goods sold as the changes occur.  As corn prices fluctuate, the value of our derivative instruments are impacted, which affects our financial performance.  We anticipate continued volatility in our cost of goods sold due to the timing of the changes in value of the derivative instruments relative to the cost and use of the commodity being hedged. 
 Our average steam and natural gas energy cost increased 23.5% per MMBTU comparing Fiscal 2017 to Fiscal 2016. Variable production expenses showed an increase when comparing Fiscal 2017 to Fiscal 2016 due to the increase in energy costs resulting from the higher average cost per MMBTU of steam and natural gas which was partially offset by the lower cost of chemicals. Fixed production expenses were higher when comparing Fiscal 2017 to Fiscal 2016 due to higher payroll and benefit charges, higher railcar lease expense and higher depreciation expenses.
General & Administrative Expense
 
Our general and administrative expenses as a percentage of revenues were 2.2% for Fiscal 2017 and 2.1% for Fiscal 2016.  General and administrative expenses include salaries and benefits of administrative employees, professional fees and other general administrative costs.  Our general and administrative expenses for Fiscal 2017 increased 4.3% compared to Fiscal 2016.  The increase in general and administrative expenses from Fiscal 2016 to Fiscal 2017 is due mainly to an increase in salary and bonus expenses and an increase in advertising expenses due to the timing of corporate sponsorships.
Other Expense

Our other expenses were approximately $0.6 million and $1.5 million for Fiscal 2017 and 2016, respectively, and were approximately 0.3% and 0.7% of our revenues for Fiscal 2017 and 2016, respectively. The majority of this decrease in other expenses was a result of a credit of $0.4 million in Fiscal 2017 compared to a charge of $0.5 million Fiscal 2016 for the ICM put option.

31



Liquidity and Capital Resources
As of September 30, 2017, we had a cash balance of $1.5 million, $31.9 million available under the term revolver and working capital of $10.3 million.
In June 2014, the Company entered into a $66.0 million Senior Credit Agreement (the “Credit Agreement”) with Farm Credit Services of America, FLCA (“FCSA”) and CoBank, ACB, as cash management provider and agent (“CoBank”). The proceeds of the Credit Agreement were used to refinance senior bank debt previously outstanding and scheduled to mature in August 2014. The Credit Agreement provides us with a term loan of $30 million, due in 2019, and a revolving term loan of $36 million, due in 2023. The interest rate on the Credit Agreement is LIBOR plus 3.35%. The Credit Agreement resulted in a significantly lower interest rate than under the prior credit facility. The Company’s term loan and revolving term loan requires it to comply with specified financial covenants related to minimum local net worth, minimum current working capital, a minimum debt service coverage ratio and limitation on unit holder distributions. The Company was in compliance with these covenants at September 30, 2017.
  

We expect the prices of our primary input (corn) and our principal products (ethanol and distillers grains) to remain stable in the first quarter of Fiscal 2018, given the relative prices of these commodities and the operations of our risk management program in the quarter. We therefore currently believe that our operating margins in the first quarter of Fiscal 2018 will be similar to our operating margins in the fourth quarter of Fiscal 2017.  We expect that in the last three quarters of Fiscal 2018 our margins will be steady if ethanol and corn prices maintain their stability.
Primary Working Capital Needs
Cash provided by operations for Fiscal 2017 and 2016 was $22.4 million and $12.3 million, respectively.  This change is primarily a result of an increase in net income and improved accounts receivable which was partially offset by an increase to inventories.  For Fiscal 2017 and 2016, net cash (used in) investing activities was ($7.7 million) and $(4.6) million, respectively, primarily for fixed asset additions, net of proceeds from the property insurance claim.  For Fiscal 2017 and 2016, net cash flows used in financing activities was $16.3 million and $7.5 million, respectively due to increased notes and revolver loan payments, as well as increased distribution payments to members. 
    
We believe that our existing sources of liquidity, including cash on hand, available revolving credit and cash provided by operating activities, will satisfy our projected liquidity requirements, which primarily consists of working capital requirements, for the next twelve months. However, in the event that the market experiences significant price volatility and negative crush margins at or in excess of the levels experienced in previous years, we may be required to explore alternative methods to meet our short-term liquidity needs including temporary shutdowns of operations, temporary reductions in our production levels, or negotiating short-term concessions from our lenders.   

 
Commodity Price Risk 
Our operations are highly dependent on commodity prices, especially prices for corn, ethanol and distillers grains and the spread between them ( the "crush margin"). 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, governmental programs and foreign purchases. We may experience increasing costs for corn and natural gas and decreasing prices for ethanol and distillers grains which could significantly impact our operating results. Because the market price of ethanol is not directly related to corn prices, ethanol producers are generally not able to compensate for increases in the cost of corn through adjustments in prices for ethanol.  We continue to monitor corn and ethanol prices and manage the "crush margin" to affect our longer-term profitability.
We enter into various derivative contracts with the primary objective of managing our exposure to adverse price movements in the commodities used for, and produced in, our business operations and, to the extent we have working capital available and available market conditions are appropriate, we engage in hedging transactions which involve risks that could harm our business. We measure and review our net commodity positions on a daily basis.  Our daily net agricultural commodity position consists of inventory, forward purchase and sale contracts, over-the-counter and exchange traded derivative instruments.  The effectiveness of our hedging strategies is dependent upon the cost of commodities and our ability to sell sufficient products to use all of the commodities for which we have futures contracts.  Although we actively manage our risk and adjust hedging strategies as appropriate, there is no assurance that our hedging activities will successfully reduce the risk caused by market volatility which

32



may leave us vulnerable to high commodity prices. Alternatively, we may choose not to engage in hedging transactions in the future. As a result, our future results of operations and financial conditions may also be adversely affected during periods in which price changes in corn, ethanol and distillers grain to not work in our favor.
In addition, as described above, hedging transactions expose us to the risk of counterparty non-performance where the counterparty to the hedging contract defaults on its contract or, in the case of over-the-counter or exchange-traded contracts, where there is a change in the expected differential between the price of the commodity underlying the hedging agreement and the actual prices paid or received by us for the physical commodity bought or sold.  We have, from time to time, experienced instances of counterparty non-performance but losses incurred in these situations were not significant.
Although we believe our hedge positions accomplish an economic hedge against our future purchases and sales, management has chosen not to use hedge accounting, which would match any gain or loss on our hedge positions to the specific commodity purchase being hedged.  We are using fair value accounting for our hedge positions, which means as the current market price of our hedge positions changes, the realized or unrealized gains and losses are immediately recognized in the current period (commonly referred to as the “mark to market” method). The immediate recognition of hedging gains and losses under fair value accounting can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged.  As corn prices move in reaction to market trends and information, our income statement will be affected depending on the impact such market movements have on the value of our derivative instruments.  Depending on market movements, crop prospects and weather, our hedging strategies may cause immediate adverse effects, but are expected to produce long-term positive impact.
In the event we do not have sufficient working capital to enter into hedging strategies to manage our commodities price risk, we may be forced to purchase our corn and market our ethanol at spot prices and as a result, we could be further exposed to market volatility and risk. However, during the past year, the spot market has been advantageous.
Credit and Counterparty Risks
Through our normal business activities, we are subject to significant credit and counterparty risks that arise through normal commercial sales and purchases, including forward commitments to buy and sell, and through various other over-the-counter (OTC) derivative instruments that we utilize to manage risks inherent in our business activities.  We define credit and counterparty risk as a potential financial loss due to the failure of a counterparty to honor its obligations.  The exposure is measured based upon several factors, including unpaid accounts receivable from counterparties and unrealized gains (losses) from OTC derivative instruments (including forward purchase and sale contracts).   We actively monitor credit and counterparty risk through credit analysis (by our marketing agent). 
Impact of Hedging Transactions on Liquidity
Our operations and cash flows are highly impacted by commodity prices, including prices for corn, ethanol, distillers grains and natural gas. We attempt to reduce the market risk associated with fluctuations in commodity prices through the use of derivative instruments, including forward corn contracts and over-the-counter exchange-traded futures and option contracts. Our liquidity position may be positively or negatively affected by changes in the underlying value of our derivative instruments. When the value of our open derivative positions decrease, we may be required to post margin deposits with our brokers to cover a portion of the decrease or we may require significant liquidity with little advanced notice to meet margin calls. Conversely, when the value of our open derivative positions increase, our brokers may be required to deliver margin deposits to us for a portion of the increase.  We continuously monitor and manage our derivative instruments portfolio and our exposure to margin calls and while we believe we will continue to maintain adequate liquidity to cover such margin calls from operating results and borrowings, we cannot estimate the actual availability of funds from operations or borrowings for hedging transactions in the future.
The effects, positive or negative, on liquidity resulting from our hedging activities tend to be mitigated by offsetting changes in cash prices in our business. For example, in a period of rising corn prices, gains resulting from long grain derivative positions would generally be offset by higher cash prices paid to farmers and other suppliers in local corn markets. These offsetting changes do not always occur, however, in the same amounts or in the same period.
We expect that a $1.00 per bushel fluctuation in market prices for corn would impact our cost of goods sold by approximately $48 million, or $0.34 per gallon, assuming our plant operates at 100% of our capacity assuming no increase in the price of ethanol.  We expect the annual impact to our results of operations due to a $0.50 decrease in ethanol prices will result in approximately a $70 million decrease in revenue.
Summary of Critical Accounting Policies and Estimates

33



Note 2 to our 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
 
The Company sells ethanol and related products pursuant to marketing agreements.  Revenues are recognized when the marketing company has taken title to the product, prices are fixed or determinable and collectability is reasonably assured. 
The Company’s products are generally shipped FOB loading point, and recorded as a sale upon delivery of the applicable bill of lading.  The Company’s ethanol sales are handled through an ethanol purchase agreement (the “Ethanol Agreement”) with Bunge North America, Inc. (“Bunge”).  Syrup and distillers grains (co-products) are sold through a distillers grains agreement (the “DG Agreement”) with Bunge, based on market prices. The Company markets and distributes all of the corn oil it produces directly to end users at market prices.   Carbon dioxide is sold through a Carbon Dioxide Purchase and Sale Agreement (the “CO2 Agreement”) with Air Products and Chemicals, Inc., formerly known as EPCO Carbon Dioxide Products, Inc. (”Air Products”). Marketing fees, agency fees, and commissions due to the marketer are calculated separately from the settlement for the sale of the ethanol products and co-products and are included as a component of cost of goods sold.  Shipping and handling costs incurred by the Company for the sale of ethanol and co-products are included in cost of goods sold.
Investment in Commodities Contracts, Derivative Instruments and Hedging Activities

The Company’s operations and cash flows are subject to fluctuations due to changes in commodity prices.  The Company is subject to market risk with respect to the price and availability of corn, the principal raw material used to produce ethanol and ethanol by-products.  Exposure to commodity price risk results from its dependence on corn in the ethanol production process.  In general, rising corn prices result in lower profit margins and, therefore, represent unfavorable market conditions.  This is especially true when market conditions do not allow the Company to pass along increased corn costs to customers.  The availability and price of corn is subject to wide fluctuations due to unpredictable factors such as weather conditions, farmer planting decisions, governmental policies with respect to agriculture and international trade and global demand and supply.
To minimize the risk and the volatility of commodity prices, primarily related to corn and ethanol, the Company uses various derivative instruments, including forward corn, ethanol and distillers grains purchase and sales contracts, over-the-counter and exchange-trade futures and option contracts.  When the Company has sufficient working capital available, it enters into derivative contracts to hedge its exposure to price risk related to forecasted corn needs and forward corn purchase contracts.  
Management has evaluated the Company’s contracts to determine whether the contracts are derivative instruments. Certain contracts that literally meet the definition of a derivative may be exempted from derivative accounting as normal purchases or normal sales.  Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business.   Gains and losses on contracts that are designated as normal purchases or normal sales contracts are not recognized until quantities are delivered or utilized in production.
The Company applies the normal purchase and sale exemption to forward contracts relating to ethanol and distillers grains and solubles and therefore these forward contracts are not marked to market. As of September 30, 2017, the Company was committed to sell 7.0 million gallons of ethanol, 84.7 thousand tons of dried distillers grains, 92.3 thousand tons of wet distillers grains and 3.7 million pounds of corn oil.
Corn purchase contracts are treated as derivative financial instruments.  Changes in fair value of forward corn contracts, which are marked to market each period, are included in costs of goods sold.  As of September 30, 2017, the Company was committed to purchasing 2.9 million bushels of corn on a forward contract basis resulting in a total commitment of $$10.3 million.   In addition the Company was committed to purchasing 691.1 thousand bushels of corn using basis contracts.
In addition, the Company enters into short-term cash, options and futures contracts as a means of managing exposure to changes in commodity prices.  The Company enters into derivative contracts to hedge the exposure to volatile commodity price fluctuations.  The Company maintains a risk management strategy that uses derivative instruments to minimize significant, unanticipated earnings fluctuations caused by market volatility.  The Company’s specific goal is to protect itself from large moves in commodity costs.  All derivatives are designated as non-hedge derivatives and the contracts will be accounted for at fair

34



value.  Although the contracts will be effective economic hedges of specified risks, they are not designated as and accounted for as hedging instruments.    
Inventory
Inventory is valued at the lower of weighted average cost or net realizable value. In the valuation of inventories and purchase commitments, net realizable value is defined as estimated selling price in the ordinary course of business less reasonable predictable costs of completion, disposal and transportation.

Put Option liability.
The put option liability consists of an agreement between the Company and ICM that contains a conditional obligation to repurchase feature. In accordance with accounting for put options as a liability, the Company calculated the fair value of the put option under Level 3, using a valuation model called the Monte Carlo Simulation. Using this model, the estimated value at September 30, 2017 was $5.7 million.
Off-Balance Sheet Arrangements
We do not have any off balance sheet arrangements.
Item 7A.   Quantitative and Qualitative Disclosures about Market Risk
Not applicable.

Item 8.   Financial Statements and Supplementary Data. 
Report of Independent Registered Public Accounting Firm

To the Board of Directors and Members
Southwest Iowa Renewable Energy, LLC 
We have audited the accompanying balance sheets of Southwest Iowa Renewable Energy, LLC as of September 30, 2017 and 2016, and the related statements of operations, members’ equity, and cash flows for years then ended.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits. 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financing reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion. 
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Southwest Iowa Renewable Energy, LLC as of September 30, 2017 and 2016, and the results of its operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.
/s/ RSM US LLP 
Des Moines, Iowa
December 18, 2017


35



SOUTHWEST IOWA RENEWABLE ENERGY, LLC
 
 
 
Balance Sheets
 
 
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
September 30, 2017
 
September 30, 2016
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
1,487

 
$
3,139

Accounts receivable
1,826

 
470

Accounts receivable, related party
11,469

 
13,137

Derivative financial instruments
23

 
88

Inventory
13,214

 
9,937

Prepaid expenses and other
441

 
470

Total current assets
28,460

 
27,241

Property, Plant and Equipment
 
 
 
Land
2,064

 
2,064

Plant, building and equipment
225,651

 
218,417

Office and other equipment
1,511

 
1,200

 
229,226

 
221,681

Accumulated depreciation
(111,000
)
 
(99,109
)
Net property, plant and equipment
118,226

 
122,572

 
 
 
 
Other Assets
2,143

 
2,150

Total Assets
$
148,829

 
$
151,963

 
 
 
 
LIABILITIES AND MEMBERS' EQUITY
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
3,387

 
$
3,295

Accounts payable, related parties
165

 
737

Derivative financial instruments
911

 
1,526

Accrued expenses
6,943

 
5,217

Accrued expenses, related parties
168

 
640

Current maturities of notes payable
6,538

 
6,517

Total current liabilities
18,112

 
17,932

Long Term Liabilities
 
 
 
Notes payable, less current maturities
13,026

 
24,754

Other long-term  liabilities
5,700

 
6,200

Total long term liabilities
18,726

 
30,954

Commitments (Notes 9 and 11)
 
 
 
Members' Equity
 
 
 
Members' capital
 
 
 
13,327 Units issued and outstanding
87,165

 
87,165

Retained earnings
24,826

 
15,912

Total members' equity
111,991

 
103,077

Total Liabilities and Members' Equity
$
148,829

 
$
151,963

See Notes to Financial Statements
 
 
 

36



SOUTHWEST IOWA RENEWABLE ENERGY, LLC
 
 
 
Statements of Operations
 
 
 
(Dollars in thousands, except per unit data)
 
 
 
 
Year Ended
 
Year Ended
 
September 30, 2017
 
September 30, 2016
Revenues
$
219,768

 
$
223,326

Cost of Goods Sold
 
 
 
Cost of goods sold-non hedging
201,376

 
211,703

Realized & unrealized hedging (gains) losses
(390
)
 
460

 
200,986

 
212,163

 
 
 
 
Gross Margin
18,782

 
11,163

 
 
 
 
General and administrative expenses
4,787

 
4,588

 
 
 
 
Operating Income
13,995

 
6,575

 
 
 
 
Other Expense
 
 
 
    Interest expense and other income, net
950

 
1,022

Change in fair value of put option liability
(400
)
 
460

 
550

 
1,482

 
 
 
 
Net Income
$
13,445

 
$
5,093

 
 
 
 
Weighted Average Units Outstanding -basic
13,327

 
13,327

Weighted Average Units Outstanding -diluted
14,394

 
13,327

Income per unit -basic
$
1,008.85

 
$
382.16

Income per unit -diluted
$
906.28

 
$
382.16

See Notes to Financial Statements
 
 
 


37



SOUTHWEST IOWA RENEWABLE ENERGY, LLC
 
 
 
 
 
Statements of Members' Equity
 
 
 
 
 
(Dollars in thousands)
 
 
 
 
 
 
Members' Capital
 
Retained Earnings
 
Total
Balance, September 30, 2015
$
87,165

 
$
14,151

 
$
101,316

Net Income

 
5,093

 
5,093

Distributions

 
(3,332
)
 
(3,332
)
 
 
 
 
 
 
Balance, September 30, 2016
$
87,165

 
$
15,912

 
$
103,077

     Net Income

 
13,445

 
13,445

     Distributions

 
(4,531
)
 
(4,531
)
 
 
 
 
 
 
Balance, September 30, 2017
$
87,165

 
$
24,826

 
$
111,991

See Notes to Financial Statements
 
 
 
 
 


38



SOUTHWEST IOWA RENEWABLE ENERGY, LLC
 
 
 
Statements of Cash Flows
 
 
 
(Dollars in thousands)
 
 
 
 
Year Ended
 
Year Ended
 
September 30, 2017
 
September 30, 2016
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net Income
$
13,445

 
$
5,093

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
12,058

 
11,785

Amortization
71

 
72

Other assets
7

 
18

Change in fair value of put option liability
(400
)
 
460

(Increase) decrease in current assets:
 
 
 
Accounts receivable
312

 
(9,843
)
Inventories
(3,277
)
 
4,361

Prepaid expenses and other
29

 
(143
)
Derivative financial instruments
65

 
731

Decrease in other long-term liabilities
(100
)
 
(100
)
Increase (decrease) in current liabilities:
 
 
 
Accounts payable
(480
)
 
(619
)
Derivative financial instruments
(615
)
 
867

Accrued expenses
1,254

 
(420
)
Net cash provided by operating activities
22,369

 
12,262



 

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Purchase of property and equipment
(7,712
)
 
(4,937
)
Decrease in restricted cash

 
305

Net cash (used in) investing activities
(7,712
)
 
(4,632
)


 

CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Distributions paid to members
(4,531
)
 
(3,332
)
Proceeds from notes payable
81,129

 
163,861

Payments on notes payable
(92,907
)
 
(168,050
)
Net cash (used in) financing activities
(16,309
)
 
(7,521
)



 


Net increase (decrease) in cash and cash equivalents
(1,652
)
 
109



 

CASH AND CASH EQUIVALENTS
 
 
 
Beginning
3,139

 
3,030

Ending
$
1,487

 
$
3,139

See Notes to Financial Statements

 

 
 
 
 
SUPPLEMENTAL CASH FLOW INFORMATION
 
 
 
Cash paid for interest
$
1,067

 
$
1,346

See Notes to Financial Statements
 
 
 



39



 
SOUTHWEST IOWA RENEWABLE ENERGY, LLC
Notes to Financial Statements
September 30, 2017
 
Note 1:  Nature of Business
Southwest Iowa Renewable Energy, LLC (the “Company”), located in Council Bluffs, Iowa, was formed in March 2005, operates a 140 million gallon capacity ethanol plant and began producing ethanol in February 2009.  The Company sold 123.7 million gallons and 124.5 million gallons of ethanol in Fiscal 2017 and Fiscal 2016, respectively. The Company sells its ethanol distillers grains, corn syrup, and corn oil in the continental United States, Mexico and the Pacific Rim.
 
Note 2:  Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a maturity of three months or less when purchased to be cash equivalents.

Concentration of Credit Risk
The Company’s cash balances are maintained in bank deposit accounts which at times may exceed federally-insured limits.  The Company has not experienced any losses in such accounts.
Revenue Recognition
The Company sells ethanol and related products pursuant to marketing agreements.  Revenues are recognized when the marketing company has taken title to the product, prices are fixed or determinable and collectability is reasonably assured. 
The Company’s products are generally shipped FOB loading point, and recorded as a sale upon delivery of the applicable bill of lading.  The Company’s ethanol sales are handled through an ethanol purchase agreement (the “Ethanol Agreement”) with Bunge North America, Inc. (“Bunge”).  Syrup and distillers grains (co-products) are sold through a distillers grains agreement (the “DG Agreement”) with Bunge, based on market prices. The Company markets and distributes all of the corn oil it produces directly to end users at market prices.   Carbon dioxide is sold through a Carbon Dioxide Purchase and Sale Agreement (the “CO2 Agreement”) with Air Products and Chemicals, Inc., formerly known as EPCO Carbon Dioxide Products, Inc. ("Air Products”). Marketing fees, agency fees, and commissions due to the marketer are calculated separately from the settlement for the sale of the ethanol products and co-products and are included as a component of cost of goods sold.  Shipping and handling costs incurred by the Company for the sale of ethanol and co-products are included in cost of goods sold.
Accounts Receivable
Accounts receivable are recorded at original invoice amounts 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 customer receivables and considering customers’ financial condition, credit history and current economic conditions.  As of September 30, 2017 and 2016, management had determined no allowance is necessary.  Receivables are written off when deemed uncollectable and recoveries of receivables written off are recorded when received.
Risks and Uncertainties
The Company's operating and financial performance is largely driven by the prices at which ethanol is sold and the net expense of corn. The price of ethanol is influenced by factors such as supply and demand, weather, government policies and

40



programs, and unleaded gasoline and the petroleum markets with ethanol selling, in general, for less than gasoline at the wholesale level. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol. The Company's largest cost of production is corn. The cost of corn is generally impacted by factors such as supply and demand, weather, government policies and programs. The Company's risk management program is used to protect against the price volatility of these commodities.

Investment in Commodities Contracts, Derivative Instruments and Hedging Activities
The Company’s operations and cash flows are subject to fluctuations due to changes in commodity prices.  The Company is subject to market risk with respect to the price and availability of corn, the principal raw material used to produce ethanol and ethanol by-products.  Exposure to commodity price risk results from its dependence on corn in the ethanol production process.  In general, rising corn prices result in lower profit margins and, therefore, represent unfavorable market conditions.  This is especially true when market conditions do not allow the Company to pass along increased corn costs to customers.  The availability and price of corn is subject to wide fluctuations due to unpredictable factors such as weather conditions, farmer planting decisions, governmental policies with respect to agriculture and international trade and global demand and supply.
To minimize the risk and the volatility of commodity prices, primarily related to corn and ethanol, the Company uses various derivative instruments, including forward corn, ethanol and distillers grains purchase and sales contracts, over-the-counter and exchange-trade futures and option contracts.  When the Company has sufficient working capital available, it enters into derivative contracts to hedge its exposure to price risk related to forecasted corn needs and forward corn purchase contracts.  
Management has evaluated the Company’s contracts to determine whether the contracts are derivative instruments. Certain contracts that literally meet the definition of a derivative may be exempted from derivative accounting as normal purchases or normal sales.  Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business.   Gains and losses on contracts that are designated as normal purchases or normal sales contracts are not recognized until quantities are delivered or utilized in production.
The Company applies the normal sale exemption to forward contracts relating to ethanol, distillers grains, and corn oil and therefore these forward contracts are not marked to market. As of September 30, 2017, the Company was committed to sell 7.0 million gallons of ethanol, 84.7 thousand tons of dried distillers grains, 92.3 thousand tons of wet distillers grains and 3.7 million pounds of corn oil.
Corn purchase contracts are treated as derivative financial instruments.  Changes in fair value of forward corn contracts, which are marked to market each period, are included in costs of goods sold.  As of September 30, 2017, the Company was committed to purchasing 2.9 million bushels of corn on a forward contract basis resulting in a total commitment of $10.3 million.  In addition the Company was committed to purchasing 691.1 thousand bushels of corn using basis contracts.
In addition, the Company enters into short-term cash, options and futures contracts as a means of managing exposure to changes in commodity prices.  The Company enters into derivative contracts to hedge the exposure to volatile commodity price fluctuations.  The Company maintains a risk management strategy that uses derivative instruments to minimize significant, unanticipated earnings fluctuations caused by market volatility.  The Company’s specific goal is to protect itself from large moves in commodity costs.  All derivatives are designated as non-hedge derivatives and the contracts will be accounted for at fair value.  Although the contracts are considered effective economic hedges of specified risks, they are not designated as or accounted for as hedging instruments.
Derivatives not designated as hedging instruments along with cash due to brokers at September 30, 2017 and 2016 are as follows:

41



 
Balance Sheet Classification
September 30, 2017
 
September 30, 2016
 
 
in 000's
 
in 000's
Futures and option contracts
 
 
 
 
In gain position
 
$
190

 
$
361

In loss position 
 
(100
)
 
(20
)
 Cash (due to) broker
 
(67
)
 
(253
)
 
Current asset
23

 
88

 
 
 
 
 
Forward contracts, corn
Current liability
911

 
1,526

 
 
 
 
 
     Net futures, options, and forward contracts
 
$
(888
)
 
$
(1,438
)
 
 
The net realized and unrealized gains and losses on the Company’s derivative contracts for the years ended September 30, 2017 and 2016 consist of the following:
 
Statement of Operations Classification
September 30, 2017
 
September 30, 2016
Net realized and unrealized (gains) losses related to:
(in 000's)
 
(in 000's)
 
 
 
 
 
Forward purchase contracts (corn)
Cost of Goods Sold
$
1,590

 
$
6,468

Futures and option contracts (corn)
Cost of Goods Sold
(1,980
)
 
(6,008
)
Futures and option contracts (ethanol)
Revenue

 
429

 
Inventory
Inventory is stated at the lower of average cost or net realizable value. In the valuation of inventories and purchase commitments, net realizable value is defined as estimated selling price in the ordinary course of business less reasonable predictable costs of completion, disposal and transportation.
Property and Equipment
Property and equipment are stated at cost.  Depreciation is computed using the straight-line method over the following estimated useful lives:
Buildings   
40 Years
Process Equipment 
10 - 20 Years
Office Equipment   
3-7 Years
 
Maintenance and repairs are charged to expense as incurred; major improvements 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 fair value of the asset. Management has determined there were no events or changes in circumstances that required an impairment evaluation during Fiscal 2017 or Fiscal 2016.
Income Taxes
The Company has elected to be treated as a partnership for federal and state income tax purposes and generally does not incur income taxes.  Instead, the Company’s earnings and losses are included in the income tax returns of the members.  Therefore, no provision or liability for federal or state income taxes has been included in these financial statements.

42



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


Fair value of financial instruments
The carrying amounts of cash and cash equivalents, derivative financial instruments, accounts receivable, accounts payable and accrued expenses approximate fair value due to the short term nature of these instruments.
The put option liability consists of an agreement between the Company and ICM that contains a conditional obligation to repurchase feature. In accordance with accounting for put options as a liability, the Company calculated the fair value of the put option under Level 3, using a valuation model called the Monte Carlo Simulation. Using this model, the estimated value at September 30, 2017 and 2016 was 5.7 million and $6.1 million, respectively.
The carrying amount of the notes payable approximates fair value, as the interest rate is a floating rate. The terms are consistent with those available in the market as of September 30, 2017 and 2016, using level 3 inputs.
Income Per Unit
Basic income per unit is calculated by dividing net income by the weighted average units outstanding for each period. Diluted income per unit is adjusted for convertible debt, using the treasury stock method and the put option using the reverse treasury stock method. In Fiscal 2016, the put option did not impact diluted income per unit as it was anti-dilutive. Basic earnings and diluted per unit data were computed as follows (in thousands except per unit data):
 
Twelve Months Ended
 
September 30, 2017
 
September 30, 2016
Numerator:
 
 
 
Net income for basic earnings per unit
$
13,445

 
$
5,093

Change in fair value of put option liability
$
(400
)
 
$

Net income for diluted earnings per unit
$
13,045

 
$
5,093

 
 
 
 
Denominator:
 
 
 
Weighted average units outstanding - basic
13,327

 
13,327

Weighted average units outstanding - diluted
14,394

 
13,327

Income per unit - basic
$
1,008.85

 
$
382.16

Income per unit - diluted
$
906.28

 
$
382.16


Recently Issued Accounting Pronouncements
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes all existing revenue recognition requirements, including most industry-specific guidance. The new standard requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. The new standard will be effective for us on October 1, 2018. The Company expects to have enhanced disclosures, but does not expect the new standard to have a material impact on the Company's financial statements.
Leases
In February 2016, FASB issued ASU 2016-02 "Leases” ("ASU 2016-02"). ASU 2016-02 requires the recognition of lease assets and lease liabilities by lessees for all leases greater than one year in duration and classified as operating leases under previous GAAP. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and for interim periods within that

43



fiscal year. We will not implement ASU 2016-02 until October 2019, when Fiscal 2020 starts. The Company does not expect the new standard to have a material impact on the Company's financial statements.
    

Interest - Imputation of Interest
In April 2015, the Financial Accounting Standards Board issued ASU 2015-03 that simplifies the presentation of debt issuance costs and requires that debt issuance costs related to a recognized debt liability be presented in the statement of financial position as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This was adopted for the presentation of 2017 financial documents, and we made reclassifications to the 2016 financial statements to conform with the 2017 presentation. There was no impact on financial position or results of operations.
        





Note 3:  Inventory
Inventory is comprised of the following at:
 
September 30, 2017

 
September 30, 2016

 
(in 000's)
 
(in 000's)
Raw Materials - corn
$
4,010

 
$
2,924

Supplies and Chemicals
4,149

 
3,293

Work in Process
1,486

 
1,271

Finished Goods
3,569

 
2,449

Total
$
13,214

 
$
9,937


Note 4:   Members’ Equity
At September 30, 2017 and 2016 outstanding member units were:
 
 
September 30, 2017
 
September 30, 2016
A Units
 
8,993

 
8,993

B Units
 
3,334

 
3,334

C Units
 
1,000

 
1,000

 
 
13,327

 
13,327

 
The Series A, B and C unit holders all vote on certain matters with equal rights.  The Series C unit holders as a group have the right to elect one Board member.  The Series B unit holders as a group have the right to elect the number of Board members which bears the same proportion to the total number of Directors in relation to Series B outstanding units to total outstanding units. Based on this calculation, the Series B unit holders have the right to elect two Board members.  Series A unit holders as a group have the right to elect the four remaining Directors not elected by the Series C and B unit holders.
  
Note 5:   Revolving Loan/Credit Agreements
FCSA/CoBank

44



During Fiscal 2014, the Company entered into a credit agreement with Farm Credit Services of America, FLCA (“FCSA”) and CoBank, ACB, as cash management provider and agent (“CoBank”) which provides the Company with a term loan in the amount of $30,000,000 (the “Term Loan”) and a revolving term loan in the amount of up to $36,000,000 (the “Revolving Term Loan ", and together with the Term Loan, the “FCSA Credit Facility”). The FCSA Credit Facility is secured by a security interest on all of the Company’s assets.
 
The Term Loan provides for payments by the Company to FCSA of quarterly installments of $1,500,000, which began on December 20, 2014 with a maturity date of September 20, 2019. The Revolving Term Loan has a maturity date of June 1, 2023 and requires annual reductions in principal availability of $6,000,000 commencing on June 1, 2020. Under the FCSA Credit Facility, the Company has the right to select from the several LIBOR based interest rate options with respect to each of the Term Loan and the Revolving Term Loan.

As of September 30, 2017, there was $16.1 million outstanding under the FCSA Credit Facility, with $31.9 million available under the Revolving Term Loan.

Financing costs associated with the Credit Agreement Facility are recorded at cost and include expenditures directly related to securing debt financing.  The Company amortizes financing costs using the effective interest method over the term of the related debt. In 2017, we adopted ASU number 2015-03 to recognize the financing costs as a direct deduction from the carrying amount of the debt liability. The 2016 statements were revised to reflect this reclassification.


Note 6: Notes Payable
Notes payable consists of the following (in 000's):
 
 
 
 
 
 
 
 
September 30, 2017
 
September 30, 2016
Term loan bearing interest at LIBOR plus 3.35% (4.59% at September 30, 2017)
$
12,000

 
$
18,000

Revolving term loan bearing interest at LIBOR plus 3.35% (4.59% at September 30 2017)
4,100

 
9,361

Other with interest rates from 3.50% to 4.15% and maturities through 2022
3,666

 
4,183

 
19,766

 
31,544

Less Current Maturities
6,538

 
6,517

Less Financing Costs, net of amortization
202

 
273

Total Long Term Debt
13,026

 
24,754

Approximate aggregate maturities of notes payable as of September 30, 2017 are as follows (in 000's):
2018
$
6,538

 
 
2019
6,560

 
 
2020
579

 
 
2021
589



2022
1,400



2023 and Thereafter
4,100



Total
$
19,766

 
Note 7:  Fair Value Measurement

45



Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  In determining fair value, the Company used various methods including market, income and cost approaches.  Based on these approaches, the Company often utilized certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique.  These inputs can be readily observable, market corroborated, or generally unobservable inputs.  The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.  Based on the observable inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy.
The fair value hierarchy ranks the quality and reliability of the information used to determine fair values.  Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
Level 1 -
Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2 -
Valuations for assets and liabilities traded in less active dealer or broker markets.  Valuations are obtained from third-party pricing services for identical or similar assets or liabilities.
Level 3 -
Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.
A description of the valuation methodologies used for instruments measured at fair value, including the general classifications of such instruments pursuant to the valuation hierarchy, is set below.
Put Option liability. The put option liability consists of an agreement between the Company and ICM that contains a conditional obligation to repurchase feature. In accordance with accounting for put options as a liability, the Company calculated the fair value of the put option under Level 3, using a valuation model called the Monte Carlo Simulation.
Derivative financial statements.  Commodity futures and exchange traded options are reported at fair value utilizing Level 1 inputs. For these contracts, the Company obtains fair value measurements from an independent pricing service.  The fair value measurements consider observable data that may include dealer quotes and live trading levels from the Chicago Mercantile Exchange (“CME”) market.  Ethanol contracts are reported at fair value utilizing Level 2 inputs from third-party pricing services.  Forward purchase contracts are reported at fair value utilizing Level 2 inputs.   For these contracts, the Company obtains fair value measurements from local grain terminal values.  The fair value measurements consider observable data that may include live trading bids from local elevators and processing plants which are based off the CME market.
The following table summarizes financial instruments measured at fair value on a recurring basis as of September 30, 2017 and 2016, categorized by the level of the valuation inputs within the fair value hierarchy: (dollars in '000s)

46



 
September 30, 2017
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
Derivative financial instruments
$
190

 
$

 
$

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
Derivative financial instruments
100

 
911

 

Put Option Liability

 

 
5,700

 
 
 
 
 
 
 

 
September 30, 2016
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
Derivative financial instruments
$
361

 
$

 
$

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
Derivative financial instruments
20

 
1,526

 

Put Option Liability

 

 
6,100


The following table summarizes the assumptions used in computing the fair value of the put option subject to fair value:
 
September 30, 2017

 
September 30, 2016

Expected dividend yield

 

Risk-free interest rate
1.34
%
 
0.63
%
Expected volatility
26
%
 
32
%
Expected life (years)
1.25

 
1.25

Exercise price
$
10,897

 
$
10,897

Company unit price
$
5,670

 
$
5,200

 
The following table reflects the activity for liabilities measured at fair value using Level 3 inputs as of September 30, 2017:
 
September 30, 2017
 
September 30, 2016
Beginning Balance
$
6,100

 
$
5,640

Change in Value
(400
)
 
460

Ending Balance
$
5,700

 
$
6,100


 
Note 8:   Incentive Compensation
The Company has an equity incentive plan which provides that the Board of Directors may make awards of equity appreciation units (“EAU”) and equity participation units (“EPU”) to employees from time to time, subject to vesting provisions as determined for each award. There are no EAUs outstanding. The EPUs are valued in accordance with the agreement which is based on the book value per unit of the Company. The Company had 83.3 unvested EPUs outstanding under this plan as of September 30, 2017, which will vest three years from the dates of the awards.  
During the Fiscal 2017 and 2016, the Company recorded compensation expense related to this plan of approximately $342,000 and $191,000, respectively.  As of September 30, 2017 and 2016, the Company had a liability of approximately $844,000 and $502,000, respectively, recorded within accrued expenses on the balance sheet. The incentive compensation expense to be recognized in future periods at September 30, 2017 and 2016 was $252,000 and $215,000, respectively.

47



Note 9:   Related Party Transactions and Major Customers
Related Party Transactions
Bunge
On December 5, 2014, the Company entered into an Amended and Restated Ethanol Purchase Agreement (the “Ethanol Agreement”) with Bunge. Under the Ethanol Agreement, the Company has agreed to sell Bunge all of the ethanol produced by the Company, and Bunge has agreed to purchase the same.  The Company will pay Bunge a percentage marketing fee for ethanol sold by Bunge, subject to a minimum and maximum annual fee.  The initial term of the Ethanol Agreement expires on December 31, 2019, however it will automatically renew for one five-year term unless Bunge provides the Company with notice of election to terminate. The Company has incurred ethanol marketing expenses of $1.5 million in each year for Fiscal 2017 and 2016, under the Ethanol Agreement.
On June 26, 2009, the Company executed a Railcar Agreement with Bunge for the lease of 325 ethanol cars and 300 hopper cars which are used for the delivery and marketing of ethanol and distillers grains. In November 2016, we reduced the number of leased ethanol cars to 323 and in both November 2013 and January 2015 we reduced the number of hopper cars by one for a total of 298 leased hopper cars).  Under the Railcar Agreement, the Company leases railcars for terms lasting 120 months and continuing on a month to month basis thereafter.  The Railcar Agreement will terminate upon the expiration of all railcar leases.  Expenses under this agreement were $4.0 million and $4.4 million for the Fiscal 2017 and 2016, net of subleases and accretion, respectively. In November 2016, the Company entered into a sublease for 96 hoppers with Bunge that is set to expire on March 24, 2019. The Company has subleased another 92 hopper cars to unrelated third parties, which expires March 25, 2019. The Company continues to work with Bunge to determine the need for ethanol and hopper cars in light of current market conditions, and the expected conditions in 2017 and beyond. The Company believes we will be able to fully utilize our fleet of hopper cars in the future, to allow us to cost-effectively ship distillers grains to distant markets, primarily the export markets.                    
On December 5, 2014, the Company and Bunge entered into an Amended and Restated Distiller’s Grain Purchase Agreement (the “ DG Purchase Agreement ”).  Under the DG Purchase Agreement, Bunge will purchase all distiller’s grains produced by the Company, and will receive a marketing fee based on the net sale price of distillers grains, subject to a minimum and maximum annual fee.  The initial term of the DG Purchase Agreement expires on December 31, 2019  and will automatically renew for one additional five year term unless Bunge provides notice of election to the Company to terminate. The Company has incurred distillers grains marketing expenses of $1.1 million and $1.3 million during Fiscal 2017 and 2016, respectively.
The Company and Bunge also entered into an Amended and Restated Grain Feedstock Agency Agreement on December 5, 2014 (the “ Agency Agreement ”).  The Agency Agreement provides that Bunge will procure corn for the Company, the Company will pay Bunge a per bushel fee, subject to a minimum and maximum annual fee.  The initial term of the Agency Agreement expires on December 31, 2019 and will automatically renew for one additional five year term unless Bunge provides notice of election to the Company to terminate. Expenses for corn procurement by Bunge were $0.7 million for each year of the fiscal years ended September 30, 2017 and 2016. The Company has outstanding corn contracts of 181 thousand bushels with a $620 thousand liability as of September 30, 2017, and 258 thousand bushels with a $900 thousand liability as of September 30, 2016 included in derivative financial instruments liability on the balance sheet.
Starting with the 2015 crop year, the Company is using corn containing Syngenta Seeds, Inc.’s proprietary Enogen® technology (“ Enogen Corn ”) for a portion of its ethanol production needs.  The Company contracts directly with growers to produce Enogen Corn for sale to the Company.  The Company has contracted for 28,900 acres of Enogen corn for Fiscal 2018. Concurrent with the Agency Agreement, the Company and Bunge entered into a Services Agreement regarding corn purchases (the “ Services Agreement ”).  Under this agreement, the Company originates all Enogen Corn contracts for its facility and Bunge assists the Company with certain administrative matters related to Enogen Corn, including facilitating delivery to the facility.  The Company pays Bunge a per bushel service fee.  The initial term of the Services Agreement expires on December 31, 2019 and will automatically renew for one additional five year term unless Bunge provides notice of election to the Company to terminate. Expenses under the Services Agreement are included as part of the Amended and Restated Grain Feedstock Agency Agreement discussed above.
 
ICM    
In connection with the payoff of the ICM subordinated debt, the Company entered into the SIRE ICM Unit Agreement dated December 17, 2014 (the “ Unit Agreement ”).  Under the Unit Agreement, the Company granted ICM the right to sell to the

48



Company its 1,000 Series C and 18 Series A Membership Units (the “ ICM Units ”) commencing anytime during the earliest of  several alternative dates and events at the greater of $10,897 per unit or the fair market value (as defined in the agreement) on the date of exercise. The Company recorded a liability of $5.6 million (included in long-term liabilities) in 2015, and recorded an additional expense of $460 thousand in Fiscal 2016, and in Fiscal 2017 reduced expense by $400 thousand in conjunction with this put right under the Unit Agreement (the "Loss from debt extinguishment" and the "Change in fair value of put option liability" ). See Note 7 Fair Value Measurement, for the terms of this agreement.
    
Major Customers
The Company is party to the Ethanol Agreement and the Distillers Grain Purchase Agreement with Bunge for the exclusive marketing, selling, and distributing of all of the ethanol and distillers grains produced by the Company.  The Company has expensed $2.6 million and $2.8 million in marketing fees under these agreements for Fiscal 2017 and 2016, respectively. Revenues with this customer were $208.8 million and $214.5 million, respectively, for Fiscal 2017 and 2016.   Trade accounts receivable due from Bunge were $11.5 million and $13.1 million as of September 30, 2017 and 2016, respectively.
Note 10: Commitments
The Company has entered into a steam contract with an unrelated party under which the vendor agreed to provide the steam required by the Company, up to 475,000 pounds per hour. The Company agreed to pay a net energy rate for all steam provided under the contract as well as a monthly demand charge. The net energy rate is set for the first three years then adjusted each year beginning on the third anniversary date.  The steam contract was renewed effective January 1, 2013, and will remain in effect until November 30, 2024.  Expenses under this agreement for the years ended September 30, 2017 and 2016 were $5.1 million and $3.7 million, respectively.
The Company leases certain equipment, railcars, vehicles, and operating facilities under non-cancellable operating leases that expire on various dates through 2019.  The future minimum lease payments required under these leases (net of sublease income) are  $4.6 million in 2018, and $2.1 million in 2019.  Rent expense (net of sublease income) related to operating leases for the years ended September 30, 2017 and 2016 was $4.6 million and $4.7 million, respectively. Non Related party sublease totals were $0.7 million in each year for 2017 and 2016.  The majority of the future minimum lease payments are due to Bunge. Future sublease income is due from unrelated third parties.
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
There are no items to report.
Item 9A.   Controls and Procedures.
The Company’s management, including its President and Chief Executive Officer (our principal executive officer), Brian T. Cahill, along with its Chief Financial Officer (our principal financial officer), Brett L. Frevert, have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15 under the Securities Exchange Act of 1934, as amended, the “Exchange Act”), as of September 30, 2017.  The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.   Based upon this review and evaluation, these officers believe that the Company’s disclosure controls and procedures are presently effective in ensuring that material information related to us is recorded, processed, summarized and reported within the time periods required by the forms and rules of the Securities and Exchange Commission (the “SEC”).
The Company’s management assessed the effectiveness of the Company’s internal control over financing reporting as of September 30, 2017.  In making this assessment, the Company’s management used the criteria set forth by the Committee Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (the 2013 Framework).  Based on this assessment, the Company’s management concluded that, as of September 30, 2017, the Company’s integrated controls over financial reporting were effective.

49



This annual report does not include an attestation report on internal controls by the company’s registered public accounting firm pursuant to the exemption under Section 989G of the Dodd-Frank Act of 2010.
Item 9B.   Other Information.
None.
 
PART III
 
Item 10.   Directors, Executive Officers and Corporate Governance.
The Information required by this Item is incorporated by reference from the definitive proxy statement for the Company’s 2018 Annual Meeting of Members (the “2018 Proxy Statement”) to be filed with the SEC within 120 days after the end of the Company’s fiscal year ended September 30, 2017.
The Information required by this Item is incorporated by reference in the 2018 Proxy Statement.

Item 11.   Executive Compensation.
The Information required by this Item is incorporated by reference in the 2018 Proxy Statement.
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Member Matters.
The Information required by this Item is incorporated by reference in the 2018 Proxy Statement.
Item 13.   Certain Relationships and Related Transactions, and Director Independence.
The Information required by this Item is incorporated by reference in the 2018 Proxy Statement.
Item 14.   Principal Accountant Fees and Services.
The Information required by this Item is incorporated by reference in the 2018 Proxy Statement.

PART IV
Item 15.   Exhibits and Financial Statement Schedules.
 
(a)
Documents filed as part of this Report.
Balance Sheets
Statements of Operations
Statements of Members’ Equity
Statements of Cash Flows
 
Notes to Financial Statements

(b)
The following exhibits are filed herewith or incorporated by reference as set forth below:
2
 
Omitted - Inapplicable.
 
 
 
 
Articles of Organization, as filed with the Iowa Secretary of State on March 28, 2005 (incorporated by reference to Exhibit 3(i) of Registration Statement on Form 10 filed by the Company on January 28, 2008).
 
 
 
 
Fourth Amended and Restated Operating Agreement dated March 21, 2014 (incorporated by reference to Exhibit 3.1 of Form 8-K filed by the Company on March 26, 2014).
 
 
 
 
 
 
 
 
 
 
Unit Transfer Policy, including QMS Manual attached thereto as Appendix 1 (incorporated by reference to Exhibit 4(v) of Form S-1/A filed by the Company on October 19, 2011).
 
 
 
 
 
 
9
 
Omitted - Inapplicable.
 
 
 
 
 
 
 
Electric Service Contract dated December 15, 2006 with MidAmerican Energy Company (incorporated by reference to Exhibit 10.6 of Registration Statement on Form 10 filed by the Company on January 28, 2008).
 
 
 

50



 
License Agreement dated September 25, 2006 between the Company and ICM, Inc. (incorporated by reference to Exhibit 10.10 of Form S-1/A filed by the Company on February 24, 2011).  Portions of the Agreement have been omitted pursuant to a request for confidential treatment.
 
 
 
 
 
 
 
Subordinated Revolving Credit Note made by the Company in favor of Bunge N.A. Holdings, Inc. dated effective August 26, 2009 (incorporated by reference to Exhibit 10.2 of Form 8-K filed by the Company on September 3, 2009).
 
 
 
 
 Amendment to Steam Service Contract by and between the Company and MidAmerican Energy Company dated effective October 3, 2008. Portions of the Agreement have been omitted pursuant to a request for confidential treatment. (incorporated by reference to Exhibit 10.61 of Form S-1/A filed by the Company on February 24, 2011)
 
 
 
 
 Second Amendment to Steam Service Contract by and between the Company and MidAmerican Energy Company dated effective January 1, 2009. Portions of the Agreement have been omitted pursuant to a request for confidential treatment. (incorporated by reference to Exhibit 10.62 of Form S-1/A filed by the Company on February 24, 2011)
 
 
 
 
Third Amendment to Steam Service Contract by and between the Company and MidAmerican Energy Company dated effective January 1, 2009. Portions of the Agreement have been omitted pursuant to a request for confidential treatment. (incorporated by reference to Exhibit 10.63 of Form S-1/A filed by the Company on February 24, 2011)
 
 
 
 
Fourth Amendment to Steam Service Contract by and between the Company and MidAmerican Energy Company dated effective December 1, 2009. Portions of the Agreement have been omitted pursuant to a request for confidential treatment. (incorporated by reference to Exhibit 10.64 of Form S-1/A filed by the Company on February 24, 2011)
 
 
 
 
Amended and Restated Railcar Sublease Agreement dated March 25, 2009 with Bunge North America, Inc. (incorporated by reference to Exhibit 10.1 of Form 10-Q filed by the Company on August 14, 2009).  Portions of the Agreement have been omitted pursuant to a request for confidential treatment.
 
 
 
 
 
 
 
 
 
 
Negotiable Subordinated Term Loan Note issued by the Company in favor of ICM, Inc., dated June 17, 2010 (incorporated by reference to Exhibit 10.2 of Form 8-K filed by the Company on June 23, 2010).
 
 
 
 
ICM, Inc. Agreement - Equity Matters, by and between ICM, Inc. and the Company, dated as of June 17, 2010 (incorporated by reference to Exhibit 10.3 of Form 8-K filed by the Company on June 23, 2010).
 
 
 
 
Subordinated Term Loan Note issued by the Company in favor of Bunge N.A. Holdings, Inc., dated June 17, 2010 (incorporated by reference to Exhibit 10.4 of Form 8-K filed by the Company on June 23, 2010).
 
 
 
 
Bunge Agreement - Equity Matters by and between the Company and Bunge N.A. Holdings, Inc. dated effective August 26, 2009. (incorporated by reference to Exhibit 10.72 of Form S-1/A filed by the Company on February 24, 2011)
 
 
 
 
First Amendment to Bunge Agreement - Equity Matters, by and between Bunge N.A. Holdings, Inc. and the Company, dated as of June 17, 2010 (incorporated by reference to Exhibit 10.5 of Form 8-K filed by the Company on June 23, 2010).
 
 
 
 
 
 
 
 
 
 
Southwest Iowa Renewable Energy Equity Incentive Plan (incorporated by reference to Exhibit 10.1 of Form 8-K filed by the Company on July 6, 2010).
 
 
 
 
Joint Defense Agreement between ICM, Inc. and the Company dated July 13, 2010 (incorporated by reference to Exhibit 10.1 of Form 8-K filed by the Company on July 16, 2010).
 
 
 
 
Tricanter Purchase and Installation Agreement by and between ICM, Inc. and the Company dated August 25, 2010 (incorporated by reference to Exhibit 10.1 of Form 8-K/A filed by the Company on January 12, 2011). Portions of the Agreement have been omitted pursuant to a request for confidential treatment.
 
 
 
 
Corn Oil Agency Agreement by and between Bunge North America, Inc. and the Company effective as of November 12, 2010 (incorporated by reference to Exhibit 10.1 of Form 8-K filed by the Company on November 30, 2010).  Portions of the Agreement have been omitted pursuant to a request for confidential treatment.
 
 
 
 
 
 
 
Employment Agreement dated effective January 1, 2012 by and between the Company and Brian T. Cahill. (incorporated by reference to Exhibit 10.2 of Form 8-K filed by the Company on January 5, 2012).
 
 
 
 
First Amendment to Promissory Note dated February 29, 2012 by and between the Company and Bunge N.A. Holdings, Inc. (incorporated by reference to Exhibit 10.2 of Form 8-K filed by the Company on March 6, 2012)
 
 
 
 
 
 
 
Base Contract for Sale and Purchase of Natural Gas between Encore Energy Services, Inc. and the Company effective April 1, 2012.  Portions of this Agreement have been omitted pursuant to a request for confidential treatment (incorporated by reference to Exhibit 10.1 of Form 8-K filed by the Company on May 1, 2012).
 
 
 

51



 
Confirming Order between Encore Energy Services, Inc. and the Company dated April 25, 2012.  Portions of the Agreement have been omitted pursuant to a request for confidential treatment. (incorporated by reference to Exhibit 10.2 of Form 8-K filed by the Company on May 1, 2012).
 
 
 
 
 
 
 
Letter Agreement by and between the Company and CFO Systems, LLC dated June 21, 2012. (incorporated by reference to Exhibit 10.2 of Form 8-K filed by the Company on June 22, 2012).
 
 
 
 
Notice of Assignment of Interests from Bunge N.A. Holdings, Inc. to Bunge North America, Inc. dated September 24, 2012. (incorporated by reference of Exhibit 10 of Form 10-K filed by Company on December 19, 2012).
 
Fifth Amendment to Steam Service Contract by and among the Company and MidAmerican Energy Company named therein dated effective January 1, 2013 (incorporated by reference to Exhibit 10.1 on Form 8-K filed by the Company on March 19, 2013).
 
 
 
 
Carbon Dioxide Purchase and Sale Agreement by and among the Company and EPCO Carbon Dioxide Products, Inc. named therein dated effective as of April 2, 2013 (incorporated by reference to Exhibit 10.1 on Form 8-K filed by the Company on April 11, 2013).
 
Non-Exclusive CO2 Facility Site Lease Agreement by and among the Company and EPCO Carbon Dioxide Products, Inc. named therein dated effective April 2, 2013 (incorporated by reference to Exhibit 10.2 on Form 8-K filed by the Company on April 11, 2013).
 
Credit Agreement by and between the Company, Farm Credit Services of America, FLCA, as Lender and CoBank, ACB as cash management provider and agent dated as of June 24, 2014 (incorporated by reference to Exhibit 10.1 on Form 8-K filed by the Company on June 30, 2014).
 
Term Note by and between the Company and Farm Credit Services of America, FLCA dated June 24, 2014 (incorporated by reference to Exhibit 10.2 on Form 8-K filed by the Company on June 30, 2014).
 
Revolving Term Note by and between the Company and Farm Credit Services of America, FLCA dated as of June 24, 2014 (incorporated by reference to Exhibit 10.3 on Form 8-K filed by the Company on June 30, 2014).
 
Subordination Agreement by and between Bunge North America, Inc., ICM Investments, LLC, and CoBank, ACB dated as of June 24, 2014 (incorporated by reference to Exhibit 10.4 on Form 8-K filed by the Company on June 30, 2014).
 
Subordinated Term Loan Note by and between the Company and Bunge North American, Inc. dated as of June 23, 2014(incorporated by reference to Exhibit 10.5 on Form 8-K filed by the Company on June 30, 2014).
 
Intercreditor Agreement by and between Bunge North America, Inc. and ICM Investments, LLC dated as of June 23, 2014 (incorporated by reference to Exhibit 10.6 on Form 8-K filed by the Company on June 30, 2014).
 
[Negotiable] Subordinated Term Loan Note by and between the Company and ICM Investments, LLC dated as of June 23, 2014 (incorporated by reference to Exhibit 10.7 on Form 8-K filed by the Company on June 30, 2014).
 
Amendment No. 1 to Ethanol Purchase Agreement by and between the Company, as Producer, Bunge North America, Inc., as Bunge dated August 29, 2014 (incorporated by reference to Exhibit 10.1 on Form 8-K filed by the Company on September 5, 2014).
 
Amendment No. 2 to Ethanol Purchase Agreement by and between the Company, as Producer, Bunge North America, Inc., as Bunge dated October 31, 2014 (incorporated by reference to Exhibit 10.1 on Form 8-K filed by the Company on October 31, 2014).
 
Amended and Restated Ethanol Purchase Agreement dated effective December 5, 2014 by and between the Company and Bunge North America, Inc. (incorporated by reference to Exhibit 10.1 on Form 8-K filed by the Company on December 11, 2014). Portions of the Ethanol Purchase Agreement have been omitted pursuant to a request for confidential treatment.
 
Amended and Restated Grain Feedstock Agency Agreement dated effective December 5, 2014 by and between the Company and Bunge North America, Inc. (incorporated by reference to Exhibit 10.2 on Form 8-K filed by the Company on December 11, 2014). Portions of the Grain Feedstock Agency Agreement have been omitted pursuant to a request for confidential treatment.
 
Amended and Restated Distiller’s Grain Purchase Agreement dated effective December 5, 2014 by and between the Company and Bunge North America, Inc. (incorporated by reference to Exhibit 10.3 on Form 8-K filed by the Company on December 11, 2014). Portions of the Distiller’s Grain Purchase Agreement have been omitted pursuant to a request for confidential treatment.
 
Services Agreement Regarding Corn Purchases dated effective December 5, 2014 by and between the Company and Bunge North America, Inc. (incorporated by reference to Exhibit 10.4 on Form 8-K filed by the Company on December 11, 2014). Portions of the Services Agreement have been omitted pursuant to a request for confidential treatment.
 
Letter Agreement dated effective December 5, 2014 by and between the Company and Bunge North America, Inc. (incorporated by reference to Exhibit 10.5 on Form 8-K filed by the Company on December 11, 2014).
 
Waiver and Forbearance Agreement dated effective December 5, 2104, by and between the Company and ICM Investments, LLC. (incorporated by reference to Exhibit 10.6 on Form 8-K filed by the Company on December 11, 2014).

52



 
SIRE ICM Unit Agreement by and between the Company and ICM Investments, LLC dated effective as of December 17, 2014 (incorporated by reference to Exhibit 10.1 on Form 8-K filed by the Company on December 23, 2014).
 
Sixth Amendment to Steam Service Contract between the Company and MidAmerican Energy Company (incorporated by reference to Exhibit 10.1 on Form 8-K filed by the Company on September 30, 2015).
11
 
Omitted - Inapplicable.
 
 
 
12
 
Omitted - Inapplicable.
 
 
 
13
 
Omitted - Inapplicable.
 
 
 
14
 
Omitted - Inapplicable.
 
 
 
16
 
Omitted - Inapplicable.
 
 
 
18
 
Omitted - Inapplicable.
 
 
 
21
 
Omitted - Inapplicable.
 
 
 
22
 
Omitted - Inapplicable.
 
 
 
23
 
Omitted - Inapplicable.
 
 
 
24
 
Omitted - Inapplicable.
 
 
 
 
Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002) executed by the Principal Executive Officer. (filed herewith)
 
 
 
 
Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002) executed by the Principal Financial Officer. (filed herewith)
 
 
 
 
Rule 15d-14(b) Certifications (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) executed by the Principal Executive Officer. (furnished herewith)
 
 
 
 
Rule 15d-14(b) Certifications (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) executed by the Principal Financial Officer. (furnished herewith)



101.XMLXBRL
 
Instance Document
 
 
 
101.XSDXBRL
 
Taxonomy Schema
 
 
 
101.CALXBRL
 
Taxonomy Calculation Database
 
 
 
101.LABXBRL
 
Taxonomy Label Linkbase
 
 
 
101.PREXBRL
 
Taxonomy Presentation Linkbase
 
 
 
101.DEFXBRL
 
Taxonomy Definition Linkbase
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