Attached files
| file | filename |
|---|---|
| EX-32.2 - CERTIFICATION - RED TRAIL ENERGY, LLC | certification32212-31x17.htm |
| EX-32.1 - CERTIFICATION - RED TRAIL ENERGY, LLC | certification32112-31x17.htm |
| EX-31.2 - CERTIFICATION - RED TRAIL ENERGY, LLC | certification31212-31x17.htm |
| EX-31.1 - CERTIFICATION - RED TRAIL ENERGY, LLC | certification31112-30x17.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the quarterly period ended December 31, 2017 | |
OR | |
o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the transition period from to . | |
COMMISSION FILE NUMBER 000-52033 | |
RED TRAIL ENERGY, LLC
(Exact name of registrant as specified in its charter)
North Dakota | 76-0742311 | |||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||
3682 Highway 8 South, P.O. Box 11, Richardton, ND 58652 | ||||
(Address of principal executive offices) | ||||
(701) 974-3308 | ||||
(Registrant's telephone number, including area code) | ||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act:
Large Accelerated Filer o | Accelerated Filer o |
Non-Accelerated Filer x | Smaller Reporting Company o |
Emerging Growth Company o | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes x No
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
As of February 14, 2018, there were 41,466,340 Class A Membership Units outstanding.
1
INDEX
Page Number | |
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
RED TRAIL ENERGY, LLC
Condensed Balance Sheets
ASSETS | December 31, 2017 | September 30, 2017 | ||||||
(Unaudited) | ||||||||
Current Assets | ||||||||
Cash and equivalents | $ | 11,293,024 | $ | 3,223,342 | ||||
Restricted cash - margin account | 5,683,142 | 5,906,666 | ||||||
Accounts receivable, primarily related party | 3,039,006 | 4,059,227 | ||||||
Other receivables | 15,474 | 8,764 | ||||||
Inventory | 15,879,209 | 16,413,742 | ||||||
Prepaid expenses | 279,968 | 33,364 | ||||||
Total current assets | 36,189,823 | 29,645,105 | ||||||
Property, Plant and Equipment | ||||||||
Land | 1,342,381 | 1,342,381 | ||||||
Land improvements | 4,266,953 | 4,266,953 | ||||||
Buildings | 8,036,031 | 8,036,031 | ||||||
Plant and equipment | 86,987,706 | 86,460,902 | ||||||
Construction in progress | 133,995 | 628,454 | ||||||
100,767,066 | 100,734,721 | |||||||
Less accumulated depreciation | 54,766,673 | 53,592,985 | ||||||
Net property, plant and equipment | 46,000,393 | 47,141,736 | ||||||
Other Assets | ||||||||
Investment in RPMG | 605,000 | 605,000 | ||||||
Patronage equity | 3,270,279 | 3,270,279 | ||||||
Deposits | 40,000 | 40,000 | ||||||
Total other assets | 3,915,279 | 3,915,279 | ||||||
Total Assets | $ | 86,105,495 | $ | 80,702,120 | ||||
Notes to Unaudited Condensed Financial Statements are an integral part of this Statement.
3
RED TRAIL ENERGY, LLC
Condensed Balance Sheets
LIABILITIES AND MEMBERS' EQUITY | December 31, 2017 | September 30, 2017 | ||||||
(Unaudited) | ||||||||
Current Liabilities | ||||||||
Accounts payable | $ | 3,585,115 | $ | 2,409,171 | ||||
Accrued expenses | 9,531,874 | 3,670,338 | ||||||
Commodities derivative instruments, at fair value (see note 2) | 1,276,525 | 933,312 | ||||||
Accrued loss on firm purchase commitments (see note 7) | 13,000 | 5,000 | ||||||
Current maturities of notes payable | 2,622 | 2,617 | ||||||
Total current liabilities | 14,409,136 | 7,020,438 | ||||||
Long-Term Liabilities | ||||||||
Notes payable | 2,264 | 2,921 | ||||||
Members’ Equity (41,466,340 as of December 31, 2017 and September 30, 2017, respectively, of Class A Membership Units issued and outstanding) | 71,694,095 | 73,678,761 | ||||||
Total Liabilities and Members’ Equity | $ | 86,105,495 | $ | 80,702,120 | ||||
Notes to Unaudited Condensed Financial Statements are an integral part of this Statement.
4
RED TRAIL ENERGY, LLC
Condensed Statements of Operations (Unaudited)
Three Months Ended | Three Months Ended | ||||||
December 31, 2017 | December 31, 2016 | ||||||
Revenues, primarily related party | $ | 26,122,856 | $ | 30,004,460 | |||
Cost of Goods Sold | |||||||
Cost of goods sold | 27,743,282 | 27,127,930 | |||||
Lower of cost or market inventory adjustment | 70,979 | — | |||||
Loss on firm purchase commitments | 8,000 | — | |||||
Total Cost of Goods Sold | 27,822,261 | 27,127,930 | |||||
Gross Profit (Loss) | (1,699,405 | ) | 2,876,530 | ||||
General and Administrative Expenses | 715,911 | 690,934 | |||||
Operating Income (Loss) | (2,415,316 | ) | 2,185,596 | ||||
Other Income (Expense) | |||||||
Interest income | 23,427 | 18,112 | |||||
Other income | 407,233 | 568,269 | |||||
Interest expense | (10 | ) | (15 | ) | |||
Total other income (expense), net | 430,650 | 586,366 | |||||
Net Income (Loss) | $ | (1,984,666 | ) | $ | 2,771,962 | ||
Weighted Average Units Outstanding | |||||||
Basic | 41,466,340 | 41,406,697 | |||||
Diluted | 41,466,340 | 41,406,697 | |||||
Net Income (Loss) Per Unit | |||||||
Basic | $ | (0.05 | ) | $ | 0.07 | ||
Diluted | $ | (0.05 | ) | $ | 0.07 | ||
Notes to Unaudited Condensed Financial Statements are an integral part of this Statement.
5
RED TRAIL ENERGY, LLC
Condensed Statements of Cash Flows (Unaudited)
Three Months Ended | Three Months Ended | ||||||
December 31, 2017 | December 31, 2016 | ||||||
Cash Flows from Operating Activities | |||||||
Net income (loss) | $ | (1,984,666 | ) | $ | 2,771,962 | ||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |||||||
Depreciation and amortization | 1,173,688 | 1,170,669 | |||||
Change in fair value of derivative instruments | 343,213 | (63,498 | ) | ||||
Lower of cost or market inventory adjustment | 70,979 | — | |||||
Loss on firm purchase commitments | 8,000 | — | |||||
Change in operating assets and liabilities: | |||||||
Restricted cash | 223,524 | (247,525 | ) | ||||
Accounts receivable | 1,020,221 | 125,591 | |||||
Other receivables | (6,710 | ) | 64,887 | ||||
Inventory | 455,553 | (6,696,029 | ) | ||||
Prepaid expenses | (246,604 | ) | (167,756 | ) | |||
Accounts payable | 1,175,944 | 1,629,501 | |||||
Accrued expenses | 5,861,537 | 12,058,830 | |||||
Accrued purchase commitment losses | 8,000 | (54,000 | ) | ||||
Net cash provided by operating activities | 8,102,679 | 10,592,632 | |||||
Cash Flows from Investing Activities | |||||||
Capital expenditures | (32,345 | ) | (174,001 | ) | |||
Net cash (used in) investing activities | (32,345 | ) | (174,001 | ) | |||
Cash Flows from Financing Activities | |||||||
Unit repurchase | — | (564,963 | ) | ||||
Debt repayments | (652 | ) | (648 | ) | |||
Net cash (used in) financing activities | (652 | ) | (565,611 | ) | |||
Net Increase in Cash and Equivalents | 8,069,682 | 9,853,020 | |||||
Cash and Equivalents - Beginning of Period | 3,223,342 | 10,274,166 | |||||
Cash and Equivalents - End of Period | $ | 11,293,024 | $ | 20,127,186 | |||
Supplemental Disclosure of Cash Flow Information | |||||||
Interest paid | $ | 3,683 | $ | 15 | |||
Units issued in exchange for property | $ | — | $ | 3,320,000 | |||
Notes to Unaudited Condensed Financial Statements are an integral part of this Statement.
6
RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 2017
The accompanying condensed unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as permitted by such rules and regulations. These financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the Company's audited financial statements for the fiscal year ended September 30, 2017, contained in the Company's Annual Report on Form 10-K.
In the opinion of management, the interim condensed unaudited financial statements reflect all adjustments considered necessary for fair presentation. The adjustments made to these statements consist only of normal recurring adjustments. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2018.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Red Trail Energy, LLC, a North Dakota limited liability company (the “Company”), owns and operates a 50 million gallon annual name-plate production ethanol plant near Richardton, North Dakota (the “Plant”).
Accounting Estimates
Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported revenues and expenses. Significant items subject to such estimates and assumptions include the useful lives of property, plant and equipment, inventory and allowance for doubtful accounts. Actual results could differ from those estimates.
Net Income Per Unit
Net income per unit is calculated on a basic and fully diluted basis using the weighted average units outstanding during the period.
Recently Issued Accounting Pronouncements
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” which supersedes the guidance in “Revenue Recognition (Topic 605)” and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period and is to be applied retrospectively, with early application not permitted. The Company has evaluated the new standard and anticipates a change in the reporting of revenue as enhanced disclosures will be required. The Company does not anticipate a significant impact on our financial statements due to the nature of our revenue streams and our revenue recognition policy.
Simplifying the Measurement of Inventory
In July 2015, the FASB issued ASU No. 2015-11, "Simplifying the Measurements of Inventory" regarding inventory that is measured using the first-in, first-out or average cost method. The guidance does not apply to inventory measured using the last-in, first-out or the retail inventory method. The guidance requires inventory within its scope to be measured at the lower of cost or net realizable value, which is the estimated selling price in the normal course of business less reasonable predictable costs of completion, disposal and transportation. These amendments more closely align GAAP with International Financial Reporting Standards (IFRS). ASU 2015-11 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and should be applied prospectively with early adoption permitted as of the beginning of an interim or annual reporting period. The Company has adopted the new standard during the quarter and there has been no significant impact to our financial statements.
7
RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 2017
Lease Accounting Standards
In February 2016, the FASB issued ASU No. 2016-02, "Leases (topic 842)" which requires a lessee to recognize a right to use asset and a lease liability on its balance sheet for all leases with terms of twelve months or greater. This guidance is effective for fiscal years beginning after December 15, 2018, included interim periods within those years with early adoption permitted. The Company has evaluated the new standard and expects it will have a material impact on the financial statements as we will have to begin capitalizing leases on the balance sheet when the new standard is implemented. See note 6 for current operating lease commitments.
Statement of Cash Flows; Restricted Cash
In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash" which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU No. 2016-18 is effective for annal periods beginning after December 15, 2017, and interim periods within those annual periods. The Company has evaluated the new standard and anticipates a change in the presentation of restricted cash on the cash flow statement once the standard is adopted.
2. DERIVATIVE INSTRUMENTS
Commodity Contracts
As part of its hedging strategy, the Company may enter into ethanol, soybean, soybean oil, natural gas and corn commodity-based derivatives in order to protect cash flows from fluctuations caused by volatility in commodity prices in order to protect gross profit margins from potentially adverse effects of market and price volatility on ethanol sales, corn oil sales, and corn purchase commitments where the prices are set at a future date. These derivatives are not designated as effective hedges for accounting purposes. For derivative instruments that are not accounted for as hedges, or for the ineffective portions of qualifying hedges, the change in fair value is recorded through earnings in the period of change. Ethanol derivative fair market value gains or losses are included in the results of operations and are classified as revenue and corn derivative changes in fair market value are included in cost of goods sold.
As of: | December 31, 2017 (unaudited) | September 30, 2017 | ||||||||||||||||
Contract Type | # of Contracts | Notional Amount (Qty) | Fair Value | # of Contracts | Notional Amount (Qty) | Fair Value | ||||||||||||
Corn futures | 1,000 | 5,000,000 | bushels | $ | 12,850 | 81 | 405,000 | bushels | $ | 16,688 | ||||||||
Corn options | 1,300 | 6,500,000 | bushels | $ | (1,289,375 | ) | 1,800 | 9,000,000 | bushels | $ | (950,000 | ) | ||||||
Total fair value | $ | (1,276,525 | ) | $ | (933,312 | ) | ||||||||||||
Amounts are combined on the balance sheet - negative numbers represent liabilities | ||||||||||||||||||
8
RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 2017
The following tables provide details regarding the Company's derivative financial instruments at December 31, 2017 and September 30, 2017:
Derivatives not designated as hedging instruments: | ||||||||
Balance Sheet - as of December 31, 2017 (unaudited) | Asset | Liability | ||||||
Commodity derivative instruments, at fair value | $ | — | $ | 1,276,525 | ||||
Total derivatives not designated as hedging instruments for accounting purposes | $ | — | $ | 1,276,525 | ||||
Balance Sheet - as of September 30, 2017 | Asset | Liability | ||||||
Commodity derivative instruments, at fair value | $ | — | $ | 933,312 | ||||
Total derivatives not designated as hedging instruments for accounting purposes | $ | — | $ | 933,312 | ||||
Statement of Operations Income/(Expense) | Location of gain (loss) in fair value recognized in income | Amount of gain(loss) recognized in income during the three months ended December 31, 2017 (unaudited) | Amount of gain (loss) recognized in income during the three months ended December 31, 2016 (unaudited) | |||||||
Corn derivative instruments | Cost of Goods Sold | $ | (568,536 | ) | $ | 218,357 | ||||
Ethanol derivative instruments | Revenue | 1,800 | 40,950 | |||||||
Soybean oil derivative instruments | Revenue | — | 12,216 | |||||||
Natural gas derivative instruments | Cost of Goods Sold | — | 10,500 | |||||||
Total | $ | (566,736 | ) | $ | 282,023 | |||||
3. INVENTORY
Inventory is valued at the lower of cost or net realizable value. Inventory values as of December 31, 2017 and September 30, 2017 were as follows:
As of | December 31, 2017 (unaudited) | September 30, 2017 | ||||||
Raw materials, including corn, chemicals and supplies | $ | 12,385,830 | $ | 11,952,560 | ||||
Work in process | 784,509 | 773,786 | ||||||
Finished goods, including ethanol and distillers grains | 794,415 | 1,577,066 | ||||||
Spare parts | 1,914,455 | 2,110,330 | ||||||
Total inventory | $ | 15,879,209 | $ | 16,413,742 | ||||
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RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 2017
Lower of cost or net realizable value adjustments for the three months ended December 31, 2017 and 2016 were as follows:
For the three months ended December 31, 2017 (unaudited) | For the three months ended December 31, 2016 (unaudited) | |||||||
Loss on firm purchase commitments | $ | 8,000 | $ | — | ||||
Loss on lower of cost or market adjustment for inventory on hand | $ | 70,979 | $ | — | ||||
Total loss on lower of cost or market adjustments | $ | 78,979 | $ | — | ||||
The Company has entered into forward corn purchase contracts under which it is required to take delivery at the contract price. At the time the contracts were created, the price of the contract approximated market price. Subsequent changes in market conditions could cause the contract prices to become higher or lower than market prices. As of December 31, 2017, the average price of corn purchased under certain fixed price contracts, that had not yet been delivered, was greater than approximated market price. Based on this information, the Company has an $8,000 estimated loss on firm purchase commitments for the three months ended December 31, 2017 and no estimated loss for the three months ended December 31, 2016. The loss is recorded in “Loss on firm purchase commitments” on the statement of operations. The amount of the potential loss was determined by applying a methodology similar to that used in the impairment valuation with respect to inventory. Given the uncertainty of future ethanol prices, further losses on the outstanding purchase commitments could be recorded in future periods.
4. BANK FINANCING
As of | December 31, 2017 (unaudited) | September 30, 2017 | ||||||
Capital lease obligations (Note 6) | $ | 4,886 | $ | 5,538 | ||||
Total Long-Term Debt | 4,886 | 5,538 | ||||||
Less amounts due within one year | 2,622 | 2,617 | ||||||
Total Long-Term Debt Less Amounts Due Within One Year | $ | 2,264 | $ | 2,921 | ||||
The Company had a $10 million operating line-of-credit with First National Bank of Omaha that matured on March 20, 2017.
On March 20, 2017, we entered into a new $10 million revolving loan (the "Revolving Loan") with U.S. Bank National Association ("U.S. Bank"). The Revolving Loan replaced the revolving loan we had with First National Bank of Omaha. The maturity date of the Revolving Loan is May 31, 2018. Our ability to draw funds on the Revolving Loan is subject to a borrowing base calculation as set forth in the Credit Agreement. At December 31, 2017, we had $10,000,000 available on the Revolving Loan, taking into account the borrowing base calculation. We had $0 drawn on the Revolving Loan as of December 31, 2017. The variable interest rate on December 31, 2017 was 3.40%. Of the $10 million revolving line-of-credit, the Company was not allowed to draw $687,597 which is reserved as a source of funds to support a guaranteed payment the Company agreed to related to its natural gas pipeline. While the Company does not expect that it will be required to make a direct payment for the natural gas pipeline, the Company's agreement requires it to have funds available in the event the Company is required to make the guaranteed payment. See note 6 for the Company's additional future minimum lease commitments.
The Company's loans are secured by a lien on substantially all of the assets of the Company. As of December 31, 2017, the Company was in compliance with all of its debt covenants.
5. FAIR VALUE MEASUREMENTS
The following table provides information on those assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2017 and September 30, 2017, respectively.
10
RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 2017
Fair Value Measurement Using | |||||||||||||||||||
Carrying Amount as of December 31, 2017 (unaudited) | Fair Value as of December 31, 2017 (unaudited) | Level 1 | Level 2 | Level 3 | |||||||||||||||
Liabilities | |||||||||||||||||||
Commodities derivative instruments | $ | 1,276,525 | $ | 1,276,525 | $ | 1,276,525 | $ | — | $ | — | |||||||||
Total | $ | 1,276,525 | $ | 1,276,525 | $ | 1,276,525 | $ | — | $ | — | |||||||||
Fair Value Measurement Using | |||||||||||||||||||
Carrying Amount as of September 30, 2017 | Fair Value as of September 30, 2017 | Level 1 | Level 2 | Level 3 | |||||||||||||||
Liabilities | |||||||||||||||||||
Commodities derivative instruments | $ | 933,312 | $ | 933,312 | $ | 933,312 | $ | — | $ | — | |||||||||
Total | $ | 933,312 | $ | 933,312 | $ | 933,312 | $ | — | $ | — | |||||||||
The fair value of the corn, ethanol, soybean oil and natural gas derivative instruments is based on quoted market prices in an active market.
6. LEASES
The Company leases equipment under operating and capital leases through January 2023. The Company is generally responsible for maintenance, taxes, and utilities for leased equipment. Equipment under operating lease includes a locomotive and rail cars. Rent expense for operating leases was approximately $154,000 and $93,000 for the three months ended December 31, 2017 and 2016, respectively. Equipment under capital leases consists of office equipment and plant equipment.
Equipment under capital leases is as follows at:
As of | December 31, 2017 (unaudited) | September 30, 2017 | ||||||
Equipment | $ | 483,488 | $ | 483,488 | ||||
Less accumulated amortization | (125,394 | ) | (120,029 | ) | ||||
Net equipment under capital lease | $ | 358,094 | $ | 363,459 | ||||
At December 31, 2017, the Company had the following minimum commitments, which at inception had non-cancelable terms of more than one year. Amounts shown below are for the 12 months period ending December 31:
11
RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 2017
Operating Leases | Capital Leases | |||||||
2018 | $ | 375,553 | $ | 2,622 | ||||
2019 | 326,608 | 2,264 | ||||||
2020 | 210,023 | — | ||||||
2021 | 167,111 | — | ||||||
2022 | 132,600 | — | ||||||
Thereafter | 11,050 | — | ||||||
Total minimum lease commitments | $ | 1,222,945 | 4,886 | |||||
Less amount representing interest | — | |||||||
Present value of minimum lease commitments included in current maturities of long-term debt on the balance sheet | $ | 4,886 | ||||||
7. COMMITMENTS AND CONTINGENCIES
Firm Purchase Commitments for Corn
To ensure an adequate supply of corn to operate the Plant, the Company enters into contracts to purchase corn from local farmers and elevators. At December 31, 2017, the Company had various fixed price contracts for the purchase of approximately 0.7 million bushels of corn. Using the stated contract price for the fixed price contracts, the Company had commitments of approximately $2.4 million related to the 0.7 million bushels under contract. The Company also has various unpriced basis contracts for the purchase of approximately 2.59 million bushels of corn that have been delivered to the Plant. The purchase price of these bushels will be set at the time of pricing the contracts at the July 2018 index price less basis. The estimated accrued payable for these bushels is $8.99 million. The deadline for pricing these 2.59 million bushels is June 29, 2018.
Profit and Cost Sharing Agreement
The Company has entered into a Profit and Cost Sharing Agreement with Bismarck Land Company, LLC which became effective on November 1, 2016. The Profit and Cost Sharing Agreement provides that the Company will share 70% of the net revenue generated by the Company from business activities which are brought to the Company by Bismarck Land Company, LLC and conducted on the real estate purchased from the Bismarck Land Company, LLC. The real estate was initially purchased in exchange for 2 million membership units at $1.66 per unit. This obligation will terminate ten years after the real estate closing date of October 11, 2016 or after Bismarck Land Company, LLC receives $10 million in proceeds from the agreement. In addition, the Company will pay Bismarck Land Company, LLC 70% of any net proceeds received by the Company from the sale of the subject real estate if a sale were to occur in the future, subject to the $10 million cap and the 10 year termination of this obligation. No payments have been made to the Bismarck Land Company, LLC at this time.
8. RELATED PARTY TRANSACTIONS
The Company has balances and transactions in the normal course of business with various related parties for the purchase of corn, sale of distillers grains and sale of ethanol. The related parties include unit holders, members of the board of governors of the Company, and RPMG, Inc. (“RPMG”). During the Company's first quarter of 2018, the Company received a capital account refund from RPMG which is included in other income (expense) in the Company's Statement of Operations. Significant related party activity affecting the financial statements is as follows:
December 31, 2017 (unaudited) | September 30, 2017 | |||||||
Balance Sheet | ||||||||
Accounts receivable | $ | 2,497,558 | $ | 4,027,061 | ||||
Accounts Payable | 12,594 | 1,569 | ||||||
Accrued Expenses | 2,377,979 | 925,503 | ||||||
12
RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 2017
For the three months ended December 31, 2017 (unaudited) | For the three months ended December 31, 2016 (unaudited) | |||||||
Statement of Operations | ||||||||
Revenues | $ | 24,798,144 | $ | 28,998,771 | ||||
Cost of goods sold | 6,462 | 9,730 | ||||||
General and administrative | 19,067 | 16,161 | ||||||
Other income/expense | 140,539 | 247,307 | ||||||
Inventory Purchases | $ | 4,293,979 | $ | 6,078,986 | ||||
9. UNCERTAINTIES IMPACTING THE ETHANOL INDUSTRY AND OUR FUTURE OPERATIONS
The Company has certain risks and uncertainties that it experiences during volatile market conditions, which can have a severe impact on operations. The Company's revenues are derived from the sale and distribution of ethanol and distillers grains to customers primarily located in the United States. Corn for the production process is supplied to the Plant primarily from local agricultural producers and from purchases on the open market. The Company's operating and financial performance is largely driven by prices at which the Company sells ethanol and distillers grains and by the cost at which it is able to purchase corn for operations. The price of ethanol is influenced by factors such as prices, supply and demand, weather, government policies and programs, and unleaded gasoline and the petroleum markets, although since 2005 the prices of ethanol and gasoline began a divergence with ethanol selling 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.
The Company's financial performance is highly dependent on the Federal Renewable Fuels Standard ("RFS") which requires that a certain amount of renewable fuels must be used each year in the United States. Corn based ethanol, such as the ethanol the Company produces, can be used to meet a portion of the RFS requirement. In November 2013, the EPA issued a proposed rule which would reduce the RFS for 2014, including the RFS requirement related to corn based ethanol. The EPA proposed rule was subject to a comment period which expired in January 2014. On November 30, 2015, the EPA released its final ethanol use requirements for 2014, 2015 and 2016 which were lower than the statutory requirements in the RFS. However, the final RFS for 2017 equaled the statutory requirement which was also the case for the 2018 RFS final rule.
The Company anticipates that the results of operations during the remainder of fiscal year 2018 will continue to be affected by volatility in the commodity markets. The volatility is due to various factors, including uncertainty with respect to the availability and supply of corn, increased demand for grain from global and national markets, speculation in the commodity markets and demand for corn from the ethanol industry.
10. MEMBER'S EQUITY
Unregistered Units Sales by the Company.
On October 10, 2016, the Company issued two million of the Company's membership units to Bismarck Land Company, LLC as part of the consideration for the acquisition of 338 acres of land adjacent to the ethanol plant that the Company will use to expand its rail yard. The membership units were issued pursuant to the exemption from registration set forth in Regulation D, Rule 506(b), as Bismarck Land Company, LLC is an accredited investor.
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RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 2017
Unit Purchases By the Company.
(a) | (b) | (c) | (d) | |
Period | Total Number of Units Purchased | Average Price Paid per Unit | Total Number of Units Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of the Units that May Yet Be Purchased Under the Plans or Programs |
October 2016 | None | None | None | None |
November 2016 | None | None | None | None |
December 2016 | 564,963 | $1.00 | None | None |
January 2017 | 116,857 | $1.00 | None | None |
February 2017 | None | None | None | None |
March 2017 | None | None | None | None |
April 2017 | None | None | None | None |
May 2017 | None | None | None | None |
June 2017 | None | None | None | None |
Total | 681,820 | $1.00 | None | None |
*681,820 Units were purchased other than through a publicly announced plan or program, pursuant to a Membership Unit Repurchase Agreement, a private transaction between the Company and a Member.
11. SUBSEQUENT EVENT
Management evaluated all other activity of the Company and concluded that no subsequent events have occurred that would require recognition in the condensed financial statements or disclosure in the notes to the condensed financial statements.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
We prepared the following discussion and analysis to help you better understand our financial condition, changes in our financial condition, and results of operations for the three month period ended December 31, 2017, compared to the same period of the prior fiscal year. This discussion should be read in conjunction with the condensed financial statements, notes and information contained in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2017. Unless otherwise stated, references in this report to particular years, quarters, months, or periods refer to our fiscal years ended in September and the associated quarters, months, or periods of those fiscal years.
Forward Looking Statements
This report contains forward-looking statements that involve future events, our future performance and our future operations and actions. In some cases you can identify forward-looking statements by the use of words such as "may," "should," "anticipate," "believe," "expect," "plan," "future," "intend," "could," "estimate," "predict," "hope," "potential," "continue," or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions 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 following factors:
• | Reductions in the corn-based ethanol use requirement in the Federal Renewable Fuels Standard; |
• | Lower oil prices which result in lower ethanol prices; |
• | Negative operating margins which result from lower ethanol prices; |
• | Lower distillers grains prices which result from the Chinese anti-dumping and countervailing duty tariffs; |
• | Lower ethanol prices due to the Chinese ethanol tariff and the Brazilian ethanol tariff; |
• | Logistics difficulties preventing us from delivering our products to our customers; |
• | Fluctuations in the price and market for ethanol, distillers grains and corn oil; |
• | Availability and costs of products and raw materials, particularly corn and natural gas; |
• | Changes in the environmental regulations that apply to our plant operations and our ability to comply with such regulations; |
• | Ethanol supply exceeding demand and corresponding ethanol price reductions impacting our ability to operate profitably and maintain a positive spread between the selling price of our products and our raw material costs; |
• | Our ability to generate and maintain sufficient liquidity to fund our operations, meet debt service requirements and necessary capital expenditures; |
• | Our ability to continue to meet our loan covenants; |
• | Limitations and restrictions contained in the instruments and agreements governing our indebtedness; |
• | Results of our hedging transactions and other risk management strategies; |
• | Changes and advances in ethanol production technology; and |
• | Competition from alternative fuels and alternative fuel additives. |
Overview
Red Trail Energy, LLC, a North Dakota limited liability company (the "Company," "Red Trail," or "we," "our," or "us"), owns and operates a 50 million gallon annual name-plate production ethanol plant near Richardton, North Dakota. Our revenues are derived from the sale and distribution of our ethanol, distillers grains and corn oil primarily in the continental United States. Corn is our largest cost component and our profitability is highly dependent on the spread between the price of corn and the price of ethanol.
The ethanol industry is dependent on several economic incentives to produce ethanol, the most significant of which is the Federal Renewable Fuels Standard (the "RFS"). The RFS requires that in each year, a certain amount of renewable fuels must be used in the United States. The RFS statutory volume requirement increases incrementally each year until the United States is required to use 36 billion gallons of renewable fuels by 2022. The United States Environmental Protection Agency (the "EPA") has the authority to waive the RFS statutory volume requirement, in whole or in part, provided one of the following two conditions have been met: (1) there is inadequate domestic renewable fuel supply; or (2) implementation of the requirement would severely harm the economy or environment of a state, region or 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. The RFS statutory Renewable Volume Obligation (RVO) for all renewable fuels for 2017 was 24 billion gallons, of which corn-based ethanol could meet 15 billion gallons of the RVO. On November 30, 2017, the final RVO for 2018 was set at 19.29 billion gallons and the corn-based ethanol RVO was set at 15 billion gallons, lower than the statutory RVO.
In recent years, the ethanol industry in the United States has increased exports of ethanol and distillers grains. However, in 2017 China instituted tariffs on ethanol and distillers grains produced in the United States and Brazil instituted a tariff on ethanol
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produced in the United States. Both China and Brazil have been major sources of import demand for United States ethanol and distillers grains. These trade actions may result in negative operating margins for U.S. ethanol producers.
In January 2017, the Chinese issued final tariffs on U.S. distillers grains. China announced a final ruling related to its anti-dumping and countervailing duty investigation imposing anti-dumping duties from a range of 42.2% to 53.7% and anti-subsidy duties from 11.2% to 12.0%. These tariffs have had a negative impact on market ethanol and distillers grains prices in the United States.
In August 2017, Brazil instituted an import quota for ethanol produced in the United States and exported to Brazil, along with a 20% tariff on ethanol imports in excess of the quota. This tariff and quota have reduced exports of ethanol to Brazil and may continue to negatively impact ethanol exports from the United States. Any reduction in ethanol exports could negatively impact market ethanol prices in the United States.
On March 20, 2017, we entered into a new $10 million revolving loan (the "Revolving Loan") with U.S. Bank National Association ("U.S. Bank"). As part of this transaction, we signed a Credit Agreement dated March 17, 2017 (the "Credit Agreement"). The Revolving Loan replaces our credit facilities with First National Bank of Omaha. Interest accrues on any outstanding balance on the Revolving Loan at a rate of 1.77% in excess of the one-month London Interbank Offered Rate ("LIBOR"). The maturity date of the Revolving Loan is May 31, 2018. Our ability to draw funds on the Revolving Loan is subject to a borrowing base calculation as set forth in the Credit Agreement. The Revolving Loan is subject to certain financial covenants as set forth in the Credit Agreement. The most significant financial covenants require us to maintain a fixed charge coverage ratio of no less than 1.25:1.00 and a current ratio of no less than 1.50:1.00. Our fixed charge coverage ratio measures our ability to pay our fixed expenses. Our current ratio measures our liquidity and ability to pay short-term and long-term obligations.
Results of Operations for the Three Months Ended December 31, 2017 and 2016
The following table shows the results of our operations and the percentages of revenues, cost of goods sold, general and administrative expenses and other items to total revenues in our unaudited statements of operations for the three months ended December 31, 2017 and 2016:
Three Months Ended December 31, 2017 (Unaudited) | Three Months Ended December 31, 2016 (Unaudited) | |||||||||||
Statement of Operations Data | Amount | % | Amount | % | ||||||||
Revenues | $ | 26,122,856 | 100.00 | $ | 30,004,460 | 100.00 | ||||||
Cost of Goods Sold | 27,822,261 | 106.51 | 27,127,930 | 90.41 | ||||||||
Gross Profit (Loss) | (1,699,405 | ) | (6.51 | ) | 2,876,530 | 9.59 | ||||||
General and Administrative Expenses | 715,911 | 2.74 | 690,934 | 2.30 | ||||||||
Operating Income (Loss) | (2,415,316 | ) | (9.25 | ) | 2,185,596 | 7.28 | ||||||
Other Income | 430,650 | 1.65 | 586,366 | 1.95 | ||||||||
Net Income (Loss) | $ | (1,984,666 | ) | (7.60 | ) | $ | 2,771,962 | 9.24 | ||||
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The following table shows additional data regarding production and price levels for our primary inputs and products for the three months ended December 31, 2017 and 2016.
Three Months ended December 31, 2017 (unaudited) | Three Months ended December 31, 2016 (unaudited) | |||||||
Production: | ||||||||
Ethanol sold (gallons) | 16,627,106 | 16,202,835 | ||||||
Dried distillers grains sold (tons) | 30,963 | 29,625 | ||||||
Modified distillers grains sold (tons) | 27,506 | 25,122 | ||||||
Corn oil sold (pounds) | 3,117,040 | 4,413,620 | ||||||
Revenues: | ||||||||
Ethanol average price per gallon (net of hedging) | $ | 1.18 | $ | 1.50 | ||||
Dried distillers grains average price per ton | 122.09 | 104.50 | ||||||
Modified distillers grains average price per ton | 63.63 | 51.99 | ||||||
Corn oil average price per pound | 0.28 | 0.27 | ||||||
Primary Inputs: | ||||||||
Corn ground (bushels) | 5,720,943 | 5,687,614 | ||||||
Natural gas (MMBtu) | 431,963 | 415,586 | ||||||
Costs of Primary Inputs: | ||||||||
Corn average price per bushel (net of hedging) | $ | 3.26 | $ | 3.54 | ||||
Natural gas average price per MMBtu (net of hedging) | 2.67 | 2.75 | ||||||
Other Costs (per gallon of ethanol sold): | ||||||||
Chemical and additive costs | $ | 0.108 | $ | 0.094 | ||||
Denaturant cost | 0.036 | 0.032 | ||||||
Electricity cost | 0.038 | 0.043 | ||||||
Direct labor cost | 0.068 | 0.065 | ||||||
Revenue
Our revenue was lower for the first quarter of our 2018 fiscal year compared to the same period of our 2017 fiscal year due to a decrease in the average sales prices we received for our ethanol during the first quarter of our 2018 fiscal year. During the first quarter of our 2018 fiscal year, approximately 75.0% of our total revenue was derived from ethanol sales, approximately 21.2% was from distillers grains sales and approximately 3.3% was from corn oil sales. During the first quarter of our 2017 fiscal year, approximately 81.1% of our total revenue was derived from ethanol sales, approximately 14.7% was from distillers grains sales and approximately 3.9% was from corn oil sales.
Ethanol
The average price we received for our ethanol was approximately 21.3% less during the first quarter of our 2018 fiscal year compared to the first quarter of our 2017 fiscal year. Management attributes this decrease in the price we received for our ethanol during the first quarter of our 2018 fiscal year to lower market corn prices and increased ethanol supply in the market. Management anticipates that ethanol prices may continue lower during our 2018 fiscal year due to a combination of factors, including anticipated increases in United States ethanol production along with lower export demand from Brazil and China. Many ethanol producers are expanding their production capacity, which, along with the Chinese and Brazilian ethanol tariffs, have increased the market supply of ethanol beyond demand which has negatively impacted ethanol prices. Management anticipates that this excess ethanol supply may continue unless new export markets for ethanol are developed or domestic demand for ethanol increases. The United States ethanol industry is continuing to work to open export markets for ethanol, including the Mexican market, which may positively impact domestic ethanol prices. Export markets are not as reliable as the domestic ethanol market which can lead to ethanol price volatility.
We sold more gallons of ethanol during the first quarter of our 2018 fiscal year compared to the first quarter of our 2017 fiscal year due to increased production from our increased operating capacity at the plant and improved operating efficiency in the 2018 period. Management anticipates that our ethanol production and sales will continue to be higher during our 2018 fiscal
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year compared to our 2017 fiscal year due to the plant improvements we made which increased our total production capacity. In addition, the amount of ethanol we produced per bushel of corn we ground increased for the first quarter of our 2018 fiscal year compared to the first quarter of our 2017 fiscal year, which positively impacted our profitability. We continue to work to maximize the additional production capacity of our ethanol plant and improve our ethanol production efficiency.
From time to time we enter into forward sales contracts for our products. At December 31, 2017, we had no open ethanol futures contracts. Ethanol futures contracts resulted in a gain of approximately $1,800 during the first quarter of our 2018 fiscal year. Ethanol futures contracts for the first quarter of our 2017 fiscal year resulted in a loss of approximately $41,000.
Distillers Grains
Previously, we sold a majority of our distillers grains in the dried form due to market conditions which favored that product. However, due to the Chinese anti-dumping and countervailing duty tariffs which have decreased export demand for distillers grains, we increased the amount of modified distillers grains we produced and sold. Modified distillers grains are used in our local market and are less impacted by world distillers grains markets. The average prices we received for both our dried and modified distillers grains were higher during the first quarter of our 2018 fiscal year compared to the first quarter of our 2017 fiscal year. Management attributes these increases to increased overall demand for distillers grains. Management anticipates distillers grains prices will remain at current levels unless we experience a significant increase in export demand for distillers grains.
We produced and sold more total tons of distillers grains during the first quarter of our 2018 fiscal year compared to the first quarter of our 2017 fiscal year due to increased overall production at the ethanol plant during the first quarter of our 2018 fiscal year along with decreased corn oil production. When we produce more pounds of corn oil, it decreases the volume of distillers grains we produce. Management anticipates relatively stable distillers grains production going forward.
Corn Oil
The total pounds of corn oil we sold was less during the first quarter of our 2018 fiscal year compared to the first quarter of our 2017 fiscal year due to a change in the production process where less corn oil is being extracted. Management anticipates that our corn oil production will continue at the current level for the remaining quarters of our 2018 fiscal year. The average price we received for our corn oil was slightly higher during the first quarter of our 2018 fiscal year compared to the first quarter of our 2017 fiscal year due primarily to increased corn oil demand from the biodiesel industry.
Cost of Goods Sold
Our cost of goods sold is primarily made up of corn and natural gas expenses. Our cost of goods sold was higher for the first quarter of our 2018 fiscal year as compared to the first quarter of our 2017 fiscal year due primarily to increased corn consumption and increased natural gas use during the first quarter of our 2018 fiscal year as compared to the first quarter of our 2017 fiscal year. The increase in our cost of goods sold was greater than the increase in our revenue during the first quarter of our 2018 fiscal year as compared to the first quarter of our 2017 fiscal year, which decreased our profitability.
Corn Costs
Our cost of goods sold related to corn was less for the first quarter of our 2018 fiscal year compared to the first quarter of our 2017 fiscal year due to the net effect of increased corn consumption offset by decreased average corn costs per bushel, before taking into account our hedge positions. For the first quarter of our 2018 fiscal year, we used approximately 0.6% more bushels of corn compared to the first quarter of our 2017 fiscal year. The average price we paid per bushel of corn, without taking into account our derivative instruments, was approximately 7.6% less for the first quarter of our 2018 fiscal year compared to the first quarter of our 2017 fiscal year. In addition, during the first quarter of our 2018 fiscal year, we had a realized loss of approximately $569,000 for our corn derivative instruments which increased our cost of goods sold. For the first quarter of our 2017 fiscal year, we had a realized gain of approximately $218,000 for our corn derivative instruments which decreased our cost of goods sold. Management anticipates that we will consume more corn in the future due to our natural gas conversion project which allows us to produce more of our products. Management anticipates that corn prices will remain relatively stable during our 2018 fiscal year due to ample corn supplies and relatively stable corn demand.
Natural Gas Costs
We consumed approximately 3.9% more MMBtu of natural gas during the first quarter of our 2018 fiscal year compared to the first quarter of our 2017 fiscal year, due to increased production and colder weather during the 2018 period. Our average
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cost per MMBtu of natural gas was approximately 2.9% less during the first quarter of our 2018 fiscal year compared to the first quarter of our 2017 fiscal year due to ample local natural gas supply.
General and Administrative Expenses
Our general and administrative expenses were higher for the first quarter of our 2018 fiscal year compared to the first quarter of our 2017 fiscal year due to additional consulting services needed during our 2018 fiscal year.
Other Income/Expense
We had more interest income during the first quarter of our 2018 fiscal year compared to the first quarter of our 2017 fiscal year due to having greater cash balances during our 2017 fiscal year. We had less other income during the first quarter of our 2018 fiscal year compared to the first quarter of our 2017 fiscal year due to a decreased capital account refund we received from our marketer during the 2018 period.
Changes in Financial Condition for the Three Months Ended December 31, 2017
Current Assets. We had more cash and equivalents at December 31, 2017 compared to September 30, 2017 primarily due to an increase in our accounts payable due to deferred corn payments owed to our corn suppliers in our 2018 fiscal year. We had less restricted cash at December 31, 2017 compared to September 30, 2017 related to cash we deposit in our margin account for our hedging transactions. Due to the timing of payments from our marketers, we had fewer accounts receivable at December 31, 2017 compared to September 30, 2017. We had less inventory on hand at December 31, 2017 compared to September 30, 2017 due primarily to having less ethanol and finished goods inventory at December 31, 2017.
Property, Plant and Equipment. The value of our property, plant and equipment was lower at December 31, 2017 compared to September 30, 2017 primarily due to the regular depreciation of our assets.
Current Liabilities. Our accounts payable was higher at December 31, 2017 compared to September 30, 2017 due to having more corn payables at December 31, 2017. Our accrued expenses were higher at December 31, 2017 compared to September 30, 2017 because we had more deferred corn payments owed to our corn suppliers at December 31, 2017 compared to September 30, 2017.
Long-term Liabilities. Our long-term liabilities were less at December 31, 2017 compared to September 30, 2017 because of capital lease payments we made during our 2018 fiscal year.
Liquidity and Capital Resources
Based on financial forecasts performed by our management, we anticipate that we will have sufficient cash from our current credit facilities and cash from our operations to continue to operate the ethanol plant for the next 12 months. Should we experience unfavorable operating conditions in the future, we may have to secure additional debt or equity sources for working capital or other purposes.
The following table shows cash flows for the three months ended December 31, 2017 and 2016:
December 31, 2017 (unaudited) | December 31, 2016 (unaudited) | |||||||
Net cash provided by operating activities | $ | 8,102,679 | $ | 10,592,632 | ||||
Net cash (used in) investing activities | (32,345 | ) | (174,001 | ) | ||||
Net cash (used in) financing activities | (652 | ) | (565,611 | ) | ||||
Net increase in cash | $ | 8,069,682 | $ | 9,853,020 | ||||
Cash and cash equivalents, end of period | $ | 11,293,024 | $ | 20,127,186 | ||||
Cash Flow from Operations
Our operations provided less cash during the first quarter of our 2018 fiscal year compared to the same period of our 2017 fiscal year due primarily to decreased profitability during the 2018 period.
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Cash Flow From Investing Activities
We used less cash for capital expenditures during the first quarter of our 2018 fiscal year compared to the same period of our 2017 fiscal year. During the 2018 period, our primary capital expenditures were for finishing parts for the hammer mill project that was started last fiscal year.
Cash Flow from Financing Activities
We used less cash for financing activities during the first quarter of our 2018 fiscal year compared to the first quarter of our 2017 fiscal year because we did not have any unit repurchases during the 2018 period.
Our liquidity, results of operations and financial performance will be impacted by many variables, including the market price for commodities such as, but not limited to, corn, ethanol and other energy commodities, as well as the market price for any co-products generated by the facility and the cost of labor and other operating costs. Assuming future relative price levels for corn, ethanol and distillers grains remain consistent, we expect operations to generate adequate cash flows to maintain operations.
Capital Expenditures
The Company had approximately $134,000 in construction in progress as of December 31, 2017 primarily relating to improvements being made to the additional land and railroad track purchased last fiscal year.
Capital Resources
Revolving Loan
On March 20, 2017, we entered into a new $10 million revolving loan (the "Revolving Loan") with U.S. Bank National Association ("U.S. Bank"). The Revolving Loan replaced a similar revolving loan we had with First National Bank of Omaha. Interest accrues on any outstanding balance on the Revolving Loan at a rate of 1.77% in excess of the one-month London Interbank Offered Rate ("LIBOR"). The maturity date of the Revolving Loan is May 31, 2018. Our ability to draw funds on the Revolving Loan is subject to a borrowing base calculation as set forth in the Credit Agreement. At December 31, 2017, we had $10 million available on the Revolving Loan. We had $0 drawn on the Revolving Loan as of December 31, 2017. Interest accrued on the Revolving Loan as of December 31, 2017 at a rate of 3.40%.
Restrictive Covenants
The Revolving Loan is subject to certain financial covenants as set forth in the Credit Agreement. The most significant financial covenants require us to maintain a fixed charge coverage ratio of no less than 1.25:1.00 and a current ratio of no less than 1.50:1.00. Our fixed charge coverage ratio measures our ability to pay our fixed expenses. Our current ratio measures our liquidity and ability to pay short-term and long-term obligations.
As of December 31, 2017, we were in compliance with our loan covenants.
Significant Accounting Policies and Estimates
We describe our significant accounting policies in Note 1, Summary of Significant Accounting Policies, of the Notes to Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017. We discuss our critical accounting estimates in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017. There has been no significant change in our significant accounting policies or critical accounting estimates since the end of our 2017 fiscal year.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to the impact of market fluctuations associated with commodity prices as discussed below. We use derivative financial instruments as part of an overall strategy to manage market risk. We use cash, futures and option contracts to hedge changes to the commodity prices of corn and ethanol. We do not enter into these derivative financial instruments for trading
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or speculative purposes, nor do we designate these contracts as hedges for accounting purposes pursuant to the requirements of Generally Accepted Accounting Principles ("GAAP").
Commodity Price Risk
We expect to be exposed to market risk from changes in commodity prices. Exposure to commodity price risk results from our dependence on corn and natural gas in the ethanol production process and the sale of ethanol.
We enter into fixed price contracts for corn purchases on a regular basis. It is our intent that, as we enter into these contracts, we will use various hedging instruments (puts, calls and futures) to maintain a near even market position. For example, if we have 1 million bushels of corn under fixed price contracts we would generally expect to enter into a short hedge position to offset our price risk relative to those bushels we have under fixed price contracts. Because our ethanol marketing company (RPMG) is selling substantially all of the gallons it markets on a spot basis we also include the corn bushel equivalent of the ethanol we have produced that is inventory but not yet priced as bushels that need to be hedged.
Although we believe our hedge positions will accomplish an economic hedge against our future purchases, they are not designated as hedges for accounting purposes, which would match the gain or loss on our hedge positions to the specific commodity purchase being hedged. We use fair value accounting for our hedge positions, which means as the current market price of our hedge positions changes, the gains and losses are immediately recognized in our cost of sales. The immediate recognition of hedging gains and losses under fair value accounting can cause net income to be volatile from quarter to quarter and year to year due to the timing of the change in value of derivative instruments relative to the cost of the commodity being hedged. However, it is likely that commodity cash prices will have the greatest impact on the derivatives instruments with delivery dates nearest the current cash price.
As of December 31, 2017, we had fixed corn purchase contracts for approximately 700,000 bushels of corn and we had corn futures and option contracts for approximately 11.5 million bushels of corn. As of December 31, 2017 we had an unrealized loss of approximately $569,000 related to our corn futures and option contracts.
It is the current position of our ethanol marketing company, RPMG, that under current market conditions selling ethanol in the spot market will yield the best price for our ethanol. RPMG will, from time to time, contract a portion of the gallons they market with fixed price contracts.
We estimate that our corn usage will be between 21 million and 23 million bushels per calendar year for the production of approximately 59 million to 64 million gallons of ethanol. 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.
A sensitivity analysis has been prepared to estimate our exposure to corn, natural gas and ethanol price risk. Market risk related to our corn, natural gas and ethanol prices is estimated as the potential change in income resulting from a hypothetical 10% adverse change in the average cost of our corn and natural gas, and our average ethanol sales price as of December 31, 2017, net of the forward and future contracts used to hedge our market risk for corn, natural gas and ethanol. The volumes are based on our expected use and sale of these commodities for a one year period from December 31, 2017. The results of this analysis, which may differ from actual results, are as follows:
Estimated Volume Requirements for the next 12 months (net of forward and futures contracts) | Unit of Measure | Hypothetical Adverse Change in Price | Approximate Adverse Change to Income | ||||||||
Ethanol | 63,900,000 | Gallons | 10 | % | $ | (7,029,000 | ) | ||||
Corn | 22,820,000 | Bushels | 10 | % | $ | (3,490,000 | ) | ||||
Natural gas | 1,664,000 | MMBtu | 10 | % | $ | (466,000 | ) | ||||
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit pursuant to the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosures.
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Our management, including our President and Chief Executive Officer (the principal executive officer), Gerald Bachmeier, along with our Chief Financial Officer, (the principal financial officer), Jodi Johnson, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2017. Based on this review and evaluation, these officers believe that our disclosure controls and procedures are 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.
For the fiscal quarter ended December 31, 2017, we made the following changes in our internal control over financial reporting which have materially affected our internal control over financial reporting:
• | A review and updating of month-end standard operating procedures. |
• | An additional step was added for the CFO and CEO to review all unusual transactions prior to financial statement preparation. |
We made these material changes in our internal control over financial reporting as a result of a material weakness we identified in our annual report on Form 10-K for the fiscal year ended September 30, 2017.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time in the ordinary course of business, we may be named as a defendant in legal proceedings related to various issues, including without limitation, workers' compensation claims, tort claims, or contractual disputes. We are not currently involved in any material legal proceedings.
Item 1A. Risk Factors
There has not been any material change to the risk factors previously disclosed in our annual report on Form 10-K for the fiscal year ended September 30, 2017.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information
None.
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Item 6. Exhibits.
(a) | The following exhibits are filed as part of this report. |
Exhibit No. | Exhibits | ||
31.1 | |||
31.2 | |||
32.1 | |||
32.2 | |||
101 | The following financial information from Red Trail Energy, LLC's Quarterly Report on Form 10-Q for the quarter ended December 31, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Balance Sheets as of December 31, 2017 and September 30, 2017, (ii) Statements of Operations for the three months ended December 31, 2017 and 2016, (iii) Statements of Cash Flows for the three months ended December 31, 2017 and 2016, and (iv) the Notes to Unaudited Condensed Financial Statements.** | ||
(*) Filed herewith.
(**) Furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
RED TRAIL ENERGY, LLC | |||
Date: | February 14, 2018 | /s/ Gerald Bachmeier | |
Gerald Bachmeier | |||
President and Chief Executive Officer | |||
(Principal Executive Officer) | |||
Date: | February 14, 2018 | /s/ Jodi Johnson | |
Jodi Johnson | |||
Chief Financial Officer | |||
(Principal Financial and Accounting Officer) | |||
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