Granite Falls Energy, LLC - Quarter Report: 2009 July (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

For the fiscal quarter ended July 31, 2009

 

 

Commission file number 00051277

 

GRANITE FALLS ENERGY, LLC

(Name of small business issuer in its charter)

 

 

 

320-564-3100

(Issuer’s telephone number)

 

Indicate by check mark whether the registrant (1) 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).  o 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.

 

 

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 September 1, 2009 there were 30,656 membership units outstanding.

 

 

Table of Contents

 

INDEX

 

	Page
PART I - FINANCIAL INFORMATION	3
Item 1.  Financial Statements	3
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.  Quantitative and Qualitative Disclosures About Market Risk	27
Item 4T. Controls and Procedures	28
PART II — OTHER INFORMATION	29
Item 1.  Legal Proceedings	29
Item 1A.  Risk Factors	29
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3.  Defaults Upon Senior Securities	30
Item 4.  Submission of Matters to a Vote of Security Holders	30
Item 5.  Other Information	30
Item 6.  Exhibits	30
SIGNATURES	30

 

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PART I - FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

 

GRANITE FALLS ENERGY, LLC

 

Condensed Balance Sheets

 

		July 31,			October 31,
		2009			2008
		(unaudited)
ASSETS
Current Assets
Cash		$	1,809,006		$	37,773
Restricted cash		825,549			1,000,000
Accounts receivable		2,741,091			3,790,454
Inventory		3,216,084			3,875,324
Derivative instruments		179,955			568,822
Prepaid expenses and other current assets		214,231			110,411
Total current assets		8,985,916			9,382,784
Property, Plant and Equipment
Land and improvements		3,490,107			3,490,107
Railroad improvements		4,127,738			4,127,738
Process equipment and tanks		59,221,289			59,140,218
Administration building		279,734			279,734
Office equipment		135,912			135,912
Rolling stock		563,007			563,007
Construction in progress		262,236			92,557
		68,080,023			67,829,273
Less accumulated depreciation		23,943,141			19,181,232
Net property, plant and equipment		44,136,882			48,648,041
Other Assets
Deferred financing costs, net of amortization		33,594			35,694
Total Assets		$	53,156,392		$	58,066,519
LIABILITIES AND MEMBERS’ EQUITY
Current Liabilities
Current portion of long-term debt		$	74,810		$	73,771
Revolving line of credit		—			2,560,500
Accounts payable		1,316,742			1,351,695
Corn payable to FCE - related party		1,033,546			—
Due to broker		—			238,581
Derivative instruments		94,080			—
Accrued liabilities		421,706			1,884,085
Total current liabilities		2,940,884			6,108,632
Long-Term Debt, less current portion		385,324			445,097
Commitments and Contingencies
Members’ Equity, 30,656 and 31,156 units authorized, issued, and outstanding, respectively		49,830,184			51,512,790
Total Liabilities and Members’ Equity		$	53,156,392		$	58,066,519

 

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

 

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GRANITE FALLS ENERGY, LLC

 

Condensed Statements of Operations

 

		Three Months			Three Months
		Ended			Ended
		July 31,			July 31,
		2009			2008
		(Unaudited)			(Unaudited)
Revenues		$	25,829,076		$	29,464,319	*
Cost of Goods Sold		23,899,283		*	33,663,068		*
Gross Profit (Loss)		1,929,793			(4,198,749		)
Operating Expenses		533,995			1,195,004
Operating Income (Loss)		1,395,798			(5,393,753		)
Other Income (Expense)
Other income		13,205			99,540
Interest income		2,330			6,789
Interest expense		(16,210		)	(12,028		)
Total other income (expense), net		(675		)	94,301
Net Income (Loss)		$	1,395,123		$	(5,299,452	)
Weighted Average Units Outstanding - Basic and Diluted		30,656			31,156
Net Gain (Loss) Per Unit - Basic and Diluted		$	45.51		$	(170.09	)
Distributions Per Unit - Basic and Diluted		$	—		$	—

 

*  Primarily related party

 

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

 

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GRANITE FALLS ENERGY, LLC

 

Condensed Statements of Operations

 

		Nine Months			Nine Months
		Ended			Ended
		July 31,			July 31,
		2009			2008
		(Unaudited)			(Unaudited)
Revenues		$	68,141,681		$	72,781,686	*
Cost of Goods Sold		67,060,694		*	73,573,560		*
Gross Profit (Loss)		1,080,987			(791,874		)
Operating Expenses		1,573,479			2,417,300
Operating Loss		(492,492		)	(3,209,174		)
Other Income (Expense):
Other income (expense), net		(618,298		)	142,966
Interest income		8,036			32,226
Interest expense		(79,852		)	(87,576		)
Total other income (expense), net		(690,114		)	87,616
Net Loss		$	(1,182,606	)	$	(3,121,558	)
Weighted Average Units Outstanding - Basic and Diluted		30,823			31,156
Net Loss Per Unit - Basic and Diluted		$	(38.37	)	$	(100.19	)
Distributions Per Unit - Basic and Diluted		$	—		$	—

 

*  Primarily related party

 

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

 

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GRANITE FALLS ENERGY, LLC

 

Condensed Statements of Cash Flows

 

		Nine Months			Nine Months
		Ended			Ended
		July 31,			July 31,
		2009			2008
		(unaudited)			(unaudited)
Cash Flows from Operating Activities:
Net loss		$	(1,182,606	)	$	(3,121,558	)
Adjustments to reconcile net loss to net cash provided by operations:
Depreciation and amortization		4,764,009			5,076,996
Change in fair value of derivative instruments		895,481			3,083,891
Changes in assets and liabilities:
Restricted cash		174,451			(2,177,402		)
Derivative instruments		(412,534		)	699,776
Accounts receivable		549,363			(1,388,173		)
Inventory		659,240			103,068
Prepaid expenses and other current assets		(103,820		)	1,022,825
Accounts payable		998,593			59,521
Due to broker		(238,581		)	—
Accrued liabilities		(1,462,379		)	419,560
Net Cash Provided by Operating Activities		4,641,217			3,778,504
Cash Flows from Investing Activities:
Capital expenditures		(81,071		)	(104,976		)
Construction in process		(169,679		)	(570,033		)
Net Cash Used in Investing Activities		(250,750		)	(675,009		)
Cash Flows from Financing Activities:
Proceeds on short-term notes payable		—			(1,000,000		)
Proceeds (payments) on revolving line of credit, net		(2,560,500		)	2,703,500
Payments on long-term debt		(58,734		)	(57,724		)
Member distributions paid		—			(6,231,200		)
Net Cash Used in Financing Activities		(2,619,234		)	(4,585,424		)
Net Increase (Decrease) in Cash		1,771,233			(1,481,929		)
Cash – Beginning of Period		37,773			3,963,425
Cash – End of Period		$	1,809,006		$	2,481,496
Supplemental Cash Flow Information
Cash paid during the period for:
Interest expense		$	72,185		$	75,740
Supplemental Disclosure of Noncash Investing, Operating and Financing Activities
Transfer of construction in process to fixed assets		$	—		$	767,681
Accounts receivable offset by repurchase of membership units		$	500,000		$	—

 

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

 

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GRANITE FALLS ENERGY, LLC

 

Notes to Unaudited Condensed Financial Statements

 

July 31, 2009

 

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying condensed balance sheet as of October 31, 2008 is derived from audited financial statements. The unaudited interim condensed financial statements of Granite Falls Energy, LLC (the “Company”) reflect all adjustments consisting only of normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of their financial position and results of operations and cash flows. The results for the three and nine month periods ended July 31, 2009 are not necessarily indicative of the results that may be expected for a full fiscal year. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) are condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), although the Company believes that the disclosures made are adequate to make the information not misleading. These condensed financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in its annual report for the year ended October 31, 2008 filed on Form 10-K with the SEC.

 

Nature of Business

 

Granite Falls Energy, LLC (“GFE” or the “Company”) is a Minnesota limited liability company currently producing fuel-grade ethanol, distillers grains, and crude corn oil near Granite Falls, Minnesota and sells these products throughout the continental United States.  GFE’s plant has an approximate annual production capacity of 50 million gallons, and its environmental permits allow the Company to produce ethanol at a rate of 49.9 million gallons of undenatured ethanol on a twelve month rolling sum basis.

 

Accounting Estimates

 

Management uses estimates and assumptions in preparing these condensed financial statements in accordance with generally accepted accounting principles in the United States of America.  Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses.  The Company uses estimates and assumptions in accounting for the following significant matters, among others: economic lives of property, plant, and equipment, realizability of accounts receivable, valuation of derivatives, and inventory, and analysis of long-lived assets impairment. Actual results may differ from previously estimated amounts, and such differences may be material to our condensed financial statements. The Company periodically reviews estimates and assumptions, and the effects of revisions are reflected in the period in which the revision is made.

 

Revenue Recognition

 

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

 

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

 

Ethanol marketing fees and commissions totaled approximately $213,000 and $192,000 for the three month periods ended July 31, 2009 and 2008, respectively. Ethanol marketing fees and commissions totaled approximately $540,000, and $523,000 for the nine month periods ended July 31, 2009 and 2008, respectively.  Distillers grain marketing fees and commissions totaled approximately $48,000 and $119,000 for the three month periods ended July 31, 2009 and 2008, respectively.  Distillers grain marketing fees and commissions totaled approximately

 

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GRANITE FALLS ENERGY, LLC

 

Notes to Unaudited Condensed Financial Statements

 

July 31, 2009

 

$118,000 and $208,000 for the nine month periods ended July 31, 2009 and 2008, respectively.

 

Long-Lived Assets

 

Property, plant, and equipment are stated at cost. Depreciation is provided over estimated useful lives by use of the straight line method. Maintenance and repairs are expensed as incurred. Major improvements and betterments are capitalized.

 

Long-lived assets, such as property, plant, and equipment, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including, but not limited to, discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.

 

The Company currently owns and operates an ethanol plant that has an approximate production capacity of 50 million gallons per year. The carrying value of these facilities at July 31, 2009 was approximately $44 million. In accordance with the Company’s policy for evaluating impairment of long-lived assets described above, management has evaluated the recoverability of the facilities based on projected future cash flows from operations over the facilities’ estimated useful lives.  Management has determined that the projected future undiscounted cash flows from operations of these facilities exceed their carrying value at July 31, 2009; therefore, no impairment loss was indicated or recognized.  In determining the projected future undiscounted cash flows, the Company has made significant assumptions concerning the future viability of the ethanol industry, the future price of corn in relation to the future price of ethanol and the overall demand in relation to production and supply capacity.

 

Derivative Instruments

 

From time to time the Company enters into derivative transactions to hedge its exposures to commodity price fluctuations.  The Company accounts for derivatives in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities. (“SFAS No. 133”). SFAS No. 133 requires the recognition of derivatives in the balance sheet and the measurement of these instruments at fair value.

 

In order for a derivative to qualify as a hedge, specific criteria must be met and appropriate documentation maintained.  Gains and losses from derivatives that do not qualify as hedges, or are undesignated, must be recognized immediately in earnings.  If the derivative does qualify as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will be either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings.  Changes in the fair value of undesignated derivatives are recorded in revenue or cost of goods sold based on the commodity being hedged.

 

Additionally, SFAS No. 133 requires a company to evaluate its contracts to determine whether the contracts are derivatives.  Certain contracts that literally meet the definition of a derivative may be exempted 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.  Certain corn and distillers grains contracts that meet the requirements of normal purchases or sales are documented as normal and exempted from the accounting and reporting requirements of SFAS No. 133, and therefore, are not marked to market in the financial statements.

 

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GRANITE FALLS ENERGY, LLC

 

Notes to Unaudited Condensed Financial Statements

 

July 31, 2009

 

During the first calendar quarter of 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FAS Statement No. 133 (“SFAS 161”).  This statement requires holders of derivative instruments to provide qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses from derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements.  The Company adopted this statement duing the second fiscal quarter of 2009.  See further discussion in Note 4.

 

Fair Value of Financial Instruments

 

The carrying values of cash, restricted cash, accounts receivable, accounts payable, and accrued liabilities approximate fair value due to the short maturity of the instruments.  The Company believes the carrying amount of the line of credit and fixed rate long-term debt instruments approximates the fair value.

 

Subsequent Events

 

The Company has evaluated subsequent events through September 14, 2009, the date which the financial statements were available to be issued.

 

2.  RISKS AND UNCERTAINTIES

 

The Company has certain risks and uncertainties that it experiences during volatile market conditions such as what the Company experienced during fiscal 2008 and into 2009. These volatilities can have a severe impact on operations.  The Company’s revenues are derived from the sale and distribution of ethanol, distillers grains, and corn oil to customers primarily located in the United States.  Corn for the production process is supplied to the plant primarily from local agricultural producers through the Company’s grain procurement agent. For the three month period ended July 31, 2009, ethanol sales averaged 82% of total revenues and corn costs averaged 70% of cost of goods sold.

 

The Company’s operating and financial performance is largely driven by the prices at which it sells ethanol and the net expense of corn. The price of ethanol is influenced by factors such as supply and demand, the weather, government policies and programs, unleaded gasoline prices and the petroleum markets as a whole. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol. The Company’s largest cost of production is corn.  The cost of corn is generally impacted by factors such as supply and demand, the weather, government policies and programs, and our risk management program used to protect against the price volatility of these commodities.

 

3.  INVENTORY

 

Inventory consists of the following:

 

		July 31, 2009			October 31, 2008
Raw materials		$	1,286,586		$	1,805,713
Spare parts		453,942			484,032
Work in process		480,530			573,416
Finished goods		995,026			1,012,163
Totals		$	3,216,084		$	3,875,324

 

4.  DERIVATIVE INSTRUMENTS

 

As of July 31, 2009, the Company has entered into corn, natural gas, and denaturant derivative instruments, which are required to be recorded as either assets or liabilities at fair value in the condensed balance sheet.  Derivatives qualify for treatment as hedges when there is a high correlation between the change in fair value of the derivative instrument and the related change in value of the underlying hedged item and when the Company formally documents, designates, and assesses the effectiveness of transactions that receive hedge accounting initially and on

 

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GRANITE FALLS ENERGY, LLC

 

Notes to Unaudited Condensed Financial Statements

 

July 31, 2009

 

an on-going basis.  The Company must designate the hedging instruments based upon the exposure being hedged as a fair value hedge or a cash flow hedge.  While the Company does not typically designate the derivative instruments that it enters into as hedging instruments because of the administrative costs associated with the related accounting, the Company believes that the derivative instruments represent an economic hedge. The Company does not enter into derivative transactions for trading purposes.

 

In order to reduce the risk caused by market fluctuations, the Company occasionally hedges its anticipated corn, natural gas, and denaturant purchases and ethanol sales by entering into options and futures contracts.  These contracts are used with the intention to fix the purchase price of anticipated requirements of corn, natural gas, and denaturant in the Company’s ethanol production activities and the related sales price of ethanol.  The fair value of these contracts is based on quoted prices in active exchange-traded or over-the-counter markets. Although the Company believes its commodity derivative positions are economic hedges, none have been formally designated as a hedge for accounting purposes and derivative positions are recorded on the balance sheet at their fair market value, with changes in fair value recognized in current period earnings or losses. Gains and losses from ethanol related derivative instruments, including unrealized changes in the fair value of these positions, are included in the results of operations and are classified as a component of revenue. Gains and losses from corn, natural gas, and denaturant derivative instruments, including unrealized changes in the fair value of these positions, are included in the results of operations and are classified as a component of costs of goods sold. The Company does not enter into financial instruments for trading or speculative purposes. The Company records withdrawals and payments against the trade equity of derivative instruments as a reduction or increase in the value of the derivative instruments

 

As of July 31, 2009, the total notional amount of the Company’s outstanding corn derivative instruments was approximately 420,000 bushels that were entered into to hedge forecasted corn purchases through September 2009. As of July 31, 2009, the total notional amount of the Company’s outstanding natural gas derivative instruments was approximately 940,000 million British thermal units (MMBTU) that were entered into to hedge forecasted natural gas purchases through March 2010. As of July 31, 2009, the total notional amount of the Company’s outstanding denaturant derivative instruments was approximately 210,000 gallons that were entered into to hedge forecasted denaturant purchases through January 2010. There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding as disclosed above.

 

The following tables provide details regarding the Company’s derivative instruments at July 31, 2009, none of which are designated as hedging instruments under SFAS 133:

 

		Balance Sheet location		Assets			Liabilities
Corn contracts		Derivative instruments		$	68,275		$	—
Natural gas contracts		Derivative instruments		—			94,080
Denaturant contracts		Derivative instruments		111,680			—
Totals				$	179,955		$	94,080

 

In addition, as of July 31, 2009 the Company maintains approximately $225,549 of restricted cash related to margin requirements for the Company’s derivative instrument positions.

 

The following tables provide details regarding the gains and losses from Company’s derivative instruments in statements of operations, none of which are designated as hedging instruments under SFAS 133:

 

		Statement of		Three-Months Ended July 31,
		Operations location		2009			2008
Ethanol contracts		Revenue		$	—		$	(1,172,572	)
Corn contracts		Cost of Goods Sold		(903,248		)	(3,383,270		)
Natural gas contracts		Cost of Goods Sold		(22,186		)	(214,075		)
Denaturant contracts		Cost of Goods Sold		158,404			—
Total loss				$	(767,030	)	$	(4,769,917	)

 

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GRANITE FALLS ENERGY, LLC

 

Notes to Unaudited Condensed Financial Statements

 

July 31, 2009

 

		Statement of		Nine-Months Ended July 31,
		Operations location		2009			2008
Ethanol contracts		Revenue		$	119,248		$	(8,480,231	)
Corn contracts		Cost of Goods Sold		(1,011,711		)	5,610,415
Natural gas contracts		Cost of Goods Sold		(182,269		)	(214,075		)
Denaturant contracts		Cost of Goods Sold		179,250			—
Total loss				$	(895,482	)	$	(3,083,891	)

 

5.  REVOLVING LINE OF CREDIT

 

The Company has a Loan Agreement with Minnwest Bank M.V. of Marshall, MN (the “Bank”).  Under the Loan Agreement, the Company has a revolving line of credit with a maximum of $10,000,000 available and is secured by substantially all of the Company’s assets. On June 12, 2009, the revolving line of credit was amended to $6,000,000.  Our current line of credit is available until November 2010, at which time the line of credit will need to be renewed. The interest rate on the revolving line of credit is 0.25 percentage points above the prime rate as reported by the Wall Street Journal, with a minimum rate of 5.0%.  The interest rate on the revolving line of credit at July 31, 2009 was 5.0%, the minimum rate under the terms of the agreement.  At July 31, 2009, the Company had no outstanding balance on this line of credit.  The Company is required to maintain a $600,000 savings account balance with the Bank to serve as collateral on this line of credit.  This amount is included in restricted cash as of July 31, 2009.

 

During first quarter of fiscal year 2008, the Company transferred letters of credit totaling $610,750 from FNBO to Minnwest Bank.  These letters of credit were renewed for the same amount with Minnwest Bank on December 18, 2008.  On February 13, 2009, the outstanding balance of the letters of credit was reduced to $462,853 due to the reduction in the credit requirement by Northern Natural Gas.

 

6.  LONG-TERM DEBT

 

Long-term debt consists of the following:

 

		July 31, 2009			October 31, 2008
Economic Development Authority (“EDA”) Loans:
City of Granite Fall / MIF		$	307,993		$	352,880
Western Minnesota RLF		71,423			79,756
Chippewa County		80,718			86,232
Total EDA Loan		460,134			518,868
Less: Current Maturities		(74,810		)	(73,771		)
Total Long-Term Debt		$	385,324		$	445,097

 

The estimated maturities of long term debt at July 31, 2009 are as follows:

 

2009		$	74,810
2010		76,031
2011		77,286
2012		78,575
2013		79,901
Thereafter		73,531
Total		$	460,134

 

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GRANITE FALLS ENERGY, LLC

 

Notes to Unaudited Condensed Financial Statements

 

July 31, 2009

 

EDA Loans:

 

On February 1, 2006, the Company signed a Loan Agreement with the City of Granite Falls, MN (“EDA Loan Agreement”) for amounts to be borrowed from several state and regional economic development authorities. The original amounts are as follows:

 

City of Granite Falls / Minnesota Investment Fund (“MIF”):
Original Amount:		$500,000
Interest Rate:		1.00%
Principal and Interest Payments:		Quarterly
Maturity Date:		June 15, 2014
Western Minnesota Revolving Loan Fund (“RLF”):
Original Amount:		$100,000
Interest Rate:		5.00%
Principal and Interest Payments:		Semi-Annual
Maturity Date:		June 15, 2016
Chippewa County:
Original Amount:		$100,000
Interest Rate:		3.00%
Principal and Interest Payments:		Semi-Annual
Maturity Date:		June 15, 2021

 

Amounts borrowed under the EDA Loan Agreements are secured by a second mortgage on all of the assets of the Company.

 

7. LEASES

 

On October 3, 2005, the Company signed a lease agreement with Trinity Industries Leasing Company (“Trinity”) for 75 hopper cars to assist us with the transport of distiller’s grains by rail. The lease is for a five-year period once the cars have been delivered and inspected in Granite Falls, MN. Based on final manufacturing and interest costs, the Company will pay Trinity $673 per month plus $0.03 per mile traveled in excess of 36,000 miles per year.  Rent expense for these leases was approximately $152,000 and $149,000 for the three months ended July 31, 2009 and 2008, respectively.  Rent expense for these leases was approximately $453,000 and $446,000 for the nine month periods ended July 31, 2009 and 2008, respectively.

 

In February 2009, the Company assumed three rail car leases for the transportation of the Company’s ethanol.  The rail car lease payments are due monthly in the aggregate amount of approximately $89,000.

 

At July 31, the Company had the following minimum commitments, which at inception had non-cancelable terms of more than one year:

 

Periods Ending October 31,
2009		$	533,432
2010		1,059,564
2011		1,054,974
2012		1,015,644
2013		771,114
Thereafter		1,070,318
Total minimum lease commitments		$	5,505,046

 

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GRANITE FALLS ENERGY, LLC

 

Notes to Unaudited Condensed Financial Statements

 

July 31, 2009

 

8. MEMBERS’ EQUITY

 

The Company has one class of membership units.   The units have no par value and have identical rights, obligations and privileges.  Income and losses are allocated to all members based upon their respective percentage of units held. In January 2009, the Company repurchased 500 units at the original offering price of $1,000 per unit from its former ethanol marketer.  As of July 31, 2009 and October 31, 2008, the Company had 30,656 and 31,156 membership units issued and outstanding, respectively.

 

9. FAIR VALUE

 

SFAS No. 157, Fair Value Measurements (“SFAS 157”) defines fair value, outlines a framework for measuring fair value (although it does not expand the required use of fair value) and details the required disclosures about fair value measurements. Effective November 1, 2008, the Company adopted SFAS 157 except for certain nonfinancial assets and liabilities with respect to the deferral under FASB Staff Position 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”). The adoption of SFAS 157 did not have a material effect on the Company’s financial position or the results of operations, or cash flows for the three and nine month periods. SFAS 157’s requirements for certain nonfinancial assets and liabilities recognized or disclosed at fair value on a nonrecurring basis are deferred until fiscal years beginning after November 15, 2008 in accordance with FSP 157-2. At the present time, the Company does not have any nonfinancial assets or liabilities that would require fair value recognition or disclosures under SFAS 157.

 

Fair value is defined as 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 the principal or most advantageous market. The Company uses a fair value hierarchy that has three levels of inputs, both observable and unobservable, with use of the lowest possible level of input to determine fair value. Level 1 inputs include quoted market prices in an active market or the price of an identical asset or liability. Level 2 inputs are market data, other than Level 1, that are observable either directly or indirectly. Level 2 inputs include quoted market prices for similar assets or liabilities, quoted market prices in an inactive market, and other observable information that can be corroborated by market data. Level 3 inputs are unobservable and corroborated by little or no market data. The Company uses valuation techniques in a consistent manner from year-to-year.

 

The following table provides information on those assets and liabilities that are measured at fair value on a recurring basis:

 

		July 31, 2009
		Fair Value Carrying
		Amount in the			Fair Value Measurement Using
		Balance Sheet			Level 1			Level 2			Level 3
Derivative instruments		$	179,955		$	179,955		$	—		$	—
Derivative instruments		$	(94,080	)	(94,080		)	—			—

 

Derivative instruments approximate their fair value based on quoted prices in active exchange-traded or over-the-counter markets.

 

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GRANITE FALLS ENERGY, LLC

 

Notes to Unaudited Condensed Financial Statements

 

July 31, 2009

 

10. COMMITMENTS AND CONTINGENCIES

 

Corn Storage and Grain Handling Agreement and Purchase Commitments

 

The Company has a corn storage and grain handling agreement with a Farmers Cooperative Elevator (FCE), a member. Under this agreement, the Company agrees to purchase all of the corn needed for the operation of the plant from FCE. The price of the corn purchased will be the bid price FCE establishes for the plant plus a fee of $0.05 per bushel. The Company did not have any forward contracts in place with FCE for corn purchases at July 31, 2009.

 

Operating and Management Agreement

 

On August 1, 2008, the Company and Glacial Lakes Energy, LLC (“GLE”) executed a settlement agreement and mutual release related to the dispute with GLE over the termination of the Operating and Management Agreement. The Company has agreed to pay GLE a contingent amount of 2% of net income of the Company, as defined per the agreement, for each of the fiscal years ending October 31, 2008 and 2009 and 1.5% of net income of the Company, as defined per the agreement, for the fiscal year ending October 31, 2010. As of July 31, 2009, the Company has not accrued for any contingent amounts due on this agreement.

 

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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 and nine month periods ended July 31, 2009, compared to the same period of the prior fiscal year. This discussion should be read in conjunction with the condensed financial statements and notes and the information contained in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2008.

 

Disclosure Regarding Forward-Looking Statements

 

This report contains historical information, as well as forward-looking statements. These forward-looking statements include any statements that involve known and unknown risks and relate to future events and our expectations regarding future performance or conditions. Words 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 are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. These forward-looking statements, and others we make from time to time, are subject to a number of risks and uncertainties. Many factors could cause actual results to differ materially from those projected in forward-looking statements. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include, but are not limited to:

 

·                 Changes in the availability and price of corn and natural gas;

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

·                 Our ability to profitably operate the ethanol plant and maintain a positive spread between the selling price of our products and our raw materials costs;

·                 Results of our hedging transactions and other risk management strategies;

·                 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;

·                 Changs in the availability of credit and our ability to generate sufficient liquidity to fund our operations, debt service requirements and capital expenditures;

·                 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;

·                 Lack of transport, storage and blending infrastructure preventing ethanol from reaching high demand markets;

·                 Changes in federal and/or state laws (including the elimination of any federal and/or state ethanol tax incentives);

·                 Changes and advances in ethanol production technology;

·                 Effects of mergers, consolidations or contractions in the ethanol industry;

·                 Competition from alternative fuel additives;

·                 The development of infrastructure related to the sale and distribution of ethanol;

·                 Our inelastic demand for corn, as it is the only available feedstock for our plant;

·                 Our ability to retain key employees and maintain labor relations; and

·                 Volatile commodity and financial markets.

 

The cautionary statements referred to in this section also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We do not undertake any duty to update forward-looking statements after the date they are made or to conform forward-looking statements to actual results or to changes in circumstances or expectations. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits, completely and with the understanding that our actual future results may be materially different from what we currently expect. We qualify all of our forward-looking statements by these cautionary statements.

 

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Overview

 

Granite Falls Energy, LLC (“Granite Falls” or the “Company”) is a Minnesota limited liability company currently producing fuel-grade ethanol, distillers grains, and crude corn oil for sale. Our plant has an approximate annual production capacity of 50 million gallons, and our environmental permits allow us to produce ethanol at a rate of 49.9 million gallons of undenatured ethanol on a twelve month rolling sum basis.

 

Our operating results are largely driven by the prices at which we sell our ethanol, distillers grains, and crude corn oil as well as the other costs related to production. The price of ethanol has historically fluctuated with the price of petroleum-based products such as unleaded gasoline, heating oil and crude oil. The price of distillers grains has historically been influenced by the price of corn as a substitute livestock feed. We expect these price relationships to continue for the foreseeable future, although recent volatility in the commodities markets makes historical price relationships less reliable. Our largest costs of production are corn, natural gas, depreciation and manufacturing chemicals. The cost of corn is largely impacted by geopolitical supply and demand factors and the outcome of our risk management strategies. Prices for natural gas, manufacturing chemicals and denaturant are tied directly to the overall energy sector, crude oil and unleaded gasoline.

 

As of the date of this report, we have 35 full time employees. Ten of these employees are involved primarily in management and administration. The remaining employees are involved primarily in plant operations. We do not currently anticipate any significant change in the number of employees at our plant.

 

Results of Operations for the Three Months Ended July 31, 2009 and 2008

 

The following table shows the results of our operations and the approximate percentage of revenues, costs of goods sold, operating expenses and other items to total revenues in our unaudited statements of operations for the three months ended July 31, 2009 and 2008:

 

		Three Months					Three Months
		Ended July 31, 2009					Ended July 31, 2008
		(Unaudited)					(Unaudited)
Statement of Operations Data		Amount			Percent		Amount			Percent
Revenues		$	25,829,076		100.00	%	$	29,464,319		100.00	%
Cost of Goods Sold		23,899,283			92.53	%	33,663,068			114.25	%
Gross Profit (Loss)		1,929,793			7.47	%	(4,198,749		)	(14.25	)%
Operating Expenses		533,995			2.07	%	1,195,004			4.06	%
Operating Income (Loss)		1,395,798			5.40	%	(5,393,753		)	(18.31	)%
Other Income (Expense), net		(675		)	(0.00	)%	94,301			0.32	%
Net Income (Loss)		$	1,395,123		5.40	%	$	(5,299,452	)	(17.99	)%

 

Revenues

 

Our revenues from operations come from three primary sources: sales of fuel ethanol, sales of distillers grains and sales of corn oil.

 

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The following table shows the sources of our revenue for the three months ended July 31, 2009.

 

		Amount			Percentage of Total Revenues
Revenue Sources
Ethanol Sales		$	21,092,398		81.66	%
Distillers Grains Sales		4,362,830			16.89
Corn Oil Sales		373,848			1.45
Ethanol Derivative Activity Gains (Losses)		—			—
Total Revenues		$	25,829,076		100.0	%

 

The following table shows the sources of our revenue for the three months ended July 31, 2008:

 

		Amount			Percentage of Total Revenues
Revenue Sources
Ethanol Sales		$	25,646,031		87.04	%
Distillers Grains Sales		4,445,805			15.09
Corn Oil Sales		545,055			1.85
Ethanol Derivative Activity Gains (Losses)		(1,172,572		)	(3.98	)
Total Revenues		$	29,464,319		100.0	%

 

The following table shows additional data regarding production and price levels for our primary inputs and products for the three months ended July 31, 2009 and 2008:

 

		Three Months ended July 31, 2009			Three Months ended July 31, 2008
Additional Data
Ethanol sold (gallons)		13,519,117			11,172,852
Dried distillers grains sold (tons)		33,747			29,384
Modified distillers grains sold (tons)		4,465			188
Corn oil sold (pounds)		1,752,460			1,313,595
Ethanol average price per gallon (net of hedging activity)		$	1.56		$	2.19
Dried distillers grains average price per ton		$	121.85		$	151.13
Modified distillers grains average price per ton		$	63.73		$	26.89
Corn oil average price per pound		$	0.21		$	0.42
Corn costs per bushel (net of hedging activity)		$	3.78		$	6.78

 

Revenues.

 

In the three month period ended July 31, 2009, ethanol sales comprised approximately 81.7% of our revenues and distillers grains sales comprised approximately 16.9% percent of our revenues, while corn oil sales comprised approximately 1.5% of our revenues. For the three month period ended July 31, 2008, ethanol sales comprised approximately 87.0% of our revenue, and distillers grains sales comprised approximately 15.1% of our revenue, without including ethanol derivatives, while corn oil sales comprised approximately 1.9% of our revenues.

 

Management believes that distillers grains represent a larger proportion of our revenues during the three months ended July 31, 2009 compared to the same period of 2008 as a result of lower ethanol prices and higher modified distillers grains prices we received during our third fiscal quarter of 2009 compared to the same period of 2008. A second factor driving our revenues for our third fiscal quarter of 2009 compared to the same period of 2008 is our increased production of ethanol, distillers grains and corn oil. In November 2008 we increased our production of ethanol from a rate of 45 million gallon per year rate to a 50 million gallon per year.

 

The average ethanol sales price we received for the three month period ended July 31, 2009 was approximately

 

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28.8% lower than our average ethanol sales price for the comparable 2008 period. Management attributes this decrease to a surplus of ethanol and the corresponding decline in ethanol prices, and the decrease in commodity prices generally, due to the worldwide economic slowdown. Management anticipates that the price of ethanol may remain steady or increase during the last quarter of our 2009 fiscal year as a result of slowly improving worldwide economics, which seems to be positively affecting the market prices of crude oil and gasoline.

 

Management also anticipates that our results of operations for our 2009 fiscal year will continue to be affected by high corn prices, a surplus of ethanol which results in low ethanol prices, and volatility in the commodity markets. As a result of these factors, management anticipates that the ethanol plant may not operate profitably for our fiscal year ending October 31, 2009. If the price of ethanol remains low for an extended period of time, management anticipates that this could significantly impact our liquidity, especially if our raw material costs increase. Management believes the industry will need to continue to grow demand and further develop an ethanol distribution system to facilitate additional blending of ethanol and gasoline to offset the increased supply brought to the marketplace by additional production. Going forward, we are optimistic that ethanol demand will continue to grow and ethanol distribution will continue to expand as a result of the positive blend economics that currently exist once the Volumetric Ethanol Excise Tax Credit is accounted for by the gasoline refiners and blenders.

 

The price we received for our dried distillers grains decreased during the three month period ended July 31, 2009 compared to the same period of 2008.  Prior to November 2008 we were not producing modified distillers grains on a regular basis and any modified distillers grains we sold was off specification product and sold at a discount.  However, after November 2008 we began producing and selling modified distillers grains and the price we received for our modified distillers grains increased by approximately 137.0% during the three month period ended July 31, 2009 compared to the same period of 2008.  We anticipate that the market price of our dried distillers grains will continue to be volatile as a result of changes in the price of corn and competing animal feed substitutes such as soybean meal as well as volatility in distillers grains supplies related to changes in ethanol production. Economic distress in the livestock industry has resulted in decreased demand for animal feed, including distillers grains, which may result in a weaker distillers grain market during our last quarter of the 2009 fiscal year.

 

We independently market our corn oil which is used primarily as a biodiesel feedstock and as a supplement for animal feed. Corn oil sales accounted for approximately 1.5% of our revenues during our quarter ended July 31, 2009.

 

We occasionally engage in hedging activities with respect to our ethanol sales. We recognize the gains or losses that result from the changes in the value of these derivative instruments in revenues as the changes occur. As ethanol prices fluctuate, the value of our derivative instruments are impacted, which affects our financial performance. We anticipate continued volatility in our revenues due to the timing of the changes in value of the derivative instruments relative to the price and volume of the ethanol being hedged.

 

Cost of Sales

 

Our costs of goods sold as a percentage of revenues were approximately 92.5% for the three month period ended July 31, 2009 compared to approximately 114.3% for the same period of 2008.  Our two largest costs of production are corn (73.6% of cost of goods sold for our three months ended July 31, 2009) and natural gas (8.6% of cost of goods sold for our three months ended July 31, 2009).  Our cost of goods sold decreased by approximately $9,760,000 in the three months ended July 31, 2009, compared to the three months ended July 31, 2008, even though our revenue only decreased by approximately $3,600,000.  This decrease in the cost of goods sold is primarily a result of decreased corn and natural gas costs. Our per bushel corn costs decreased by approximately 44.3% for the three months ended July 31, 2009 as compared to the same period for our 2008 fiscal year.  Even with increased corn consumption and corresponding ethanol production our aggregate cost of goods sold decreased, resulting in positive margins in the quarter ending July 31, 2009.

 

We anticipate that corn prices will continue to be volatile throughout the remainder of the growing season. Cooler weather in the corn belt has caused speculation of a damaging frost, which has caused the price of corn to remain strong. However, we anticipate that corn prices may decrease somewhat following harvest if projected corn yields are realized.  We expect that the poor conditions associated with the global economic slowdown and the economic distress in the domestic livestock industry will ultimately reduce the demand for corn. We anticipate that this may reduce corn

 

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prices during the first portion of the new marketing year, which coincides with the last month of our fiscal year ending October 31, 2009 and the first quarter of our fiscal year ending October 31, 2010. We performed a lower of cost or market analysis on inventory as of July 31, 2009 and determined that the market values of certain inventories were not less than their carrying value.

 

As of September 11, 2009, the United States Department of Agriculture estimated that 2009 corn acres harvested will be up approximately 1.7% from 2008. The USDA attributes the increase in 2009 corn acreage to strong corn prices during the corn planting season. The USDA also reports that the average yield per acre will be higher in 2009 than in 2008. As of the September 11, 2009 report, the UDSA reported total anticipated corn production of approximately 13.0 billion bushels, up approximately 7.0% from 2008. Accordingly, if this large corn crop materializes, management expects corn prices to be weaker during the last quarter of the 2009 calendar year.

 

For the three month period ended July 31, 2009, we experienced a decrease of approximately 42.0% in natural gas prices compared to the same period of 2008.  We attribute this significant decrease in natural gas prices to the excess supply in the natural gas market.  We expect the market price for natural gas to remain low in the near term as we continue to endure the worldwide economic slowdown and the resulting decreased energy demand. Our natural gas consumption increased by approximately 15.4% for the three month period ended July 31, 2009 compared to the same period of 2008. We attribute this increase in natural gas consumption with our 21.0% increase in ethanol production during the three month period ended July 31, 2009 compared to the same period of 2008.

 

We occasionally engage in hedging activities with respect to corn, natural gas or denaturant. We recognize the gains or losses that result from the changes in the value of our derivative instruments in cost of goods sold as the changes occur. As corn, natural gas and denaturant 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.

 

Operating Expense

 

Our operating expenses as a percentage of revenues were lower for the three month period ended July 31, 2009 than they were for the same period ended July 31, 2008. These percentages were approximately 2.1% and 4.1% for the three months ended July 31, 2009 and 2008, respectively. This decrease in operating expenses is primarily due to increased operating efficiencies and a concerted effort by management and staff to lower our operating expenses.  We expect that going forward our operating expenses will remain relatively steady.

 

Operating Income (Loss)

 

Our income from operations for the three months ended July 31, 2009 was approximately 5.4% of our revenues compared to a loss of approximately 18.3% of our revenues for the three months ended July 31, 2008. For the three months ended July 31, 2009, we reported operating income of approximately $1,396,000 and for the three months ended July 31, 2008, we had an operating loss of approximately $5,394,000. This significant increase in our operating income is primarily due to lower corn costs relative to ethanol prices.

 

Interest Expense and Interest Income

 

Interest expense for the three months ended July 31, 2009, was less that one tenth of one percent of our revenue and totaled approximately $16,000, compared to approximately $12,000 interest expense for the three months ended July 31, 2008. This minor increase in interest expense is due primarily to an increase in the outstanding balance we carried on our revolving line of credit at Minnwest Bank during part of our third quarter ended July 31, 2009. As of July 31, 2009, we had no outstanding balance on this line of credit.

 

Results of Operations for the Nine Months Ended July 31, 2009 and 2008

 

The following table shows the results of our operations and the approximate percentage of revenues, costs of sales, operating expenses and other items to total revenues in our unaudited statements of operations for the nine

 

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months ended July 31, 2009 and 2008:

 

		Nine Months Ended July 31, 2009 (Unaudited)					Nine Months Ended July 31, 2008 (Unaudited)
Statement of Operations Data		Amount			Percent		Amount			Percent
Revenues		$	68,141,681		100.00	%	$	72,781,686		100.0	%
Cost of Goods Sold		67,060,694			98.41	%	73,573,560			101.09	%
Gross Profit (Loss)		1,080,987			1.59	%	(791,874		)	(1.09	)%
Operating Expenses		1,573,479			2.31	%	2,417,300			3.32	%
Operating Loss		(492,492		)	(0.72	)%	(3,209,174		)	(4.41	)%
Other Income (Expense), net		(690,114		)	(1.01	)%	87,616			0.12	%
Net Loss		$	(1,182,606	)	(1.74	)%	$	(3,121,558	)	(4.29	)%

 

Revenues

 

Our revenues from operations come from three primary sources: sales of fuel ethanol, sales of distillers grains and sales of corn oil.

The following table shows the sources of our revenue for the nine months ended July 31, 2009.

 

		Amount			Percentage of Total Revenues
Revenue Sources
Ethanol Sales		$	55,331,232		81.19	%
Distillers Grains Sales		11,855,675			17.40
Corn Oil Sales		835,525			1.23
Ethanol Derivative Activity Gains/ (Losses)		119,249			0.18
Total Revenues		$	68,141,681		100.00	%

 

The following table shows the sources of our revenue for the nine months ended July 31, 2008:

 

		Amount			Percentage of Total Revenues
Revenue Sources
Ethanol Sales		$	69,512,289		95.51	%
Distillers Grains Sales		11,204,573			15.39
Corn Oil Sales		545,055			0.75
Ethanol Derivative Activity Gains/ (Losses)		(8,480,231		)	(11.65	)
Total Revenues		$	72,781,686		100.00	%

 

The following table shows additional data regarding production and price levels for our primary inputs and products for the nine months ended July 31, 2009 and 2008:

 

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