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

Table of Contents

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

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

For the fiscal quarter ended April 30, 2009

o  Transition report under Section 13 or 15(d) of the Exchange Act of 1934.

 

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 June 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. Disclosure Controls and Procedures	28
PART II — OTHER INFORMATION	28
Item 1. Legal Proceedings	28
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	31
Item 6. Exhibits	31
SIGNATURES	31

 

2

Table of Contents

 

PART I - FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

 

GRANITE FALLS ENERGY, LLC

 

Condensed Balance Sheets

 

		April 30,			October 31,
		2009			2008
		(unaudited)
ASSETS
Current Assets
Cash		$	440,859		$	37,773
Restricted cash		1,418,487			1,000,000
Accounts receivable - primarily related party		2,425,411			3,790,454
Inventory		3,734,486			3,875,324
Derivative instruments		14,923			568,822
Prepaid expenses and other current assets		256,541			110,411
Total current assets		8,290,707			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		193,908			92,557
		68,011,695			67,829,273
Less accumulated depreciation		22,337,938			19,181,232
Net property, plant and equipment		45,673,757			48,648,041
Other Assets
Deferred financing costs, net of amortization		34,294			35,694
Total Assets		$	53,998,758		$	58,066,519
LIABILITIES AND MEMBERS’ EQUITY
Current Liabilities
Current portion of long-term debt		$	74,362		$	73,771
Revolving line of credit		2,090,000			2,560,500
Accounts payable		1,227,093			1,351,695
Corn payable to FCE - related party		1,124,619			—
Due to broker		—			238,581
Derivative instruments		99,970			—
Accrued liabilities		539,886			1,884,085
Total current liabilities		5,155,930			6,108,632
Long-Term Debt, less current portion		407,767			445,097
Commitments and Contingencies
Members’ Equity, 30,656 and 31,156 units authorized, issued, and outstanding, respectively		48,435,061			51,512,790
Total Liabilities and Members’ Equity		$	53,998,758		$	58,066,519

 

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

 

3

Table of Contents

 

GRANITE FALLS ENERGY, LLC

 

Condensed Statements of Operations

 

		Three Months			Three Months
		Ended			Ended
		April 30,			April 30,
		2009			2008
		(Unaudited)			(Unaudited)
Revenues		$	21,529,863		$	19,018,497	*
Cost of Goods Sold		22,089,595		*	19,027,679		*
Gross Loss		(559,732		)	(9,182		)
Operating Expenses		518,509			566,866
Operating Loss		(1,078,241		)	(576,048		)
Other Income (Expense)
Other income		31,339			43,824
Interest income		2,468			6,883
Interest expense		(26,809		)	(27,545		)
Total other income, net		6,998			23,162
Net Loss		$	(1,071,243	)	$	(552,886	)
Weighted Average Units Outstanding - Basic and Diluted		30,656			31,156
Net Loss Per Unit - Basic and Diluted		$	(34.94	)	$	(17.75	)
Distributions Per Unit - Basic and Diluted		$	—		$	—

 

* Primarily related party

 

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

 

4

Table of Contents

 

GRANITE FALLS ENERGY, LLC

 

Condensed Statements of Operations

 

		Six Months			Six Months
		Ended			Ended
		April 30,			April 30,
		2009			2008
		(Unaudited)			(Unaudited)
Revenues		$	42,312,605		$	43,317,367	*
Cost of Goods Sold		43,161,411		*	39,910,492		*
Gross Profit (Loss)		(848,806		)	3,406,875
Operating Expenses		1,039,484			1,222,296
Operating Income (Loss)		(1,888,290		)	2,184,579
Other Income (Expense):
Other income (expense), net		(631,503		)	43,426
Interest income		5,706			25,437
Interest expense		(63,642		)	(75,548		)
Total other expense, net		(689,439		)	(6,685		)
Net Income (Loss)		$	(2,577,729	)	$	2,177,894
Weighted Average Units Outstanding - Basic and Diluted		30,907			31,156
Net Income (Loss) Per Unit - Basic and Diluted		$	(83.40	)	$	69.90
Distributions Per Unit - Basic and Diluted		$	—		$	—

 

*  Primarily related party

 

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

 

5

Table of Contents

 

GRANITE FALLS ENERGY, LLC

 

Condensed Statements of Cash Flows

 

		Six Months			Six Months
		Ended			Ended
		April 30,			April 30,
		2009			2008
		(unaudited)			(unaudited)
Cash Flows from Operating Activities:
Net income (loss)		$	(2,577,729	)	$	2,177,894
Adjustments to reconcile net income (loss) to net cash provided by operations:
Depreciation and amortization		3,158,106			3,365,486
Change in fair value of derivative instruments		128,451			(1,686,025		)
Changes in assets and liabilities:
Restricted cash		(418,487		)	(1,115,524		)
Derivative instruments		525,418			5,596,181
Accounts receivable		865,043			332,903
Inventory		140,838			(1,208,603		)
Prepaid expenses and other current assets		(146,130		)	65,638
Accounts payable		1,000,017			364,635
Due to broker		(238,581		)	—
Accrued liabilities		(1,344,199		)	(212,638		)
Net Cash Provided by Operating Activities		1,092,747			7,679,947
Cash Flows from Investing Activities:
Capital expenditures		(81,071		)	(88,708		)
Construction in process		(101,351		)	(138,528		)
Net Cash Used in Investing Activities		(182,422		)	(227,236		)
Cash Flows from Financing Activities:
Payments on revolving line of credit, net		(470,500		)	—
Payments on long-term debt		(36,739		)	(36,163		)
Member distributions paid		—			(6,231,200		)
Net Cash Used in Financing Activities		(507,239		)	(6,267,363		)
Net Increase in Cash		403,086			1,185,348
Cash – Beginning of Period		37,773			3,963,425
Cash – End of Period		$	440,859		$	5,148,773
Supplemental Cash Flow Information
Cash paid during the period for:
Interest expense		$	52,833		$	66,793
Supplemental Disclosure of Noncash Investing, Operating and Financing Activities
Accounts receivable offset by repurchase of membership units		$	500,000		$	—

 

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

 

6

Table of Contents

 

GRANITE FALLS ENERGY, LLC

 

Notes to Unaudited Condensed Financial Statements

 

April 30, 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 six month periods ended April 30, 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”) is a Minnesota limited liability company operating an ethanol manufacturing facility near Granite Falls, Minnesota.  The Company produces and sells fuel ethanol and distillers grains, a co-product of the fuel ethanol production process, in the continental United States.  GFE’s plant has an approximate production capacity of 50 million gallons per year.

 

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

 

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

 

Ethanol marketing fees and commissions totaled approximately $177,000 and $149,000 for the three month periods ended April 30, 2009 and 2008, respectively. Ethanol marketing fees and commissions totaled approximately $326,000, and $331,000 for the six month periods ended April 30, 2009 and 2008, respectively.  Distillers grain marketing fees and commissions totaled approximately $30,000 and $53,000 for the three month periods ended

 

7

Table of Contents

 

GRANITE FALLS ENERGY, LLC

 

Notes to Unaudited Condensed Financial Statements

 

April 30, 2009

 

April 30, 2009 and 2008, respectively.  Distillers grain marketing fees and commissions totaled approximately $70,000 and $75,000 for the six month periods ended April 30, 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 April 30, 2009 was approximately $46 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 April 30, 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 SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. 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.

 

8

Table of Contents

 

GRANITE FALLS ENERGY, LLC

 

Notes to Unaudited Condensed Financial Statements

 

April 30, 2009

 

During the first quarter of 2008, the FASB issued FASB Statement 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 effective in the three months ended April 30, 2009.  See further discussion in Note 4.

 

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 to date in fiscal 2009. These volatilities can have a severe impact on operations.  The Company’s revenues are derived from the sale and distribution of ethanol and distillers grains to customers primarily located in the 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 April 30, 2009, ethanol sales averaged 68% of total revenues and corn costs averaged 66% 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.  The Company anticipates that results from operations for the 2009 fiscal year will continue to be affected by relatively high corn prices, a surplus of ethanol, and possibly low ethanol prices.  If the price of ethanol remains low for an extended period of time, the Company anticipates this could significantly affect our liquidity and gross margins may continue to stay negative, especially if raw material costs continue to increase.

 

3.  INVENTORY

 

Inventory consists of the following:

 

		April 30, 2009			October 31, 2008
Raw materials		$	1,489,628		$	1,805,713
Spare parts		451,592			484,032
Work in process		545,332			573,416
Finished goods		1,247,934			1,012,163
Totals		$	3,734,486		$	3,875,324

 

4.  DERIVATIVE INSTRUMENTS

 

As of April 30, 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 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 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

 

9

Table of Contents

 

GRANITE FALLS ENERGY, LLC

 

Notes to Unaudited Condensed Financial Statements

 

April 30, 2009

 

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 April 30, 2009, the total notional amount of the Company’s outstanding corn derivative instruments was approximately 950,000 bushels that were entered into to hedge forecasted corn purchases through July 2009. As of April 30, 2009, the total notional amount of the Company’s outstanding natural gas derivative instruments was approximately 160,000 million British thermal units (MMBTU) that were entered into to hedge forecasted natural gas purchases through March 2010. At of April 30, 2009, the total notional amount of the Company’s outstanding denaturant derivative instruments was approximately 630,000 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 April 30, 2009, none of which are designated as hedging instruments under SFAS 133:

 

		Balance Sheet location		Assets			Liabilities
Corn contracts		Derivative instruments		$	3,262		$	—
Natural gas contracts		Derivative instruments		—			99,970
Denaturant contracts		Derivative instruments		11,661			—
Totals				$	14,923		$	99,970

 

In addition, as of April 30, 2009 the Company maintains $418,487 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 April 30,
		Operations location		2009			2008
Ethanol contracts		Revenue		$	—		$	(3,884,446	)
Corn contracts		Cost of Goods Sold		(3,921		)	4,853,264
Natural gas contracts		Cost of Goods Sold		(164,727		)	—
Denaturant contracts		Cost of Goods Sold		20,847			—
Total gain (loss)				$	(147,801	)	$	968,818

 

10

Table of Contents

 

GRANITE FALLS ENERGY, LLC

 

Notes to Unaudited Condensed Financial Statements

 

April 30, 2009

 

		Statement of		Six-Months Ended April 30,
		Operations location		2009			2008
Ethanol contracts		Revenue		$	119,248		$	(7,307,659	)
Corn contracts		Cost of Goods Sold		(108,463		)	8,993,684
Natural gas contracts		Cost of Goods Sold		(160,083		)	—
Denaturant contracts		Cost of Goods Sold		20,847			—
Total gain (loss)				$	(128,451	)	$	1,686,025

 

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. The interest rate on the revolving line of credit is 0.75 percentage points under the prime rate as reported by the Wall Street Journal, with a minimum rate of 6.0%.  The interest rate on the revolving line of credit at April 30, 2009 was 6.0%, the minimum rate under the terms of the agreement.  At April 30, 2009, the Company had an outstanding balance on this line of credit of $2,090,000.  The Company is required to maintain a $1,000,000 savings account balance with the Bank to serve as collateral on this line of credit.  This amount is included in restricted cash as of April 30, 2009 and October 31, 2008.

 

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:

 

		April 30, 2009			October 31, 2008
Economic Development Authority (“EDA”) Loans:
City of Granite Fall / MIF		$	322,993		$	352,880
Western Minnesota RLF		75,641			79,756
Chippewa County		83,495			86,232
Total EDA Loan		482,129			518,868
Less: Current Maturities		(74,362		)	(73,771		)
Total Long-Term Debt		$	407,767		$	445,097

 

The estimated maturities of long term debt at April 30, 2009 are as follows:

 

2009		$	74,362
2010		75,568
2011		76,807
2012		78,081
2013		79,390
Thereafter		97,921
Total		$	482,129

 

11

Table of Contents

 

GRANITE FALLS ENERGY, LLC

 

Notes to Unaudited Condensed Financial Statements

 

April 30, 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 $150,231 and $149,000 for the three months ended April 30, 2009 and 2008, respectively.  Rent expense for these leases was $301,561 and $297,000 for the six month periods ended April 30, 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 April 30, 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

 

12

Table of Contents

 

GRANITE FALLS ENERGY, LLC

 

Notes to Unaudited Condensed Financial Statements

 

April 30, 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 April 30, 2009 and October 31, 2008, the Company had 30,656 and 31,156 membership units issued and outstanding, respectively.

 

9. FAIR VALUE

 

Statement of Financial Accounting Standard 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 FSP 157-2. The adoption of SFAS 157 did not have a material effect on the Company’s financial position as of April 30, 2009, or the results of operations, or cash flows for the three and six month periods then ended. 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 FASB Staff Position 157-2, Effective Date of FASB Statement No. 157 (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:

 

		April 30, 2009
		Fair Value Carrying Amount in the			Fair Value Measurement Using
		Balance Sheet			Level 1			Level 2		Level 3
Assets
Derivative instruments		$	14,923		$	14,923		—		—
Total assets at fair value		$	14,923		$	14,923		—		—
Liabilities
Derivative instruments		$	99,970		$	99,970		—		—
Total liabilities at fair value		$	99,970		$	99,970		—		—

 

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

 

13

Table of Contents

 

GRANITE FALLS ENERGY, LLC

 

Notes to Unaudited Condensed Financial Statements

 

April 30, 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 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 April 30, 2009.

 

Operating and Management Agreement

 

On August 1, 2008, the Company and Glacial Lakes Energy, LLC (“GLE”), a member, 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 April 30, 2009, the Company has not accrued for any contingent amounts due on this agreement.

 

14

Table of Contents

 

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 six month periods ended April 30, 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;

·                 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.

 

15

Table of Contents

 

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 April 30, 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 April 30, 2009 and 2008:

 

		Three Months Ended April 30, 2009 (Unaudited)					Three Months Ended April 30, 2008 (Unaudited)
Statement of Operations Data		Amount			Percent		Amount			Percent
Revenues		$	21,529,863		100.0	%	$	19,018,497		100.0	%
Cost of Goods Sold		22,089,595			102.6	%	19,027,679			100.0	%
Gross Loss		(559,732		)	(2.6	)%	(9,182		)	(0.1	)%
Operating Expenses		518,509			2.4	%	556,866			2.9	%
Operating Loss		(1,078,241		)	(5.0	)%	(576,048		)	(3.0	)%
Other Income, net		6,998			—	%	23,162			0.1	%
Net Loss		$	(1,071,243	)	(5.0	)%	$	(552,886	)	(2.9	)%

 

Revenues

 

Our revenues from operations come from two primary sources: sales of fuel ethanol and sales of distillers grains. However, during the quarter ended April 30, 2009, we also had revenue from the sale of corn oil.

 

The following table shows the sources of our revenue for the three months ended April 30, 2009.

 

16

Table of Contents

 

		Amount			Percentage of Total Revenues
Revenue Sources
Ethanol Sales		$	17,473,968		81.1	%
Distillers Grains Sales		3,812,328			17.7
Corn Oil Sales		243,567			1.2
Ethanol Derivative Activity Gains (Losses)		—			—
Total Revenues		$	21,529,863		100.0	%

 

The following table shows the sources of our revenue for the three months ended April 30, 2008:

 

		Amount			Percentage of Total Revenues
Revenue Sources
Ethanol Sales		$	19,836,318		104.3	%
Distillers Grains Sales		3,066,625			16.1
Corn Oil Sales		—			—
Ethanol Derivative Activity Gains (Losses)		(3,884,446		)	(20.4	)
Total Revenues		$	19,018,497		100.0	%

 

The following table shows additional data regarding production and price levels for our primary inputs and products for the three months ended April 30, 2009 and 2008:

 

		Three Months ended April 30, 2009			Three Months ended April 30, 2008
Additional Data
Ethanol sold (gallons)		12,082,537			9,891,100
Dried distillers grains sold (tons)		29,934			25,987
Modified distillers grains sold (tons)		4,767			414
Corn oil sold (pounds)		1,436,920			—
Ethanol average price per gallon (net of hedging activity)		$	1.45		$	1.61
Dried distillers grains average price per ton		$	117.14		$	117.57
Modified distillers grains average price per ton		$	64.15		$	27.65
Corn oil average price per pound		$	0.17		—
Corn costs per bushel (net of hedging activity)		$	3.48		$	3.82

 

Revenues.

 

In the three month period ended April 30, 2009, ethanol sales comprised approximately 81% of our revenues and distillers grains sales comprised approximately 18% percent of our revenues, while corn oil sales comprised approximately 1% of our revenues. For the three month period ended April 30, 2008, ethanol sales comprised approximately 87% of our revenue, and distillers grains sales comprised approximately 13% of our revenue, without including ethanol derivatives. We did not have any revenue from the sale of corn oil for the three month period ended April 30, 2008.

 

Management believes that distillers grains represent a larger proportion of our revenues during the three months ended April 30, 2009 compared to the same period of 2008 as a result of lower ethanol prices and higher distillers grains prices we received during our second fiscal quarter of 2009 compared to the same period of 2008. A second factor driving our revenues for our second 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 and our co-products from a 45 million gallon per year rate to a 50 million gallon per year rate.

 

The average ethanol sales price we received for the three month period ended April 30, 2009 was approximately 10% lower than our average ethanol sales price for the comparable 2008 period. Management attributes this decrease

 

17

Table of Contents

 

in ethanol prices, and the decrease in commodity prices generally, to the worldwide economic slowdown. However, management anticipates that the price of ethanol may increase during the second half of our 2009 fiscal year as a result of an increased fuel demand as we move into the summer driving season, 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, and volatility in the commodity markets. As a result of these factors, management anticipates that the ethanol plant may not operate profitably in 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 continue to 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. We expect ethanol demand to continue to grow and ethanol distribution to 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 was steady during the three month period ended April 30, 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 were off specification product and were 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 232% during the three month period ended April 30, 2009 compared to the same period of 2008.  We anticipate that the market price of 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.

 

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% of our revenues during our quarter ended April 30, 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 103% for the three month period ended April 30, 2009 compared to approximately 100% for the same period of 2008.  Our two largest costs of production are corn (66% of cost of goods sold for our three months ended April 30, 2009) and natural gas (14% of cost of goods sold for our three months ended April 30, 2009).  Our cost of goods sold increased by approximately $3,000,000 in the three months ended April 30, 2009, compared to the three months ended April 30, 2008, even though our revenue only increased by approximately $2,500,000.  This increase in the cost of goods sold is primarily a result of increased corn and natural gas consumption, which resulted in the production of approximately 2,200,000 additional gallons of ethanol.  Our per bushel corn costs decreased by approximately 10% for the three months ended April 30, 2009 as compared to the same period for our 2008 fiscal year.  However, due to our increased corn consumption and corresponding ethanol production our aggregate cost of goods sold also increased.  Our increased cost of goods sold combined with declining ethanol revenues placed pressure on our operating margins.

 

We anticipate that corn prices will continue to be volatile throughout the first half of the growing season. Wet weather in the eastern corn belt has caused planting delays, which have caused recent increases in the price of corn. However, we anticipate that corn prices may decrease somewhat following planting time. We expect that the poor conditions associated with the global economic slowdown will ultimately reduce demand for corn. We anticipate that this may reduce corn prices during the end of the current marketing year. We performed a lower of cost or market analysis on inventory as of April 30, 2009 and determined that the market values of certain inventories were not less than their carrying value.

 

18

Table of Contents

 

For the three month period ended April 30, 2009, we experienced an increase of approximately 15% in natural gas prices compared to the same period of 2008.  We attribute this significant increase in natural gas prices to the forward purchase contracts we entered last summer and fall to hedge our winter natural gas usage.  The market price for natural gas over the winter months was less than our forward contract prices and our natural gas expense was higher than it would have been had we decided not to hedge our winter natural gas supplies.  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 17% for the three month period ended April 30, 2009 compared to the same period of 2008. We attribute this increase in natural gas consumption with increased ethanol production during the three month period ended April 30, 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 April 30, 2009 than they were for the same period ended April 30, 2008. These percentages were 2.4% and 2.9% for the three months ended April 30, 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 loss from operations for the three months ended April 30, 2009 was approximately 5.0% of our revenues compared to a loss of approximately 3.0% of our revenues for the three months ended April 30, 2008. For the three months ended April 30, 2009, we reported an operating loss of approximately $1,100,000 and for the three months ended April 30, 2008, we had an operating loss of approximately $600,000. This significant decrease in our operating income is primarily due to lower per gallon revenue from our ethanol sales.

 

Interest Expense and Interest Income

 

Interest expense for the three months ended April 30, 2009, was approximately 0.13% of our revenue and totaled $27,000, compared to no interest expense for the three months ended April 30, 2008. This increase in interest expense is due primarily to an increase in the outstanding balance we have been carrying on our revolving line of credit at Minnwest Bank.

 

Results of Operations for the Six Months Ended April 30, 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 six months ended April 30, 2009 and 2008:

 

19

Table of Contents

 

		Six Months  Ended April 30, 2009 (Unaudited)					Six Months  Ended April 30, 2008 (Unaudited)
Statement of Operations Data		Amount			Percent		Amount			Percent
Revenues		$	42,312,605		100.0	%	$	43,317,367		100.0	%
Cost of Goods Sold		43,161,411			102.0	%	39,910,492			92.1	%
Gross Profit (Loss)		(848,806		)	(2.0	)%	3,406,875			7.9	%
Operating Expenses		1,039,484			2.5	%	1,222,296			2.8	%
Operating Income (Loss)		(1,888,290		)	(4.5	)%	2,184,579			5.0	%
Other Expense, net		(689,439		)	(1.6	)%	(6,685		)	—	%
Net Income (Loss)		$	(2,577,729	)	(6.0	)%	$	2,177,894		5.0	%

 

Revenues

 

Our revenues from operations come from two primary sources: sales of fuel ethanol and sales of distillers grains. However, during the six months ended April 30, 2009, we also had revenue from the sale of corn oil.

 

The following table shows the sources of our revenue for the six months ended April 30, 2009.

 

		Amount			Percentage of Total Revenues
Revenue Sources
Ethanol Sales		$	34,238,833		81.0	%
Distillers Grains Sales		7,492,845			17.7
Corn Oil Sales		461,678			1.0
Ethanol Derivative Activity Gains/ (Losses)		119,249			0.3
Total Revenues		$	43,312,605		100.0	%

 

The following table shows the sources of our revenue for the six months ended April 30, 2008:

 

		Amount			Percentage of Total Revenues
Revenue Sources
Ethanol Sales		$	43,866,258		101.3	%
Distillers Grains Sales		6,758,767			15.6
Corn Oil Sales		—			—
Ethanol Derivative Activity Gains/ (Losses)		(7,307,658		)	(16.9	)
Total Revenues		$	43,317,367		100.0	%

 

The following table shows additional data regarding production and price levels for our primary inputs and products for the six months ended April 30, 2009 and 2008:

 

20