Green Brick Partners, Inc. - Annual Report: 2011 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2011

or

For the transition period from         to        

Commission file number: 001-33530

BIOFUEL ENERGY CORP.

(Exact name of registrant as specified in its charter)

(303) 640-6500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.¨

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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The aggregate market value of voting and non-voting stock held by non-affiliates of the Registrant as of June 30, 2011 was $17,731,000.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

DOCUMENTS INCORPORATED BY REFERENCE

The Registrant’s definitive Proxy Statement for its 2011 Annual Meeting of Stockholders is incorporated by reference into Part III of this Form 10-K.

FORWARD LOOKING STATEMENTS

Certain information included in this report, other materials filed or to be filed by BioFuel Energy Corp. (the “Company”, “we”, “our”, or “us”) with the Securities and Exchange Commission (“SEC”), as well as information included in oral statements or other written statements made or to be made by the Company contain or incorporate by reference certain statements (other than statements of historical or present fact) that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

All statements other than statements of historical fact are “forward-looking statements”, including any projections of earnings, revenue or other financial items, any statements concerning future commodity prices and their effect on the Company, any statements of the plans, strategies and objectives of management for future operations, any statements concerning proposed new projects or other developments, any statements regarding future economic conditions or performance, any statements of management’s beliefs, goals, strategies, intentions and objectives, and any statements of assumptions underlying any of the foregoing. Words such as “may”, “will”, “should”, “could”, “would”, “predicts”, “potential”, “continue”, “expects”, “anticipates”, “future”, “intends”, “plans”, “believes”, “estimates” and similar expressions, as well as statements in the future tense, identify forward-looking statements.

These statements are necessarily subjective and involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from any future results, performance or achievements described in or implied by such statements. Actual results may differ materially from expected results described in our forward-looking statements, including with respect to correct measurement and identification of factors affecting our business or the extent of their likely impact, the accuracy and completeness of the publicly available information with respect to the factors upon which our business strategy is based or the success of our business. Furthermore, industry forecasts are likely to be inaccurate, especially over long periods of time and in relatively new and rapidly developing industries such as ethanol.

Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of whether, or the times by which, our performance or results may be achieved. Forward-looking statements are based on information available at the time those statements are made and management’s belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to, those factors discussed under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-K.

Should one or more of the risks or uncertainties described above or elsewhere in this Form 10-K occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. We specifically disclaim all responsibility to publicly update any information contained in a forward-looking statement or any forward-looking statement in its entirety and therefore disclaim any resulting liability for potentially related damages.

All forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary statement.

PART I

ITEM 1. BUSINESS

Overview

BioFuel Energy Corp. produces and sells ethanol and its co-products (primarily distillers grain and corn oil), through its two ethanol production facilities located in Wood River, Nebraska and Fairmont, Minnesota, each having an undenatured nameplate production capacity of approximately 110 million gallons per year (“Mmgy”). Our operating strategy is focused on optimizing production and streamlining operations with the goal of producing at or above nameplate capacity at the lowest cost per gallon.

Our operations and cash flows are subject to wide and unpredictable fluctuations due to changes in commodities prices, specifically, the price of our main commodity input, corn, relative to the price of our main commodity product, ethanol, which is known in the industry as the “crush spread.” See “Risk Factors — Risks relating to our business and industry — Narrow commodity margins have resulted in decreased liquidity and continue to present a significant risk to our ability to service our debt.” Since we commenced operations, we have from time to time entered into derivative financial instruments such as futures contracts, swaps and option contracts with the objective of limiting our exposure to changes in commodities prices, and we may continue to enter into these instruments in the future. However, our experience with these financial instruments has at times been unsuccessful. See “Risk Factors — Risks relating to our business and industry — Our results and liquidity may be adversely affected by future hedging transactions and other strategies.” In addition, we are currently able to engage in such hedging activities only on a limited basis due to our lack of financial resources, and we may not have the financial resources to conduct any hedging activities in the future. See “Risk Factors — Risks relating to our business and industry — We are currently limited in our ability to hedge against fluctuations in commodity prices and may be unable to do so in the future, which further exposes us to commodity price risk.”

We are a holding company with no operations of our own, and are the sole managing member of BioFuel Energy, LLC (the “LLC”), which is itself a holding company and indirectly owns all of our operating assets. As the sole managing member of the LLC, BioFuel Energy Corp. operates and controls all of the business and affairs of the LLC and its subsidiaries. The Company’s ethanol plants are owned and operated by the Operating Subsidiaries of the LLC.

Our Facilities

Our facilities are strategically located in the Midwest “Corn Belt,” and each of our facilities is able to meet local, regional, national and international demand for ethanol. Both facilities have unit train access to the Union Pacific Railroad, and are positioned in some of the lowest-priced, highest-supply feedstock markets in the United States. Each of our facilities was constructed by TIC Wyoming, an industrial general contracting firm, under engineering, procurement and construction (EPC) contracts, utilizing an operations and process technology licensed from its joint venture partner Delta-T Corporation, an engineering and design firm. In connection with each of the EPC contracts, Delta-T granted to us perpetual limited licenses to use Delta-T’s proprietary technology and information in connection with the operation, maintenance, optimization, enhancement and expansion of each of our facilities up to the designed limits. Consideration for the licenses was included as part of the payments under the EPC contracts. These facilities have been in operation for over three years, and during that period we have made capital modifications and improvements that have increased our capacity utilization rates and yield (measured by gallons of denatured ethanol per bushel of corn), and have continuously lowered our overall fixed costs per gallon of production.

Our relationship with Cargill

From inception, we have worked closely with Cargill, Inc., one of the world’s leading agribusiness companies, with whom we have an extensive commercial relationship. Cargill participates in almost every aspect of the corn industry in the United States, including operation of grain elevators, management of export facilities, transportation, ethanol production and livestock nutrition. Our two plant locations were selected primarily based on access to corn supplies, the availability of rail transportation and natural gas and Cargill’s competitive position in the area. Pursuant to 10-year ethanol marketing agreements, Cargill purchases 100% of the ethanol produced at our facilities and, under 20-year corn supply agreements, supplies 100% of our corn for these facilities. We also have the opportunity to utilize Cargill’s risk management services.

Corn supply

Our ethanol facilities each require approximately 41 million bushels of corn per year in order to produce their undenatured nameplate capacity of 110 Mmgy of ethanol. Cargill supplies all of the corn to our facilities. Under the corn supply agreements, Cargill has agreed to deliver U.S. No. 2 yellow dent corn meeting certain specifications. We regularly contract in advance for physical corn delivery (basis only). On the day of delivery, we pay the applicable corn futures price then in effect, less the local basis differential paid by Cargill to purchase corn on our behalf, plus an origination fee of $0.045 per bushel.

We have also entered into concurrent 20-year leases of Cargill’s existing grain elevators at each of our Wood River and Fairmont sites. These elevators provide corn storage capacity to service the plants at normal operating levels plus excess capacity to allow us to purchase corn opportunistically, for example, based on seasonality.

Sales logistics

Both of our ethanol plants are located adjacent to a rail mainline operated by the Union Pacific Railroad. A railcar unit train loading facility capable of handling up to 100 cars has been constructed at each of the plants. We typically ship ethanol in 80-car unit trains, which hold approximately 2.4 million gallons of ethanol, roughly equivalent to 8 days of ethanol production at each of these plants. We also have storage capacity to accommodate approximately 9 days of ethanol production and 9 days of dried distillers grain production at each of these plants. Each of our plants also has road access for loading and transportation of ethanol and distillers grain by truck, as needed.

Under our ethanol marketing agreements, Cargill performs a number of logistics functions relating to the ethanol produced at our facilities, utilizing its extensive network of rail and trucking relationships. These functions include arranging for rail and truck freight, bills of lading and scheduling pick-up appointments. Under the ethanol marketing agreements, we are responsible for providing tank railcars to service our facilities. As a result, we have entered into 10-year leases for our tank railcar fleet from Trinity Industries Leasing Company.

Ethanol Marketing

All of our ethanol is sold to Cargill as our third party marketer and distributor, for which Cargill is paid a commission. Cargill has established relationships with many of the leading end-users of ethanol products such as major oil companies and refiners, as well as independent jobbers, storage companies and transportation companies. Our ethanol that is sold in the United States is “pooled” with all of the ethanol produced by Cargill in the United States whereby we receive the average price of the ethanol sold for the producers in the marketing group. Each of the participants in the pool receives the same price for its share of ethanol sold, net of freight and other agreed costs incurred by Cargill with respect to the pooled ethanol. Freight and other charges are divided among pool participants based upon each participant’s ethanol volume in the pool rather than the location of the plant or the delivery point of the customer. We also sell a portion of our ethanol production to Cargill for export, which sales are shipped un-denatured and are excluded from the marketing pool.

Under our arrangements with Cargill, we have the ability to opt out of the marketing pool described above. In order to opt out of the marketing pool, we would need to provide six months’ notice prior to the date on which ethanol will first be delivered under the contract or any anniversary of that date, except that we may be obligated to participate in the pool for up to 18 months to the extent necessary to allow Cargill to fulfill contractual commitments to deliver ethanol from the pool. We also have the ability to sell ethanol directly to end-customers on a long-term basis, using Cargill as an agent, and in the future we may do so if an attractive opportunity arises. In these circumstances, Cargill would continue to provide transportation and logistics services, would act as a contracting agent and would continue to be paid commissions by us. We will evaluate the desirability of selling ethanol directly to end-customers on an ongoing basis.

Other agreements with Cargill

In addition to the agreements described above, our relationship with Cargill with respect to each of our ethanol facilities is governed by a master agreement. Each of these master agreements provides certain terms and conditions that apply to all of our agreements with Cargill with respect to the relevant plant. The master agreements contain a right of first negotiation in favor of Cargill in the event we subsequently acquire or construct additional ethanol facilities. Under this right, Cargill and we have agreed to negotiate in good faith for Cargill to provide all of the commercial arrangements covered by our agreements with respect to any additional facilities. The master agreements also allow for payments due and owing to each party under all of our agreements with Cargill to be netted and offset by the parties, although we have not done so and do not expect to do so in the future.

We have leased, for an initial term of twenty years, Cargill’s grain facilities located adjacent to each plant, for the purpose of receiving, storing and transferring corn to each ethanol facility. Under the lease agreements, we are responsible for the maintenance and repair of the premises. We will be in default under the leases, and Cargill will have the right to terminate the relevant lease, if we fail to pay any rent or other amounts due to Cargill within 30 days following written notice that such amounts are due and payable, default in any non-monetary obligation under the lease and fail to cure such default within a specified time, become subject to certain events of bankruptcy or insolvency or permit the relevant lease to be sold under any attachment or execution.

The Operating Subsidiaries entered into Omnibus Agreements with Cargill, which became effective on September 1, 2009. Pursuant to these agreements, Cargill agreed to extend payment terms for our corn purchases and defer a portion of certain fees and grain elevator lease payments payable to Cargill for one year. The deferred fees were to be payable to Cargill by the Operating Subsidiaries over a two-year period, and the payment terms for corn were to revert to the original terms beginning on September 1, 2010. On September 23, 2010, we entered into a Letter Agreement with Cargill that continues the extended payment terms for the duration of our corn supply agreements and reduces certain fees payable under those agreements and our ethanol marketing agreements. These agreements are expected to provide us with varying amounts of additional working capital over their duration. As of December 31, 2011, $2.9 million of such deferrals remained outstanding, and we continue to make periodic payments of deferred ethanol commissions at our discretion.

Other Marketing Arrangements

Distillers grain marketing

Under our distillers grain marketing agreements, all of the dried distillers grain produced at our two facilities is sold to an independent third party marketer and distributor, for which it is paid a commission. Our dried distillers grain is primarily marketed nationally to agricultural customers for use as an animal feed ingredient. Under these marketing agreements, our third party marketer also performs a number of logistics functions, which include arranging for rail and truck freight, bills of lading and scheduling pick-up appointments.

We market our wet distillers grain through another independent third party marketer. Due to its limited shelf life and high freight cost, wet distillers grain is sold primarily to local agricultural customers for use as an animal feed ingredient.

Corn oil marketing

During 2011, we began installing corn oil extraction systems at each of our plants so that we could begin producing corn oil as an additional co-product. These systems were installed using certain patented technology we have licensed from Greenshift Corporation, for which we pay a royalty. The installation in Wood River was completed in December 2011, and the installation in Fairmont was completed in January 2012. The corn oil produced at our plants is used primarily as a feedstock for the production of biodiesel and, potentially, as an animal feed ingredient. The corn oil produced in Wood River is being sold to the same independent third party marketer that purchases our dried distillers grains from that facility. The corn oil produced in Fairmont is being sold to a biodiesel producer under an off-take agreement. Corn oil is shipped from our plants by trucks.

Industry

Ethanol is a clean burning, high-octane fuel that is produced from the fermentation of carbohydrates such as grain-derived starches and sugars. In the United States, ethanol is produced primarily from corn. It is used primarily as a gasoline additive to increase octane rating and to comply with air emissions regulations by reducing emissions of carbon monoxide and nitrogen oxide. In addition, the Renewable Fuel Standard, or RFS, mandates that renewable biofuels comprise a certain minimum amount of the U.S. fuel supply. Fuel blended with up to 10% ethanol, also referred to as E10 fuel, is approved for use by major motor vehicle manufacturers and is often recommended as a result of ethanol’s clean burning characteristics. In December 2010, the U.S. EPA approved ethanol blends of up to 15% in motor fuel, referred to as E15, for use in all cars manufactured in 2007 and later years. In January 2011, the U.S. EPA extended that approval to cars made between 2001 and 2006. Ethanol also comprises up to 85% of E85 fuel, although flexible fuel vehicles, or FFV’s, capable of using E85 fuel currently comprise a relatively small portion of the U.S. motor vehicles on the road.

We believe that the key drivers of ethanol demand include:

Blending benefits

Ethanol has an octane rating of 113, and is added to gasoline to raise the octane level of gasoline. Unblended gasoline typically has a base octane level of approximately 84. Typical gasoline and ethanol blends (up to E10) have octane ratings ranging from 87 to 93. Higher octane gasoline has the benefit of reducing engine knocking. Gasoline with higher octane typically has been sold at a higher price per gallon than lower octane gasoline. At times when ethanol sells at a discount to gasoline, there are further economic incentives to blend ethanol into motor fuel.

Legislative and government policy support

As mandated by The Energy Independence and Security Act of 2007, or the 2007 Act, the RFS required that 12.6 billion gallons of conventional biofuels, which includes corn-based ethanol, be blended into the U.S. fuel supply in 2011, increasing to 15.0 billion gallons per year by 2015. The 2007 Act also mandated an increasing overall use of renewable fuels through 2022. The new targets are expected to be reached by phasing in additional volumes of both conventional biofuels (including corn-based ethanol) and “advanced biofuels,” such as cellulosic ethanol and biomass based diesel.

The RFS requires motor fuels sold in the United States to contain in the aggregate the following minimum volumes of renewable fuels:

In 2011 and 2012, due to the unavailability of advanced biofuels on a commercial scale, the U.S. EPA granted a waiver to the refining industry setting the cellulosic component of the advanced biofuel blending requirements at lower levels than those called for under the RFS.

Environmental benefits

Ethanol, as an oxygenate, reduces tailpipe emissions when added to gasoline. The additional oxygen in the ethanol results in a more complete combustion of the fuel in the engine cylinder, resulting in reduced carbon monoxide and nitrogen oxide emissions. Prior federal programs that mandated the use of oxygenated gasoline in areas with high levels of air pollution spurred widespread use of ethanol in the United States. Although the federal oxygenate requirement was eliminated in May 2006, oxygenated gasoline continues to be used in order to help meet separate federal and state air emission standards. The refining industry has generally abandoned the use of methyl tertiary butyl ether (MTBE), making ethanol the primary clean air oxygenate currently used.

Geopolitical concerns

The United States is dependent on foreign oil. Political unrest and attacks on oil infrastructure in the major oil-producing nations, particularly in the Middle East, have periodically disrupted the flow of oil. At the same time, developing nations such as China and India have increased their demand for oil. As a result, NYMEX oil prices have ranged dramatically in recent years. As a domestic, renewable source of energy, ethanol can help to reduce the United States’ dependence on foreign oil by increasing the amount of fuel that can be consumed for each barrel of imported crude oil. According to the Renewable Fuels Association, or RFA, the 13.9 billion gallons of ethanol produced in the U.S. in 2011 reduced demand for imported oil by 485 million barrels.

Ethanol as a gasoline substitute

Automakers in the United States now offer a wide variety of Flexible Fuel Vehicles, or FFVs, which are vehicles capable of running on blends up to 85% ethanol. Management believes that motorists may increasingly choose FFVs due to their lower greenhouse gas emissions, flexibility and performance characteristics. Changes in corporate average fuel economy, or CAFE, standards may also benefit the ethanol industry by encouraging use of E85 fuel products. Though E85 is not in widespread use today, auto manufacturers may find it attractive to build more flexible-fuel trucks and sport utility vehicles in order to meet CAFE standards. Future widespread adoption of FFVs could potentially boost ethanol demand and reduce the consumption of gasoline.

Supply of ethanol

The primary feedstock for ethanol production in the United States is corn. Proximity to corn supplies is a crucial factor in the economics of ethanol plants, as transporting corn is much more expensive than transporting the finished ethanol product. As such, the ethanol industry is geographically concentrated in the Midwest based on the proximity to the highest concentration of corn supply. In addition to corn, the ethanol production process requires natural gas or, in some cases, coal in order to power the facility and dry distillers grain.

Despite the geographic concentration, production in the ethanol industry remains fragmented. According to the RFA, as of January 2012 the ethanol industry in the United States was comprised of 209 production facilities with an aggregate industry capacity of approximately 14.9 billion gallons per year (“Bgpy”). According to the RFA, in 2011 domestic ethanol production was approximately 13.9 billion gallons. The top ten producers accounted for approximately 49% of the industry’s total estimated production capacity as of December 2011. Smaller producers and farmer-owned cooperatives, all of which have production capacities less than ours, generate the remaining production. Since a typical ethanol facility can be constructed in approximately 18 months from groundbreaking to operation, the industry is able to forecast capacity additions for up to 18 months in the future. As a result of the existing capacity and potential increases in production due to increasing yields and other improvements, the ethanol industry faces the risk of excess capacity. See “Risk Factors — Risks relating to our business and industry — Excess production capacity in our industry may result in over-supply of ethanol which could adversely affect our business”.

Ethanol is typically either produced by a dry-milling or wet-milling process. Although the two processes feature numerous technical differences, the primary operating trade-off of the wet-milling process is a higher co-product yield in exchange for a lower ethanol yield. Dry-milling ethanol production facilities, including the Company’s, constitute the substantial majority of new ethanol production facilities constructed in the past five years because of the increased efficiencies and lower capital costs of dry-milling technology. Older dry-mill ethanol facilities typically produce between five and 50 Mmgy, with newer dry-mill facilities producing over 100 Mmgy and expected to provide economies of scale in both construction and operating costs per gallon.

Ethanol production process

The dry-mill process of using corn to produce ethanol and co-products that we use at our plants is described below.

Step one: grain receiving, storing and milling

Corn is delivered by truck, at which point it is inspected, weighed and unloaded in a receiving building and then transferred to storage bins. On the grain receiving system, a dust collection system limits particulate emissions. Truck scales weigh delivered corn. The corn is then unloaded to the storage systems consisting of concrete and steel storage bins. From its storage location, corn is conveyed to cleaning machines called scalpers to remove debris from the corn before it is transferred to hammermills or grinders where it is ground into a flour, or “meal.”

Step two: conversion and liquefaction, fermentation and evaporation systems

The meal is conveyed into slurry tanks for processing. The meal is mixed with water and enzymes and heated to break the ground grain into a fine slurry. The slurry is routed through pressure vessels and steam flashed in a flash vessel. This liquefied meal, now called “mash”, reaches a temperature of approximately 200° F, which reduces bacterial build-up. The sterilized mash is then pumped to a liquefaction tank where additional enzymes are added. This cooked mash continues through liquefaction tanks and is pumped into one of the fermenters, where propagated yeast is added, to begin a batch fermentation process.

The fermentation process converts the cooked mash into carbon dioxide and fermented mash, called “beer”, which contains ethanol as well as all the solids from the original corn feedstock. The mash is kept in a fermentation tank for approximately two days. Circulation through heat exchangers keeps the mash at the proper temperature.

Step three: distillation and molecular sieve

After batch fermentation is complete, beer is pumped to an intermediate tank called the beer well and then to the columnar distillation tank to vaporize and separate the alcohol from the mash. The distillation results in a 96%, or 190-proof, alcohol. This alcohol is then transported through a system of tanks and molecular sieves where it is dehydrated to produce 200-proof anhydrous ethanol. The 200-proof ethanol is then denatured (rendered unfit for human consumption) by mixing up to approximately 2.4% unleaded gasoline to prepare it for sale in the U.S.

Step four: liquid-solid separation system

The residual corn mash from the distillation stripper, called “stillage”, is pumped into one of several decanter type centrifuges for dewatering. The water, or thin stillage, is then pumped from the centrifuges back to mashing or to an evaporator where it is dried into a thick syrup. The solids that exit the centrifuges, known as “wet cake”, are conveyed to the wet cake storage pad or the gas-fired dryer for removal of residual water. Syrup is added to the wet cake. The result is wet distillers grain with solubles. The wet distillers grain can then be placed into a dryer, where moisture is removed. The end result of the process is dried distillers grain.

Step five: product storage

Storage tanks hold the ethanol product prior to being transferred to loading facilities for truck and rail car transportation. Our plants each have approximately 3.1 million gallons of ethanol tank storage capacity, which will accommodate nine days of ethanol production per plant.

Co-products of ethanol production

Dried distillers grain with solubles.   A co-product of dry-mill ethanol production, dried distillers grain is a high-protein and high-energy animal feed that is sold primarily as an ingredient in beef and dairy cattle rations. Dried distillers grain consists of the concentrated nutrients (protein, fat, fiber, vitamins and minerals) remaining after the starch in corn is converted to ethanol. Over 85% of the dried distillers grain is fed to cattle. It is also used in poultry, swine and other livestock feed.

Wet distillers grain with solubles.   Wet distillers grain is similar to dried distillers grain except that the final drying stage of dried distillers grain is bypassed and the product is sold as a wet feed containing 25% to 35% dry matter, as compared to dried distillers grain, which contains about 90% dry matter. Wet distillers grain is an excellent livestock feed with better nutritional characteristics than dried distillers grain because it has not been exposed to the heat of drying. The sale of wet distillers grain is usually more profitable because the plant saves the cost of natural gas for drying. The product is sold locally because of its limited shelf life and the higher cost of transporting the product to distant markets.

Corn oil.    Corn oil is extracted on the “back end” of the dry-mill ethanol production process from the condensed distillers solubles stream portion of the process.  The oil is extracted using a separator, or centrifuge, and then further clarified in settling tanks. It is then sold either as a feedstock to produce biodiesel or as an animal feed ingredient. We began producing corn oil in January 2012.

Competition

Domestic Competition

The markets where our ethanol is sold are highly competitive. According to the RFA, industry capacity in the United States was approximately 14.9 billion gallons per year as of January 2012. The ethanol industry in the United States consisted of approximately 209 production facilities as of January 2012 with relatively few new facilities under construction or expansion, and is primarily corn-based.

Over the past few years, the U.S. ethanol industry has witnessed significant acquisition activity by gasoline and oil refiners that has resulted in a number of relatively large companies competing in the production of ethanol. As a result, we compete with both a small number of large, integrated companies that produce ethanol, as well as with a larger number of smaller, dedicated ethanol producers.

The three largest ethanol producers (Archer Daniels Midland, Poet, and Valero Energy) together controlled approximately 30% of the ethanol production capacity in the United States as of the end of 2011.

Source: Renewable Fuels Association, 2012 Ethanol Industry Outlook

We compete with a number of significant competitors in the ethanol industry, including blenders, producers and/or other retailers of gasoline such as Valero Energy, Murphy Oil, Koch Industries and Sunoco Oil. We also compete with other large ethanol producers such as Archer Daniels Midland, Poet, Green Plains Renewable Energy, Abengoa Bioenergy Corporation, The Andersons and Pacific Ethanol Products. A number of our competitors have substantially greater financial and other resources than we do. See “Risk Factors — Risks relating to our business and industry — We may not be able to compete effectively.” The remainder of the industry is highly fragmented, consisting of many small, independent firms and farmer-owned cooperatives. Through our ethanol marketing agreements with Cargill, we are able to compete on a national basis.

Ethanol is a commodity and as such is priced on a very competitive basis. We believe that our ability to compete successfully in the ethanol production industry depends on many factors, including price, reliability of our production processes and delivery schedule and volume of ethanol produced and sold. We try to differentiate ourselves from our competition through continuous focus on cost control and production efficiency and by utilizing Cargill’s expertise in ethanol marketing and corn supply. We constructed our ethanol facilities with a focus on minimizing cost inputs such as corn, natural gas and transportation. We chose the sites for our Wood River and Fairmont plants in part because of their access to significant local corn production, their proximity to competitive natural gas supplies and their access to transportation infrastructure. We also promote a company-wide culture of continuous improvement, cost control and efficiency regardless of the economic cycle. We strive to be one of the lowest cost ethanol producers in the industry through the application of the latest technology, strict attention to cost efficiencies and, where appropriate, long-term contracts for the supply of inputs such as corn and natural gas.

With respect to distillers grain and corn oil, we compete with other ethanol producers as well as a number of large and smaller suppliers of competing animal feed. We believe the principal competitive factors are price, proximity to purchasers, reliability of supply and, especially, product quality and consistency. We try to differentiate ourselves from our competition through consistent, high product quality, strategic plant locations and access to our marketers’ expertise in feed and feedstock merchandising.

Foreign Competition

We also face competition from foreign producers of ethanol and such competition may increase in the future. Large, international companies, such as Royal Dutch Shell and Cargill, along with foreign based companies, such as the Brazilian firm Cosan, have developed, or are developing, increased foreign ethanol production capacities. Brazil is the world’s second largest ethanol producer, making its product primarily from sugarcane. Until December 31, 2011, ethanol produced in foreign countries was subject to an import tariff of $0.54 per gallon, largely making their products uncompetitive with U.S. based producers. Sugar-based ethanol also qualifies as an “advanced” biofuel under the RFS, and blenders who incorporate it into their fuel are able to garner advanced Renewable Identification Numbers (RIN’s), which trade at a significant premium to RIN’s generated by conventional, corn-based ethanol. As a result of the expiration of the import tariff and the value of advanced RIN’s, we and the ethanol industry generally expect to face increased competition from foreign producers.

According to the Economic Research Service of the USDA, in recent years various other countries have begun increasing their use of ethanol as part of their motor fuel supply. While these new markets may offer increased export opportunities for U.S. producers such as us, Brazilian producers may, depending upon a variety of factors including their own domestic ethanol demand, public policy and regulations, world sugar and oil prices and currency exchange rates, export ethanol to meet some or all of this demand.

Environmental matters

We are subject to various federal, state and local environmental laws and regulations, including those relating to the discharge of materials into the air, water and ground, the generation, storage, handling, use, transportation and disposal of hazardous materials, access to and use of water supply, and the health and safety of our employees. These laws and regulations can require expensive pollution control equipment or operational changes to limit actual or potential impacts to the environment. A violation of these laws and regulations or permit conditions can result in substantial fines, natural resource damage claims, criminal sanctions, permit revocations and facility shutdowns. During the start-up and initial operation of our two plants, we occasionally failed to meet all of the parameters of our air and water discharge permits. We have addressed these issues primarily through adjustments to our equipment and operations, including significant upgrades to our water treatment system in Fairmont, Minnesota, and subsequent re-tests have indicated that we are operating within our permitted limits. In the past, we have received Notices of Violations with respect to both sites from environmental regulators relating to these issues. We do not anticipate a material adverse impact on our business or financial condition as a result of these prior violations.

Our water permits are issued under the federal National Pollutant Discharge Elimination System (NPDES), as administered by the states. Our Minnesota NPDES permit contains certain discharge variances from the water quality standards adopted by the U.S. EPA, which variances expired on July 31, 2011. As part of a Stipulated Agreement with the state of Minnesota, we are required either to implement additional alternative technologies to allow us to either meet the water quality standards, cease discharging altogether, or implement alternative discharge solutions such as a pipeline to a larger, more remote receiving stream. We are currently negotiating a water supply agreement with the City of Fairmont for a minimum water supply and are designing a zero liquid discharge system which will allow the plant to cease its off-site surface water discharge and to recycle all water used at the plant. The state of Minnesota has agreed with this approach and has allowed the plant until December 31, 2013 to cease its discharge. This undertaking will require significant expenditures which we expect will represent a significant portion of our capital improvement budgets in Fairmont in 2012 and 2013.

Ethanol production involves the emission of various airborne pollutants, including particulate, carbon dioxide, oxides of nitrogen, hazardous air pollutants and volatile organic compounds. In 2007, the U.S. Supreme Court classified carbon dioxide as an air pollutant under the Clean Air Act in a case seeking to require the EPA to regulate carbon dioxide in vehicle emissions. On February 3, 2010, the EPA released its proposed final regulations on the Renewable Fuels Standard, or RFS. These final regulations grandfather our plants at their current operating capacity, though any expansion of our plants would need to meet a threshold of a 20% reduction in GHG emissions from a 2005 baseline measurement to produce ethanol eligible for the RFS mandate. Although we have no current intention to expand either of our plants, if we were to do so in the future, we may be required to obtain additional permits or reduce drying of certain amounts of distillers grains.

Since the time when the air permits were originally issued for both plants, there have been changes in air regulations that have resulted in new or more stringent air quality standards which, if either plant were to modify existing emission sources or create new ones, would require the entire plant to comply with the new standards. Specifically applicable to our plants are standards for one-hour oxides of nitrogen and for a particulate matter less than 2.5 micron (PM_2.5). Recent changes in air regulations in Minnesota now require the use of higher particulate emission factors without location-specific documentation of actual particulate emissions. In order to comply with these new standards, the Fairmont facility will construct a new grain receiving building to reduce particulate emissions. Construction of these improvements is expected to occur in 2013.

Separately, the California Air Resources Board has adopted a Low Carbon Fuel Standard requiring a 10% reduction in GHG emissions from transportation fuels by 2020. This standard is being challenged by numerous lawsuits. If this standard is implemented, our products may become ineligible for sale in California and, if adopted in other jurisdictions, could have the effect of further limiting the markets in which we could sell ethanol.

There is a risk of liability for the investigation and cleanup of environmental contamination at each of the properties that we own or operate and at off-site locations where we arrange for the disposal of hazardous substances. If these substances have been or are disposed of or released at sites that undergo investigation or remediation by regulatory agencies, we may be responsible under the Comprehensive Environmental, Response, Compensation and Liability Act of 1980, or CERCLA, or other environmental laws for all or part of the costs of investigation or remediation and for damage to natural resources. We also may be subject to related claims by private parties alleging property damage and personal injury due to exposure to hazardous or other materials at or from these properties. Some of these matters may require us to expend significant amounts for investigation and/or cleanup or other costs. We do not currently have material environmental liabilities relating to contamination at or from our facilities or at off-site locations where we have transported or arranged for the disposal of hazardous substances.

In addition, new laws, new interpretations of existing laws, increased governmental enforcement of environmental laws or other developments could require us to make additional significant expenditures. Continued government and public emphasis on environmental issues can be expected to result in increased future investments for environmental controls at our ongoing operations. Present and future environmental laws and regulations and related interpretations applicable to our operations, more vigorous enforcement policies and discovery of currently unknown conditions may require substantial capital and other expenditures. Our air emissions are subject to the federal Clean Air Act, the federal Clean Air Act Amendments of 1990 and similar state and local laws and associated regulations. The U.S. EPA has promulgated National Emissions Standards for Hazardous Air Pollutants, or NESHAP, under the federal Clean Air Act that could apply to facilities that we own or operate if the emissions of hazardous air pollutants exceed certain thresholds. If a facility we operate becomes authorized to emit hazardous air pollutants above the threshold level, we would be required to comply with the NESHAP related to our manufacturing process and would be required to come into compliance with another NESHAP applicable to boilers and process heaters. Although emissions from our plants are not expected to exceed the relevant threshold levels, new or expanded facilities would be required to comply with both standards upon startup if they exceed the hazardous air pollutant threshold. In addition to costs for achieving and maintaining compliance with these laws, more stringent standards also may limit our operating flexibility. Because other domestic ethanol manufacturers will have similar restrictions, however, we believe that compliance with more stringent air emission control or other environmental laws and regulations is not likely to materially affect our competitive position.

The hazards and risks associated with producing and transporting our products, such as fires, natural disasters, explosions, abnormal pressures, blowouts, train derailments and truck accidents also may result in personal injury claims or damage to property and third parties. As protection against operating hazards, we maintain insurance coverage against some, but not all, potential losses. Our coverage includes physical damage to assets, employer’s liability, comprehensive general liability, automobile liability and workers’ compensation. We believe that our insurance is adequate and customary for our industry, but losses could occur for uninsurable or uninsured risks or in amounts in excess of existing insurance coverage. We do not currently have pending material claims for damages or liability to third parties relating to the hazards or risks of our business.

Employees

As of March 1, 2012, we had 148 full-time employees and 1 part-time employee. None of these employees are subject to a collective bargaining agreement.

Organizational structure

Company history

BioFuel Energy Corp. was incorporated as a Delaware corporation in April 2006. BioFuel Energy Corp. has not engaged in any business or other activities except in connection with its formation and its holding of interests in BioFuel Energy, LLC. Between January 2005 and its incorporation, various predecessor companies were engaged in the financing, development and construction of our plants.

The certificate of incorporation of BioFuel Energy Corp.:

In February 2011, we completed a Rights Offering to the Company’s common stockholders of rights to purchase 63,773,603 depositary shares representing fractional interests in shares of Series A Non-Voting Convertible Preferred Stock (“Preferred Stock”). Concurrent with the Rights Offering, the LLC conducted a private placement of LLC interests that was structured to provide the holders of the membership interests in the LLC (other than the Company) with a private placement that was economically equivalent to the Rights Offering. On February 2, 2011, the Company’s stockholders approved an increase in the number of authorized shares of common stock of the Company, which resulted in the automatic conversion of shares of the Preferred Stock into shares of the Company’s common stock such that subscribers in the Rights Offering were issued one share of common stock in lieu of each depositary share subscribed for. The transactions were completed, and 63,773,603 shares of common stock and 18,369,262 LLC interests (along with an equivalent number of shares of Class B common stock) were issued, on February 4, 2011, and the aggregate gross proceeds of the Rights Offering and the concurrent private placement were $46.0 million. In contemplation of the Rights Offering, on September 23, 2010 we entered into a Letter Agreement with Cargill pursuant to which we issued 6,597,790 shares of common stock to Cargill on February 15, 2011, in exchange for the extinguishment of certain indebtedness.

At December 31, 2011, we owned 85.0% of the LLC membership units with the remaining 15.0% owned by certain individuals and by certain investment funds affiliated with some of the original equity investors of the LLC. There were 105,383,295 shares of our common stock and 18,622,944 shares of our Class B common stock issued and outstanding as of December 31, 2011. The Class B common shares were held by the holders of membership interests in the LLC (other than BioFuel Energy Corp.), who also held 18,622,944 membership units in the LLC.

Holding company structure

BioFuel Energy Corp. is a holding company and its sole asset is its equity interest in the LLC. As the sole managing member of the LLC, BioFuel Energy Corp. operates and controls all of the business and affairs of the LLC and its subsidiaries. BioFuel Energy Corp. consolidates the financial results of the LLC and its subsidiaries. The ownership interest of the holders of membership interests in the LLC is reflected as a noncontrolling interest in BioFuel Energy Corp.’s consolidated financial statements.

Pursuant to the amended limited liability company agreement of the LLC, BioFuel Energy Corp. has the right to determine when distributions will be made to the members of the LLC and the amounts of any such distributions. If BioFuel Energy Corp. authorizes a distribution, such distribution will be made to the members of the LLC (1) in the case of a tax distribution (as described below), to the holders of membership units in proportion to the amount of taxable income of the LLC allocated to such holder and (2) in the case of other distributions, pro rata in accordance with the percentages of their respective membership units.

The holders of membership units in the LLC, including BioFuel Energy Corp., will incur U.S. federal, state and local income taxes on their proportionate shares of any net taxable income of the LLC. Net profits and net losses of the LLC will generally be allocated to its members, including BioFuel Energy Corp., the managing member, pro rata in accordance with the percentages of their respective membership units. Because BioFuel Energy Corp. owned approximately 85.0% of the total membership units in the LLC at December 31, 2011, BioFuel Energy Corp. was allocated approximately 85.0% of the net losses of the LLC. The remaining net losses were allocated to the other holders of membership interests in the LLC. These percentages are subject to change, including upon an exchange of membership units for shares of our common stock and upon issuance of additional shares to the public. The amended limited liability company agreement provides for cash distributions to the holders of membership units of the LLC if BioFuel Energy Corp. determines that the taxable income of the LLC will give rise to taxable income for its members. In accordance with the amended limited liability company agreement, we will generally intend to cause the LLC to make cash distributions to the holders of its membership units for purposes of funding their tax obligations in respect of the income of the LLC that is allocated to them. Generally, these tax distributions will be computed based on our estimate of the net taxable income of the LLC allocable to such holders of membership units multiplied by an assumed tax rate equal to the highest effective marginal combined U.S. federal, state and local income tax rate prescribed for an individual or corporate resident in New York, New York (taking into account the nondeductibility of certain expenses and the character of our income).

BioFuel Energy Corp. does not intend to pay any dividends on its common stock. If, however, BioFuel Energy Corp. declares dividends on its common stock, the LLC will make distributions to BioFuel Energy Corp. in order to fund any dividends. If BioFuel Energy Corp. declares dividends, the other holders of membership interests in the LLC will be entitled to receive equivalent distributions pro rata based on their membership units in the LLC.

ITEM 1A. RISK FACTORS

You should carefully consider the following risks, as well as other information contained in this Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. The risks described below are those that we believe are the material risks we face. Any of these risks could significantly and adversely affect our business, prospects, financial condition and results of operations.

Risks relating to our business and industry

Narrow commodity margins have resulted in decreased liquidity and continue to present a significant risk to our ability to service our debt.

Our operations and cash flows are subject to wide and unpredictable fluctuations due to changes in commodity prices, specifically, the price of our main commodity input, corn, relative to the price of our main commodity product, ethanol, expressed on a per gallon equivalent basis, which is known in the industry as the “crush spread.” The prices of these commodities are volatile and beyond our control. For example, from January 1, 2010 through December 31, 2011, spot corn prices on the Chicago Board of Trade (CBOT) ranged from $3.25 to $7.86 per bushel, while CBOT ethanol prices ranged from $1.47 to $3.07 per gallon during the same period. However, the volatility in corn prices and the volatility in ethanol prices are not necessarily correlated, and as a result, the crush spread, as measured by CBOT prices, and an assumed yield of 2.8 gallons of ethanol per bushel of corn fluctuated widely throughout 2010, ranging from $0.02 per gallon to $0.54 per gallon, and during 2011, ranging from ($0.11) per gallon to $0.60 per gallon. The actual commodity margins we realize may not be the same as the crush spreads reflected by CBOT market prices as a result of various factors, including differences in geographic basis paid for corn, varying ethanol sales prices in different markets and the timing differential between when we purchase corn and when we sell our products.

As a result of the volatility of the prices for these and other items, our results fluctuate substantially and in ways that are largely beyond our control. As reported in the audited consolidated financial statements included elsewhere with this Annual Report, we reported net losses of $10.4 million and $25.2 million for the years ended December 31, 2011 and December 31, 2010, respectively. During each of these years crush spreads fluctuated significantly.

Narrow commodity margins present a significant risk to our cash flows and liquidity. We have had, and continue to have limited liquidity, with $15.1 million of cash and cash equivalents as of December 31, 2011. Crush spreads contracted severely during the last few weeks of 2011 and have remained at depressed levels since. Should current margins continue for an extended period of time, we may not generate sufficient cash flow from operations to both service our debt and operate our plants. In 2012, we will be required to make, under the terms of our Senior Debt Facility (of which $176.8 million was outstanding as of December 31, 2011), quarterly principal payments at a minimum amount of $3,150,000, plus accrued interest. We cannot predict when or if crush spreads will fluctuate again or if the current margins will improve or worsen. If crush spreads were to remain at current levels for an extended period of time, we may expend all of our sources of liquidity, in which event we would not be able to pay principal and interest on our debt. In the event crush spreads narrow further, we may choose to curtail operations at our plants or cease operations altogether. Any inability to pay principal and interest on our debt would lead to an event of default under our Senior Debt Facility, which, in the absence of forbearance, debt service abeyance or other accommodations from our lenders, could require us to seek relief through a filing under the U.S. Bankruptcy Code. We expect fluctuations in the crush spread to continue. Any further reduction in the crush spread may cause our operating margins to deteriorate further, resulting in an impairment charge in addition to causing the consequences described above.

Since we commenced operations, we have from time to time entered into derivative financial instruments such as futures contracts, swaps and option contracts with the objective of limiting our exposure to changes in commodities prices. However, we are currently able to engage in such hedging activities only on a limited basis due to our lack of financial resources, and we may not have the financial resources to increase or conduct any of these hedging activities in the future. In addition, if geographic basis differentials are not hedged, they could cause our hedging programs to be ineffective or less effective than anticipated.

We have a significant amount of indebtedness and limited liquidity, and virtually all of our assets are pledged to secure our senior debt.

The operating subsidiaries of the LLC that own and operate our Wood River and Fairmont plants have entered into a Senior Debt Facility with a group of financial institutions that is secured by substantially all of those subsidiaries’ assets. As of December 31, 2011, we had $176.8 million of indebtedness outstanding under our Senior Debt Facility.

Our substantial indebtedness could:

Our ability to make payments on and refinance our Senior Debt Facility depends on our ability to generate cash from our operations. Our ability to generate cash from operations is subject, in large part, to our crush spread as well as general economic, competitive, legislative and regulatory factors and other factors that are beyond our control. During our first three full years’ of operations, we have been unable to consistently generate positive cash flow, mostly due to the narrow crush spread. In addition, we have had, and continue to have, limited liquidity, with $15.1 million of cash and cash equivalents as of December 31, 2011. If we do not have sufficient cash flow to service our debt, we would need to refinance all or part of our existing debt, sell assets, borrow more money or raise additional capital, any or all of which we may not be able to do on commercially reasonable terms or at all. If we are unable to do so, we may be required to curtail operations or cease operating altogether, and could be forced to seek relief from creditors through a filing under the U.S. Bankruptcy Code. Because the debt under our Senior Debt Facility subjects substantially all of our assets to liens, there may be no assets left for stockholders in the event of a liquidation. In the event of a foreclosure on all or substantially all of our assets, we may not be able to continue to operate as a going concern.

The terms of the Senior Debt Facility include customary events of default and covenants that limit the applicable subsidiaries from taking certain actions without obtaining the consent of the lenders. In particular, our Senior Debt Facility places significant restrictions on the ability of those subsidiaries to distribute cash to the LLC, which limits our ability to use cash generated by those subsidiaries for other purposes. In addition, the Senior Debt Facility restricts those subsidiaries’ ability to incur additional indebtedness. Under our Senior Debt Facility, if Cargill admits in writing its inability to, or is generally unable to, pay its debts as such debts become due, we will be deemed to be in default. In addition, should either of our subsidiaries that are borrowers under the Senior Debt Facility admit in writing its inability to, or is generally unable to, pay its debts as such debts become due, we will be deemed to be in default.

Any future debt facilities will likely be secured by substantially all our assets.

We expect that any debt we incur to finance future needs will be incurred either pursuant to an expanded version of our current Senior Debt Facility, a new, separate credit facility (which would require the consent of our existing banks) or a new corporate credit facility that would replace our current Senior Debt Facility. In any event, it is most likely that this indebtedness would be secured by substantially all of our assets. Because the debt under these facilities may subject substantially all of our assets to liens, there may be no assets left for stockholders in the event of a liquidation. Moreover, because the Senior Debt Facility only contains limits on the amount of indebtedness that certain of our subsidiaries may incur, we have the ability to incur substantial additional indebtedness, and any additional indebtedness we incur could exacerbate the risks described above.

The expiration of the blenders’ credit could have a material adverse impact on our results of operations and financial position.   

The Volumetric Ethanol Excise Tax Credit (VEETC), commonly referred to as the “blenders’ credit,” was a federal excise tax incentive program that allowed gasoline distributors that blend ethanol with gasoline to receive a federal excise tax rate reduction for each blended gallon they sold. This $0.45 per gallon of ethanol credit expired on December 31, 2011. The expiration of the blenders’ credit may decrease future demand for ethanol, which is likely to result in lower prices for ethanol, or it may result in a decrease in the price gasoline blenders and marketers are willing or able to pay for ethanol. In such event, there would likely be a material adverse effect on our results of operations, liquidity and financial condition. The expiration of the blenders’ credit may also inhibit adoption of E15 if and when such products are registered with the EPA and become available in the market, thereby further reducing the potential demand for ethanol.

The demand for ethanol is highly dependent on the continued implementation of the Renewable Fuel Standard, or RFS, which is uncertain.   

The Energy Independence and Security Act of 2007 and the Energy Policy Act of 2005, established minimum nationwide levels of renewable fuels — ethanol, biodiesel or any other liquid fuel produced from biomass or biogas — to be blended with gasoline. The legislation also included provisions for trading of credits for use of renewable fuels and authorized potential reductions in the RFS minimum by action of a governmental administrator. The rules for implementation of the RFS and the energy bill have been in effect since September 2007, but the ultimate effects of these rules on the ethanol industry remain uncertain. For example, in 2010 and 2011, the U.S. EPA, under the statutory authority provided by the 2005 Act, issued waivers of the cellulosic component of the advanced biofuel RFS due to the lack of availability of cellulosic biofuels on a commercial scale. In addition, the traditional (corn-based) ethanol provisions in the 2007 Act and 2005 Act may be adversely affected by the enactment of future legislation. Ethanol critics frequently cite the purported effect on international food prices from redirecting corn supplies from international food markets to domestic fuel markets. Should public support for ethanol erode, it is possible that these federal mandates will lose political support thereby severely curtailing the demand for ethanol, if the RFS were reduced or eliminated. Refineries, for example, may elect to use replacement additives other than ethanol, such as iso-octane, iso-octene and alkylate. Such reduction in demand would likely result in reduced ethanol prices which could have a material adverse effect on our operating results and our financial condition.

We are currently limited in our ability to hedge against fluctuations in commodity prices and may be unable to do so in the future, which further exposes us to commodity price risk.

Since we have commenced operations, we have from time to time entered into derivative financial instruments such as futures contracts, swaps and option contracts with the objective of limiting our exposure to changes in commodities prices. However, we are currently able to engage in such hedging activities only on a limited basis due to our lack of financial resources, and we may not have the financial resources to conduct hedging activities in the future. In addition, ethanol futures have historically traded with an inverted price progression, or “strip,” whereby outer month contracts are priced at lower prices than spot or near-month contracts. In contrast, corn futures historically have traded such that outer months have higher prices than near or spot months. As a result, even under market conditions in which we realize positive margins at current (spot) prices we may not be able to lock in such margins for future production. Furthermore, because of the lack of a sufficiently established futures market or established markets for future physical delivery of ethanol, we may not be able to price a material amount of our future production so as to permit us to hedge a material portion of our commodities price risks.

Our results and liquidity may be adversely affected by future hedging transactions and other strategies.

Although our ability to do so is presently limited due to limited financial resources, we may in the future enter into contracts to sell a portion of our ethanol and co-product production or to purchase a portion of our corn or natural gas requirements on a forward basis to offset some of the effects of volatility of ethanol prices and costs of commodities. From time to time, we may also engage in other hedging transactions involving exchange-traded futures contracts for corn, ethanol and natural gas. We may also hedge against changes in corn oil prices by means of heating oil futures contracts. The financial statement impact of these activities will depend upon, among other things, the prices involved, changes in the underlying market price and our ability to sell sufficient products to use all of the corn and natural gas for which we have futures contracts or our ability to sell excess corn or natural gas purchased in hedging transactions. Hedging arrangements also expose us to the risk of financial loss in situations where the other party to the hedging contract defaults on its contract or, in the case of exchange-traded contracts, where there is a change in the expected differential between the underlying price in the hedging agreement and the actual prices paid or received by us.

Although we will attempt to link our hedging activities to sales and production plans and pricing activities, such hedging activities can themselves result in losses. Hedging activities can result in losses when a position is purchased in a declining market or a position is sold in a rising market. This risk can be increased in highly volatile conditions such as those recently experienced in corn and other commodities futures markets. A hedge position is often settled when the physical commodity is either purchased (corn and natural gas) or sold (ethanol or distillers grain). In the interim, we are and may continue to be subject to the risk of margin calls and other demands on our financial resources arising from hedging activities. We have experienced hedging losses in the past and we may experience hedging losses again in the future. We may also vary the amount of hedging or other price mitigation strategies we undertake, and we may choose not to engage in hedging transactions at all. As a result, our results of operations and financial condition may be adversely affected by increases in the price of corn or natural gas or decreases in the price of ethanol. In addition, our significant indebtedness and debt service requirements increase the effect of changes in commodities prices on our cash flow, and may limit our ability to sustain our operations in the future.

The Company has adopted a risk management policy which is intended to provide additional, formal oversight over the hedging activities of the LLC and the operating subsidiaries of the LLC. We cannot assure you, however, that this policy will prevent or mitigate future hedging losses.

Increased acceptance of ethanol as a fuel and construction of additional ethanol production plants could lead to shortages of availability and increases in the price of corn.

The growth of the ethanol industry has led to significantly greater demand for corn. Cargill, which supplies corn for our plants, may have difficulty from time to time in sourcing corn on economical terms, due to supply shortages or elevated market prices. Any supply shortage could require us to suspend operations until corn becomes available on economical terms. Suspension of operations would materially harm our business, results of operations and financial condition. Additionally, the price we pay for corn could increase if another ethanol production facility were built in the same general vicinity, if we expand one of our production facilities or based on market conditions. One of our competitors has constructed a large scale ethanol production plant approximately six miles from our Fairmont site, near Welcome, Minnesota. Two plants in such close proximity could lead to increases in the price of corn or shortages of availability of corn in the area. In addition, the price of corn increased significantly over historical levels in 2011 and has remained high into the first quarter of 2012. We believe that this increase in corn prices is attributable in part to the increased demand from new ethanol production capacity. We cannot assure you that the price of corn will not rise significantly in the future, which could adversely affect our results of operations.

Excess production capacity in our industry may result in over-supply of ethanol which could adversely affect our business.

According to the Renewable Fuels Association (the “RFA”), a trade group, domestic ethanol production capacity has increased from approximately 1.8 billion gallons per year (Bgpy) in 2001, to an estimated 14.9 Bgpy at the end of 2011. In addition, the Energy Information Agency (EIA) of the U.S. Department of Energy recently estimated that, during the month of December 2011, the most recent month for which statistics were available, daily ethanol production in the U.S. averaged 960,000 barrels per day, which would equate to an annualized output of approximately 14.7 Bgpy. As a result of this increase in production, the ethanol industry faces the risk of excess capacity. In a manufacturing industry with excess capacity, producers have an incentive to continue manufacturing products as long as the price of the product exceeds the marginal cost of production (i.e., the cost of producing only the next unit, without regard to interest, overhead or other fixed costs).

Excess ethanol production capacity also may result from decreases in the demand for ethanol, which could result from a number of factors, including regulatory developments and reduced gasoline consumption in the United States. Reduced gasoline consumption could occur as a result of a decline in general economic conditions, as a result of increased prices for gasoline or crude oil, which could cause businesses and consumers to reduce driving or acquire vehicles with more favorable gasoline mileage, or as a result of technological advances, such as the commercialization of hydrogen fuel-cells, which could supplant gasoline-powered engines. There are a number of governmental initiatives designed to reduce gasoline consumption, including tax credits for hybrid vehicles and consumer education programs. According to preliminary data published by the EIA, motor fuel consumption in the United States, which includes ethanol blended with gasoline, decreased to approximately 133.7 billion gallons in 2011 from approximately 137.9 billion gallons the prior year. Management believes that this moderation in overall motor fuel consumption has been the result of the continued weak economic recovery recently experienced in the U.S., and has also contributed to declining margins for ethanol.

If there is excess capacity in our industry, and it continues to outstrip demand for a significant period of time, the market price of ethanol could remain at a level that is inadequate to generate sufficient cash flow to cover costs, which could result in an impairment charge, could have an adverse effect on our results of operations, cash flows and financial condition, and which could render us unable to make debt service payments and cause us to cease operating altogether.

Competition for qualified personnel in the ethanol industry is intense, and we may not be able to retain qualified personnel to operate our ethanol plants.

Our success depends in part on our ability to attract and retain competent personnel. For each of our plants, we must hire and retain qualified managers, engineers and operations and other personnel, which can be challenging in a rural community. Competition for both managers and plant employees in the ethanol industry can be intense. Although we have hired the personnel necessary to operate our plants, we may not be able to maintain or retain qualified personnel. If we are unable to hire and maintain or retain productive and competent personnel, our strategy may be adversely affected and we may not be able to efficiently operate our ethanol plants as planned.

We are dependent upon our officers for management and direction, and the loss of any of these persons could adversely affect our operations and results.

We are dependent upon the diligence and skill of our senior management team for implementation of our proposed strategy and execution of our business plan, and our future success depends to a significant extent on the continued service and coordination of our senior management team. We do not maintain “key person” life insurance for any of our officers or other employees. The loss of any of our officers could delay or prevent the achievement of our business objectives.

We are dependent on our commercial relationship with Cargill and subject to various risks associated with this relationship.

Our operating results may suffer if Cargill does not perform its obligations under our contracts.   We have entered into an extensive commercial relationship with Cargill and are largely dependent on Cargill for the success of our business. This relationship includes long-term marketing agreements with Cargill, under which Cargill has agreed to market and distribute 100% of the ethanol produced at our Wood River and Fairmont production plants. We have also entered into corn supply agreements with Cargill, under which Cargill supplies 100% of the corn for our Wood River and Fairmont plants. The success of our business depends on Cargill’s ability to provide our production plants with the required corn supply in a cost-effective manner and to market and distribute our ethanol products successfully. If Cargill defaults on payments owed to us, fails to perform any of its responsibilities or does not perform its responsibilities as effectively as we expect them to under our agreements, our results of operations will be adversely affected.

Cargill may terminate its arrangements with us in the event that certain parties acquire 30% or more of our common stock or the power to elect a majority of the Board.   Cargill has the right to terminate its arrangements with us for any or all of our facilities if any of five identified parties or their affiliates acquires 30% or more of our common stock or the power to elect a majority of our board of directors. Cargill has designated five parties, each of which is currently engaged primarily in the agricultural commodities business, and it has the right to annually update this list of identified parties, so long as the list does not exceed five entities and the affiliates of such entities. The five parties currently identified by Cargill are Archer Daniels Midland Company, CHS Inc., Tate & Lyle PLC, The Scoular Company and Bunge Limited. Cargill’s termination right may have the effect of deferring, delaying or discouraging transactions with these parties and their affiliates that might otherwise be beneficial to us. If Cargill were to terminate any of our goods and services agreements, it would have a significant negative impact on our business and we would be unable to continue our operations at each affected facility until alternative arrangements were made. If we were required to make alternative arrangements, we may not be able to make such arrangements or, if we are able to make such arrangements, they may not be on terms as favorable as our agreements with Cargill. We currently have no agreements or structure in place that would prohibit any of the parties identified by Cargill from acquiring 30% or more of our common stock and we do not expect to have any such agreements or structures in the future. However, we have no expectation that any of these parties would have an interest in acquiring shares of our common stock. We monitor Schedule 13D filings so that we will be informed of any parties accumulating ownership of our stock. If any identified party accumulates a significant amount of stock, our board of directors will address the matter at that time consistent with its fiduciary duties under applicable law.

If we do not meet certain quality and quantity standards under our marketing agreements with Cargill, our results of operations may be adversely affected.   If our ethanol does not meet certain quality standards, Cargill may reject our products or accept our products and decrease the purchase price to reflect the inferior quality. If we fail to produce a sufficient amount of ethanol and, as a result, Cargill is required to purchase replacement ethanol from third parties at a higher purchase price to meet sale commitments, we must pay Cargill the price difference plus a commission on the deficiency volume. Our failure to meet the quality and quantity standards in our marketing agreements with Cargill could adversely affect our results of operations.

We will be subject to certain risks associated with Cargill’s ethanol marketing pool.   Under the terms of our ethanol marketing agreements, Cargill may place our ethanol in a common marketing pool with ethanol produced by Cargill and certain other third party producers. Each participant in the pool will receive the same price for its share of ethanol sold, net of freight and other agreed costs incurred by Cargill with respect to the pooled ethanol. Freight and other charges will be divided among pool participants based solely upon each participant’s ethanol volume in the pool. As a result, we may be responsible for higher freight and other costs than we would be if we did not participate in the marketing pool, depending on the freight and other costs attributable to the other marketing pool members. In addition, we may become committed to sell ethanol at a fixed price in the future under the marketing pool, exposing us to the risk of increased corn prices if we are unable to hedge such sales. We have the right to opt out of the ethanol marketing pool for any contract year by giving Cargill a six-month advance notice. However, we may be required to participate in the pool for an additional 18 months if Cargill has contractually committed to sell ethanol based on our continued participation in the pool.

We are subject to certain risks associated with our corn supply agreements with Cargill.   We have agreed to purchase our required corn supply for our Wood River and Fairmont plants exclusively from Cargill and pay Cargill a per bushel fee for all corn Cargill sells to us. We cannot assure you that the prices we pay for corn under our corn supply agreements with Cargill, together with the fee we have agreed to pay to Cargill, will be lower than the prices we could pay or that our competitors will be paying for corn from other sources.

Our interests may conflict with the interests of Cargill.   Cargill owns and operates two of its own ethanol plants, which are capable of producing approximately 120 Mmgy. In addition, we understand that Cargill may market ethanol for other third parties under the marketing pool arrangements described above. We cannot assure you that Cargill will not favor its own interests or those of other parties over our interests. Under our marketing agreements with Cargill, other than our right to terminate to the extent such conflict results in material quantifiable pecuniary loss, we have waived any claim of conflict of interest against Cargill for failure to use commercially reasonable efforts to maximize our returns to the extent such claims relate to an alleged conflict of interest or alleged preference to third parties for which Cargill provides marketing services. If we elected to terminate the marketing agreements in these circumstances, we would need to enter into replacement marketing arrangements with another party, which may not be possible at all or on terms as favorable as our current agreements with Cargill. To the extent a conflict of interest does not result in material quantifiable pecuniary loss, we would be without recourse against Cargill.

New technologies for producing ethanol could displace corn-based ethanol and materially harm our results of operations and financial condition.

The development and implementation of new technologies may impact our business significantly. The current trend in ethanol production research is to develop an efficient method of producing ethanol from cellulosic biomass such as agricultural waste, forest residue, and municipal solid waste. This trend is driven by the fact that cellulosic biomass is generally cheaper than corn and producing ethanol from cellulosic biomass would create opportunities to produce ethanol in areas that are unable to grow corn. Another trend in ethanol production research is to produce ethanol through a chemical process rather than a fermentation process, thereby significantly increasing the ethanol yield per pound of feedstock. Although current technology does not allow these production methods to be cost competitive, new technologies may develop that would allow these or other methods to become viable means of ethanol production in the future thereby displacing corn-based ethanol in whole or in part or intensifying competition in the ethanol industry. Our plants are designed to produce corn-based ethanol through a fermentation process. If we are unable to adopt or incorporate these advances into our operations, our cost of producing ethanol could be significantly higher than those of our competitors, and retrofitting our plants, if feasible, may be very time-consuming and could require significant capital expenditures. In addition, advances in the development of alternatives to ethanol, such as alternative fuel additives, or technological advances in engine and exhaust system design performance, such as the commercialization of hydrogen fuel-cells or hybrid engines, or other factors could significantly reduce demand for or eliminate the need for ethanol. We cannot predict when new technologies may become available, the rate of acceptance of new technologies, the costs associated with new technologies or whether these other factors may harm demand for ethanol.

Our profit margins may be adversely affected by gasoline demand and fluctuations in the selling price of gasoline.

Ethanol is marketed as a fuel additive to reduce vehicle emissions from gasoline, as an octane enhancer to improve the octane rating of the gasoline with which it is blended and, to a lesser extent, as a gasoline substitute. As a result, ethanol prices are influenced by the supply of and demand for gasoline. Our results of operations may be materially harmed if the demand for, or the price of, gasoline decreases. Conversely, a prolonged increase in the price of gasoline could result in overall reduction in motor fuel (i.e., E10) usage, thereby reducing the demand for ethanol, which could result in lower prices for ethanol. A sustained reduction in the price of ethanol, either in absolute terms or relative to the price of gasoline, may harm our operating results and financial condition.

Our business is highly sensitive to corn prices, and we generally cannot pass along increases in corn prices to our customers.

Corn is the principal raw material we use to produce ethanol and distillers grain. In 2011, corn costs represented approximately 82% of our cost of goods sold, and approximately 81% of our total operating expenses. Changes in the price of corn therefore significantly affect our business. In general, rising corn prices result in lower profit margins and may result in negative margins if not accompanied by increases in ethanol prices. Under current market conditions, because ethanol competes with fuels that are not corn-based, we generally are unable to pass along increased corn costs to our customer. At certain levels, corn prices would make ethanol uneconomical to use in fuel markets. Over the period from January 1, 2010 through December 31, 2011, spot corn prices, based on the Chicago Board of Trade, or CBOT, have ranged from a low of $3.25 per bushel in June 2010 to a high of $7.86 per bushel in June 2011, with prices averaging $5.45 per bushel during this two year period. As of December 31, 2011, the CBOT spot price of corn was $6.47 per bushel. The price of corn is influenced by a number of factors, including weather conditions and other factors affecting crop yields, farmer planting decisions and general economic, market and regulatory factors, government policies and subsidies with respect to agriculture and international trade, and global and local supply and demand. In addition, any event that tends to increase the demand for corn could cause the price of corn to increase. We believe that the increasing ethanol production capacity has contributed to, and will continue to contribute to, a period of elevated corn prices compared to historical levels.

The elimination of or significant changes to the Freedom to Farm Act could reduce corn supplies.   

In 1996, Congress passed the Freedom to Farm Act, which allows farmers continued access to government subsidies while reducing restrictions on farmers’ decisions about land use. This act not only increased acreage dedicated to corn crops but also allowed farmers more flexibility to respond to increases in corn prices by planting greater amounts of corn. The elimination of this act could reduce the amount of corn available in future years and could reduce the farming industry’s responsiveness to the increasing corn needs of ethanol producers.

The market for natural gas is subject to market conditions that create uncertainty in the price and availability of the natural gas that we will use in our manufacturing process.

We rely upon third parties for our supply of natural gas, which we use in the ethanol production process. The prices for and availability of natural gas are subject to volatile market conditions. The fluctuations in natural gas prices over the period from January 1, 2010 through December 31, 2011, based on the New York Mercantile Exchange, or NYMEX, have ranged from a low of $3.00 per million British Thermal Units (Mmbtu) in December 2011 to a high of $6.01 per Mmbtu in January 2010, averaging $4.24 per Mmbtu during this two year period. As of December 31, 2011, the NYMEX spot price of natural gas was $3.00 per Mmbtu. These market conditions are often affected by factors beyond our control, such as the price of oil as a competitive fuel, higher prices resulting from colder than average weather conditions or the impact of hurricanes and overall economic conditions. Local variation in the cost or supply of natural gas at either plant may also negatively impact our operations. Significant disruptions in the supply of natural gas could impair our ability to manufacture ethanol for our customers. Furthermore, increases in natural gas prices could adversely affect our results of operations.

We may not be able to compete effectively.

We compete with a number of significant ethanol producers in the United States, including Archer Daniels Midland, Valero Energy, Poet, Green Plains Renewable Energy, Koch Industries and Abengoa Bioenergy Corporation. Some of our competitors are divisions of larger enterprises and have substantially greater financial resources than we do. According to the RFA, the three largest producers (Archer Daniels Midland, Poet and Valero Energy) together controlled approximately 30% of the U.S. ethanol production capacity as of the end of 2011.

In 2009 and 2010, a number of ethanol production facilities were acquired, through bankruptcy sales or other transactions, by either existing ethanol producers, such as Poet and Green Plains Renewable Energy, or to new entrants to the industry, including blenders, producers and/or retailers of gasoline such as Valero Energy, Murphy Oil, Koch Industries and Sunoco Oil. The impact of these large oil refiners and retailers vertically integrating into ethanol production, and the possibility that one or more of our other competitors have acquired productive assets out of bankruptcy with improved capital structures, or without significant debt service obligations, could have the potential effect of placing us at a competitive disadvantage.

In addition to the larger sized competitors described above, there are many smaller competitors that have been able to compete successfully in the ethanol industry made up mostly of farmer-owned cooperatives and independent firms consisting of groups of individual farmers and investors. As many of these smaller competitors are farmer-owned, they receive government subsidies that we do not and often require their farmer-owners to commit to selling them a certain amount of corn as a requirement of ownership. We expect competition to increase as the ethanol industry becomes more widely known and demand for ethanol increases.

We also face increasing competition from international suppliers. International suppliers produce ethanol primarily from sugar cane and at times may have cost structures that are substantially lower than ours depending on the market price of sugar or other feedstocks relative to corn. With the expiration on December 31, 2011 of the $0.54 per gallon tariff on foreign-produced ethanol, ethanol imports may become increasingly competitive with domestic ethanol, including our products. Sugar-based ethanol also qualifies as an “advanced” biofuel under the RFS, and blenders who incorporate it into their fuel are able to garner advanced Renewable Identification Numbers (RIN’s), which trade at a significant premium to RIN’s generated by conventional, corn-based ethanol. In addition, according to the Economic Research Service of the USDA, in recent years various other countries have begun increasing their use of ethanol as part of their motor fuel supply. While these new markets may offer increased export opportunities for U.S. producers such as us, Brazilian producers may, depending upon a variety of factors including their own domestic ethanol demand, public policy and regulations, world sugar and oil prices and currency exchange rates, export ethanol to meet some or all of this demand.

Any increase in domestic or foreign competition could force us to reduce our prices and take other steps to compete effectively, which may adversely affect our results of operations and financial position.

We may not be able to continue to sell ethanol for export profitably.

During the course of 2011, we were able to export a significant portion of our ethanol production to foreign markets. These markets offered net pricing that in most cases represented a premium to the U.S. domestic market. Among the factors that make U.S. produced ethanol competitive in foreign markets, and which could affect our ability to sell ethanol overseas at a premium in the future, are the price of corn relative to other feed stocks, particularly sugar, the production economics of ethanol in various other countries, the relative strength of the U.S. dollar against a variety of foreign currencies and the public policies, including taxes and import duties, of various foreign governments and regulators. We cannot assure you that we will be able to export our ethanol product in the future or that, if we are able to do so, we will enjoy similar favorable pricing as we have in the past.

Growth in the sale and distribution of ethanol depends on changes to and expansion of related infrastructure which may not occur on a timely basis, if at all.

It currently is impracticable to transport by pipeline fuel blends that contain ethanol. Substantial development of infrastructure will be required by persons and entities outside our control for our business, and the ethanol industry generally, to grow. Areas requiring expansion include, but are not limited to:

The substantial investments or government support required for these infrastructure changes and expansions may not be made on a timely basis or at all. Any delay or failure in making the changes to or expansion of infrastructure could weaken the demand or prices for our products, impede our delivery of products, impose additional costs on us or otherwise materially harm our results of operations or financial position.

Transportation delays, including those as a result of disruptions to infrastructure, could adversely affect our operations.

Our business depends on the availability of rail and road distribution infrastructure. Any disruptions in this infrastructure network, whether caused by earthquakes, storms, other natural disasters or human error or malfeasance, could materially impact our business. It currently is impracticable to transport by pipeline fuel blends that contain ethanol, and we have limited ethanol storage capacity at our facilities. Therefore, any unexpected delay in transportation of our ethanol could result in significant disruption to our operations, possibly requiring shutting down our plant operations. We rely upon others to maintain our rail lines from our production plants to national rail networks, and any failure on their part to maintain the lines could impede our delivery of products, impose additional costs on us or otherwise cause our results of operations or financial condition to suffer.

Disruptions in the supply of oil or natural gas could materially harm our business.

Significant amounts of oil and natural gas are required for the growing, fertilizing and harvesting of corn, as well as for the fermentation, distillation and transportation of ethanol and the drying of distillers grain. A serious disruption in the supply of oil or natural gas and any related period of elevated prices could significantly increase our production costs and possibly require shutting down our plant operations, which would materially harm our business.

Our business may be influenced by seasonal fluctuations over which we have no control.

Our operating results may be influenced by seasonal fluctuations in the price of our primary operating inputs, corn and natural gas, and the price of our primary product, ethanol. Generally speaking, the spot price of corn tends to rise during the spring planting season in April and May and tends to decrease during the fall harvest in October and November. The price for natural gas, however, tends to move inversely to that of corn and tends to be lower in the spring and summer and higher in the fall and winter. In addition, ethanol prices have historically been substantially correlated with the price of unleaded gasoline. The demand for unleaded gasoline tends to rise during the late spring and summer, generally resulting in higher prices during those periods. Due to the rapid growth in the supply of ethanol and the expiration of the blenders’ credit, ethanol has recently traded at a discount to gasoline and we believe it is likely to continue to do so. During the three full years of our operation, we have seen a seasonal narrowing in the “crush spread” during the first half of the year, as corn prices firm following completion of the harvest and gasoline and ethanol demand slows during the winter months. Although we have generally experienced a widening crush spread in the latter part of the year, as the summer driving season increases demand for motor fuel and the approaching harvest eases corn prices, we cannot assure you that this will continue to occur in this or any other year.

The price of distillers grain is affected by the price of other commodity products, such as soybeans, and decreases in the price of these commodities could decrease the price of distillers grain.

Distillers grain is one of many animal feed products and competes with other protein-based animal feed products. The price of distillers grain may decrease when the price of competing feed products decreases. The prices of competing animal feed products are based in part on the prices of the commodities from which they are derived. Downward pressure on commodity prices, such as soybeans, will generally cause the price of competing animal feed products to decline, resulting in downward pressure on the price of distillers grain. Because the price of distillers grain is not tied to production costs, decreases in the price of distillers grain will result in us generating less revenue and lower profit margins. In addition, the production of distillers grain has risen significantly in recent years with the expansion of ethanol production capacity in the United States. As a result of this significant increase in supply, the market price of distillers grain may fall sharply from its current levels. If the market price of distillers grain falls, our business and financial results may be harmed.

The price of corn oil is affected by the price of other commodity products, such as soybean oil, and the price of and demand for biodiesel, and decreases in the price of these commodities could decrease the price of corn oil.

The corn oil we produce in our plants is chiefly used as a feedstock to produce biodiesel, and thus competes with other feedstocks such as soybean oil and yellow grease. The market price for corn oil may decrease when the price of other biodiesel feedstocks decreases. Biodiesel is itself a commodity product and competes with traditional diesel fuels. Beginning in July 2011, the RFS has required that a certain volume of biomass-based diesel fuel, which includes biodiesel, be included in the U.S. motor fuel supply. Blenders who incorporate biodiesel can generate Renewable Identification Numbers (RINS) for advanced biofuels, which trade at a premium to conventional ethanol RINS and therefore provide further support for the price of biodiesel. However, the continuation of this aspect of the RFS has been the subject of extensive litigation, and is also subject to the same uncertainties as described above with respect to traditional biofuels. Biodiesel has also enjoyed the advantage of favorable tax treatment, as those marketers who blended biodiesel with petroleum-based diesel have been eligible for an excise tax credit of $1.00 per gallon of biodiesel incorporated into their products. The biodiesel blenders’ tax credit became effective January 1, 2005 and then lapsed January 1, 2010 before being reinstated retroactively on December 17, 2010. The biodiesel blenders’ tax credit again expired as of December 31, 2011 and it is uncertain whether it will be reinstated. If Congress fails to extend the credit, or extends it at a reduced rate, the demand for, and/or price of, biodiesel may decrease. This may result in reduced demand for corn oil as a feedstock or a reduction in the market price for corn oil from its current levels, or both. If we experience a reduction in our revenues from this co-product, our business and financial results may be harmed.

Our financial results may be adversely affected by potential future acquisitions or sales of our plants, which could divert the attention of key personnel, disrupt our business and dilute stockholder value.

As part of our business strategy, and as market and financing conditions permit, we intend to (1) pursue acquisitions of other ethanol producers, production facilities, storage or distribution facilities and selected infrastructure and (2) seek opportunities to sell one or more plants on a basis more favorable than we would expect to realize by holding them. Due to increased competition, however, we may not be able to secure suitable acquisition opportunities. Further, we may not be able to find a buyer or buyers for one or more of our plants at prices that we consider attractive. In addition, the completion of any acquisition may result in unforeseen operating difficulties and may require significant financial and managerial resources that would otherwise be available for the ongoing development or expansion of our operations. In addition, if we finance acquisitions by issuing equity securities or debt that is convertible into equity securities, our existing stockholders may be diluted, which could affect the market price of our common stock. The failure to successfully evaluate and execute acquisitions or investments or otherwise adequately address these risks could materially harm our business and financial results.

We have encountered unanticipated difficulties in operating our plants, which may recur and cause us to incur substantial losses.

We are aware of certain plant design and construction defects that may impede the reliable and continuous operation of our plants, and as a result, our plants have not consistently operated at full capacity. While we have addressed a number of these reliability issues, we anticipate that we will encounter a variety of other reliability and operational issues that will require us to invest in capital improvements at our plants. However, our limited liquidity may prevent us from financing all of these initiatives and, even if completed, we cannot assure you that our initiatives will be successful or can be implemented in a timely fashion or without an extended period of interruption to operations. As a result, the operation of our plants has been more costly or inefficient than we anticipated, and this may recur in the future. Any inability to operate our plants at full capacity on a consistent basis could have a negative impact on our cash flows and liquidity.

We may also encounter other factors that could prevent us from conducting operations as expected, resulting in decreased capacity or interruptions in production, including shortages of workers or materials, design issues relating to improvements, construction and equipment cost escalation, transportation constraints, adverse weather, unforeseen difficulties or labor issues, or changes in political administrations at the federal, state or local levels that result in policy change towards ethanol in general or our plants in particular. Furthermore, local water, electricity and gas utilities may not be able to reliably supply the resources that our facilities will need or may not be able to supply them on acceptable terms. Our operations may be subject to significant interruption if any of our facilities experiences a major accident or is damaged by severe weather or other natural disasters. In addition, our operations may be subject to labor disruptions, unscheduled downtime or other operational hazards inherent in our industry. Some of these operational hazards may cause personal injury or loss of life, severe damage to or destruction of property and equipment or environmental damage, and may result in suspension of operations and the imposition of civil or criminal penalties. Our insurance may not be adequate to cover the potential operational hazards described above and we may not be able to renew our insurance on commercially reasonable terms or at all. Any cessation of operations due to any of the above factors would cause our sales to decrease significantly, which would have a material adverse effect on our results of operation and financial condition.

We may be adversely affected by environmental, health and safety laws, regulations and liabilities.

We are subject to various federal, state and local environmental laws and regulations, including those relating to the discharge of materials into the air, water and ground, the generation, storage, handling, use, transportation and disposal of hazardous materials, access to and impacts on water supply, and the health and safety of our employees. Some of these laws and regulations require our facilities to operate under permits that are subject to renewal or modification. These laws, regulations and permits can require expensive emissions testing and pollution control equipment or operational changes to limit actual or potential impacts to the environment. A violation of these laws and regulations or permit conditions can result in substantial fines, natural resource damages, criminal sanctions, permit revocations and facility shutdowns. We may not be in compliance with these laws, regulations or permits at all times or we may not have all permits required to operate our business. We may be subject to legal actions brought by environmental advocacy groups and other parties for actual or alleged violations of environmental laws or permits. In addition, we may be required to make significant capital expenditures on an ongoing basis to comply with increasingly stringent environmental laws, regulations and permits.

During the start-up and initial operation of our two plants, we occasionally failed to meet all of the parameters of our air and water discharge permits. We have addressed these issues primarily through adjustments to our equipment and operations, including significant upgrades to our water treatment system in Fairmont, Minnesota, and subsequent re-tests indicate that we are operating within our permitted limits. We have received Notices of Violations with respect to both sites from environmental regulators relating to these issues. In Nebraska, we have not been subject to any enforcement action. In Minnesota, we have resolved all of our outstanding enforcement issues through a Stipulated Agreement with the state, which resulted in us paying fines of $285,000 in 2010 and $46,000 in 2011. We do not anticipate a material adverse impact on our business or financial condition as a result of these prior violations.

Our water permits are issued under the federal National Pollutant Discharge Elimination System (NPDES), as administered by the states. Our Minnesota NPDES permit contains certain discharge variances from the water quality standards adopted by the U.S. EPA, which variances expired on July 31, 2011. As part of the Stipulated Agreement with the state of Minnesota, we are required either to implement additional alternative technologies to allow us to meet the water quality standards, cease all off-site surface water discharges or implement alternative discharge solutions, such as a pipeline to a larger, more remote receiving stream. We are currently negotiating a water supply agreement with the City of Fairmont for a minimum water supply and are designing a zero liquid discharge system which will allow the plant to cease its off-site surface water discharge and to recycle all water used at the plant. The state of Minnesota has agreed with this approach and has allowed the plant until December 31, 2013 to cease its discharge. Until a water supply agreement has been finalized with the City of Fairmont, the plant runs the risk of being required to construct a zero liquid discharge system using only on-site well water at a significantly higher cost than the cost of a system using City water. In any event, this undertaking will require significant expenditures which we expect will represent a significant portion of our capital improvement budgets in Fairmont in 2012 and 2013. We also have no assurances at this time that we will be able to meet the timelines for implementing the proposed solution or that the proposed solution will be technically feasible. Failure to meet the water quality standards as required by the Stipulated Agreement may result in additional enforcement actions, including substantial fines, and may result in legal actions by private parties, any one or combination of which could have a material adverse affect on our financial condition.

We may be adversely affected by pending climate change regulations.

Ethanol production involves the emission of various airborne pollutants, including particulate, carbon dioxide, oxides of nitrogen, hazardous air pollutants and volatile organic compounds. In 2007, the U.S. Supreme Court classified carbon dioxide as an air pollutant under the Clean Air Act in a case seeking to require the EPA to regulate carbon dioxide in vehicle emissions. On February 3, 2010, the EPA released its proposed final regulations on the Renewable Fuels Standard, or RFS. We believe these final regulations grandfather our plants at their current operating capacity, though expansion of our plants would need to meet a threshold of a 20% reduction in “greenhouse gas,” or GHG, emissions from a 2005 baseline measurement to produce ethanol eligible for the RFS mandate. Although we have no current intention to expand either of our plants, if we were able to do so in the future, we may be required to obtain additional permits or reduce drying of certain amounts of distillers grains.

Separately, the California Air Resources Board has adopted a Low Carbon Fuel Standard requiring a 10% reduction in GHG emissions from transportation fuels by 2020. An Indirect Land Use Change component is included in this lifecycle GHG emissions calculation, though this standard is being challenged by numerous lawsuits. This proposed standard could have the effect in the future of rendering our ethanol unsaleable in the state of California and, if adopted in other states, elsewhere.

Risks relating to the ownership of our common stock

The existing market for our common stock is illiquid, and we do not know whether a liquid trading market will develop.

Although our common stock is listed on the Nasdaq Capital Market, the trading market is relatively illiquid. As of December 31, 2011, there were approximately 104.6 million shares of our common stock, excluding treasury shares, and 18.6 million shares of our Class B common stock issued and outstanding, of which approximately 51.7% were held by certain of our “affiliates”. As a result, there are relatively few shares in publicly traded hands, there are few institutional stockholders other than those controlled by certain of our affiliates and we do not receive a significant amount of analyst coverage. An illiquid market will limit your ability to resell shares of our common stock.

Our common stock could be delisted from the Nasdaq Stock Market, which could negatively impact the price of our common stock and our ability to access the capital markets.

Our common stock is currently listed on the Nasdaq Capital Market under the symbol “BIOF.” The listing standards of Nasdaq provide, among other things, that a company may be delisted if the bid price for its stock drops below $1.00 for a period of 30 consecutive business days. We failed to satisfy this threshold and on April 20, 2011, we received a letter from Nasdaq indicating that the bid price of our common stock, which was listed on the Nasdaq Global Market at the time, had closed below the minimum $1.00 per share required for continued listing under Nasdaq Listing Rule 5450(a)(1) for the last 30 consecutive trading days. We were provided an initial period of 180 calendar days, or until October 17, 2011, on the Nasdaq Global Market to regain compliance. On October 17, 2011, we received another letter from Nasdaq informing us that we had failed to regain compliance by such date but, due to our transition from the Nasdaq Global Market to the Nasdaq Capital Market, we were provided an additional period of 180 calendar days, or until April 16, 2012, to regain compliance. The letter stated that the Nasdaq staff will provide written notification that we have achieved compliance if at any time before April 16, 2012, the bid price of our common stock closes at $1.00 per share or more for a minimum of 10 consecutive business days unless the Nasdaq staff exercises its discretion to extend this 10 day period.

If we do not regain compliance with the Nasdaq listing rules by April 16, 2012, the Nasdaq staff will provide written notice, in the form of a Nasdaq Staff Determination Letter, that our common stock is subject to delisting. At that time, we may appeal Nasdaq’s determination to a Hearings Panel. That appeal must contain, among other things, a definitive plan to come into compliance which would include, among other things, an undertaking to conduct a reverse stock split, which would require the approval of the Company’s stockholders.

If we were to receive a Nasdaq Staff Determination Letter to this effect, and fail to successfully appeal the delisting determination, our common stock may be delisted and traded on the over-the-counter bulletin board network. Moving our listing to the over-the-counter bulletin board network could adversely affect the liquidity of our common stock. The delisting of our common stock would significantly affect the ability of investors to trade our securities and could significantly negatively affect the value and liquidity of our common stock. In addition, the delisting of our common stock could materially adversely affect our ability to raise capital on terms acceptable to us or at all. Delisting from Nasdaq could also have other negative results, including the potential loss of confidence by suppliers and employees, the loss of institutional investor interest and fewer business development opportunities.

The price of our common stock may continue to be volatile.

The trading price of our common stock is highly volatile and could be subject to future fluctuations in response to a number of factors beyond our control. Some of these factors are:

In recent years the stock market has experienced significant price and volume fluctuations. These fluctuations may be unrelated to the operating performance of particular companies. These broad market fluctuations may cause declines in the market price of our common stock. The price of our common stock could fluctuate based upon factors that have little or nothing to do with our company or its performance, and those fluctuations could materially reduce our common stock price.

Certain large stockholders’ shares may be sold into the market in the future, which could cause the market price of our common stock to decrease significantly.

As of December 31, 2011 we had outstanding approximately 104.6 million shares of common stock, excluding treasury shares, and 18.6 million shares of Class B common stock. Some of the shares of common stock were, when issued (including some of the shares issued in the Rights Offering), “restricted securities” within the meaning of Rule 144 under the Securities Act of 1933. These shares, including those owned by our “affiliates,” have either become eligible for sale in the public market under Rule 144 or will become eligible for sale upon satisfaction of the holding period requirements of Rule 144, subject, in the case of shares held by affiliates, to volume limitations and other restrictions contained in Rule 144. In addition, shares of Class B common stock may be converted at any time into shares of common stock and, once converted, become eligible for resale under Rule 144 subject to the holding period requirements and, in the case of shares held by affiliates, the volume restrictions of Rule 144. In addition, certain of these affiliates have the right to require us to register the resale of their shares. If holders sell substantial amounts of these shares, the price of our common stock could decline. In addition, the sale of these shares could impair our ability to raise capital through the sale of additional equity securities.

Certain large stockholders own a significant percentage of our shares and exert significant influence over us. Their interests may not coincide with yours and they may make decisions with which you may disagree.

Our certificate of incorporation provides that the holders of shares of our Class B common stock will be entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. As of December 31, 2011, certain affiliates of Greenlight Capital, Inc., with respect to the Class B common stock and common stock held by them, and certain affiliates of Third Point LLC, with respect to the common stock held by them, respectively, controlled approximately 34.7% and 17.0% of the voting power of BioFuel Energy Corp. These large stockholders, acting together, could determine substantially all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change in control of our company and make some transactions more difficult or impossible without the support of these stockholders. The interests of these stockholders may not always coincide with our interests as a company or the interests of other stockholders. Accordingly, these stockholders could cause us to enter into transactions or agreements that you would not approve or make decisions with which you may disagree.

We do not intend to pay dividends on our common stock.

We have not paid any dividends since inception and do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently anticipate that we will retain all of our available cash, if any, for use as working capital and for other general corporate purposes, including to service our debt and to fund the development and operation of our business. Any payment of future dividends will be at the discretion of our Board of Directors and will depend upon, among other things, our earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations that the Board of Directors deems relevant. In addition, our bank facility imposes restrictions on the ability of the subsidiaries that own and operate our Wood River and Fairmont plants to pay dividends or make other distributions to us, which will restrict our ability to pay dividends. Investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize a return on their investment. Investors seeking cash dividends should not purchase our common stock.

Risks relating to our organizational structure

Our only material asset is our interest in BioFuel Energy, LLC, and we are accordingly dependent upon distributions from BioFuel Energy, LLC to pay dividends, taxes and other expenses.

BioFuel Energy Corp. is a holding company and has no material assets other than its ownership of membership units in the LLC. BioFuel Energy Corp. has no independent means of generating revenue. We intend to cause the LLC to make distributions to its members in an amount sufficient to cover all applicable taxes payable, if any, by such members. Our bank facility contains negative covenants, which limit the ability of our operating subsidiaries to declare or pay dividends or distributions. To the extent that BioFuel Energy Corp. needs funds, and the LLC is restricted from making such distributions under applicable law or regulations, or is otherwise unable to provide such funds due, for example, to the restrictions in our bank facility that limit the ability of our operating subsidiaries to distribute funds, our liquidity and financial condition could be materially harmed.

Our ability to use net operating loss carryforwards to offset future taxable income for U.S. federal income tax purposes may be limited as a result of prior or future acquisitions of our common stock, including but not limited to the recently consummated Rights Offering and periodic exchanges of membership interests in the LLC for shares of common stock.

As of December 31, 2011 we reported federal net operating loss (“NOL”) carryforwards of approximately $190.0 million, which will begin to expire if not used by December 31, 2028. For accounting purposes, a valuation allowance is required to reduce our potential deferred tax assets if it is determined that it is more likely than not that all or some portion of such assets will not be realized for any reason. Our financial statements currently provide a valuation allowance against our NOL carryforwards.

Our ability to utilize our tax attributes, such as NOL carryforwards and tax credits (“Tax Attributes”), during future periods will depend in part on whether we have undergone an “ownership change” as defined in Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). For this purpose, an ownership change generally occurs if, as of any “testing date” (as defined under Section 382 of the Code), our “5-percent shareholders” have collectively increased their ownership in our common stock by more than 50 percentage points over their lowest percentage ownership at any time during the relevant testing period, which generally begins three years before each “testing date” transaction. In general, our 5-percent shareholders would include (i) any individual who owns 5% or more of our common stock and (ii) any “public group” that owns our common stock, in each case whether such shareholders own our common stock directly or indirectly through one or more higher tier entities that directly or indirectly own 5% or more of our common stock. A “public group” generally consists of any group of individuals each of whom directly or indirectly owns less than 5% of our common stock. An ownership change may therefore occur following substantial changes in the direct or indirect ownership of our outstanding stock by one or more 5-percent shareholders over this period.

After an ownership change, Section 382 of the Code imposes an annual limitation on the amount of our post-change taxable income that may be offset by our pre-change Tax Attributes. The limitation imposed by Section 382 for any post-change year is generally determined by multiplying the value of our common stock immediately before the ownership change by the applicable long-term tax-exempt rate. Any unused annual limitation may, subject to certain limits, be carried over to later years. In addition, the limitation may be increased under certain circumstances by any “built-in gain” in our assets at the time of the ownership change. It is unclear whether all or a portion of our Tax Attributes are or will be subject to a limitation under Section 382 of the Code as a result of prior or future acquisitions of our common stock by 5-percent shareholders, including but not limited to the recently consummated Rights Offering, periodic exchanges of membership interests in the LLC for shares of our common stock and certain changes in the ownership of any entity that owns 5% or more of our common stock.

If our Tax Attributes are not currently subject to limitation under Section 382 of the Code, our Board of Directors may take actions to impose transfer restrictions or other protective mechanisms, including the adoption of a “tax benefit preservation plan,” to reduce the likelihood of a future ownership change. Any such plan, if adopted, would be adopted on terms and conditions approved by our Board of Directors.

Our ability to use our Tax Attributes will also depend on the amount of taxable income we generate in future periods. Even without regard to Section 382 of the Code, therefore, all or a portion of our Tax Attributes may expire before we generate sufficient taxable income to utilize them.

We will be required to pay certain holders of membership interests in the LLC for a portion of the benefits relating to any additional tax depreciation or amortization deductions we may claim as a result of tax basis step-ups we receive in connection with future exchanges of BioFuel Energy, LLC membership units for shares of our common stock.

The membership units in the LLC held by members other than BioFuel Energy Corp. may be exchanged for shares of our common stock. The exchanges may result in increases in the tax basis of the assets of the LLC that otherwise would not have been available. These increases in tax basis may reduce the amount of tax that we would otherwise be required to pay in the future, although the IRS may challenge all or part of the tax basis increases, and a court could sustain such a challenge. At the current trading price, which was $0.64 as of March 6, 2012, we do not anticipate any material change in the tax basis of the LLC’s assets.

We have entered into a tax benefit sharing agreement with certain holders of membership interests in the LLC that will provide for the payment by us to such holders of LLC membership interests of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that we actually realize as a result of these increases in tax basis. The increase in tax basis, as well as the amount and timing of any payments under this agreement, will vary depending upon a number of factors, including the timing of exchanges, the price of shares of our common stock at the time of the exchange, the extent to which such exchanges are taxable, and the amount and timing of our income. As a result of the size of the increases in the tax basis of the tangible and intangible assets of the LLC attributable to our interest in the LLC, during the expected term of the tax benefit sharing agreement, we expect that the payments that we may make to these holders LLC membership interests could be substantial.

Although we are not aware of any issue that would cause the IRS to challenge a tax basis increase, the holders of interests in the LLC will not reimburse us for any payments that may previously have been made under the tax benefit sharing agreement. As a result, in certain circumstances we could make payments to these holders of LLC membership interests under the tax benefit sharing agreement in excess of our cash tax savings. Our ability to achieve benefits from any tax basis increase, and the payments to be made under the tax benefit sharing agreement, will depend upon a number of factors, as discussed above, including the timing and amount of our future income.

Provisions in our charter documents and our organizational structure may delay or prevent our acquisition by a third party or may reduce the value of your investment.

Some provisions in our certificate of incorporation and bylaws may be deemed to have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt that a stockholder may deem to be in his or her best interest. For example, our Board of Directors may determine the rights, preferences, privileges and restrictions of unissued series of preferred stock without any vote or action by our stockholders. In addition, stockholders must provide advance notice to nominate Directors or to propose business to be considered at a meeting of stockholders and may not take action by written consent. Our corporate structure, which provides our historical LLC equity investors, through the shares of Class B common stock they will hold, a number of votes equal to the number of shares of common stock issuable upon exchange of their membership units in the LLC, may also have the effect of delaying, deferring or preventing a future takeover or change in control of our company. The existence of these provisions and this structure could also limit the price that investors may be willing to pay in the future for shares of our common stock.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Facilities

Headquarters

Our corporate headquarters are located at 1600 Broadway, Suite 2200, Denver, Colorado, where we currently lease approximately 9,000 square feet of office space.

Production Facilities

The table below provides an overview of our Wood River, Nebraska and Fairmont, Minnesota ethanol plants, which began operations in 2008.

Wood River plant

Our Wood River production plant began operations in June 2008 and reached substantial completion in December 2008. The plant is located on an approximately 125 acre site owned by us approximately 100 miles west of Lincoln, Nebraska. The site is immediately adjacent to an existing Cargill grain elevator. The grain elevator provides all required corn storage and handling capacity for the plant and, together with the site on which it sits, has been leased, effective in September 2008, from Cargill pursuant to a 20-year lease. Natural gas distribution to the site’s lateral pipeline is provided by the Kinder Morgan Interstate Pipeline. Electricity to the site is being provided by Southern Power District. We have drilled our own wells for water needed at the facility.

Fairmont plant

Our Fairmont production plant began operations in June 2008 and reached substantial completion in December 2008. The plant is located on an approximately 200 acre site owned by us approximately 150 miles southwest of Minneapolis, Minnesota. The site is immediately adjacent to an existing Cargill grain elevator. The grain elevator provides all required corn storage and handling capacity for the plant and, together with the site on which it sits, has been leased, effective in September 2008, from Cargill pursuant to a 20-year lease. Natural gas distribution to the plant’s lateral pipeline is provided by the Northern Border Interstate Pipeline. Electricity to the site is being provided by Federated Rural Electric Association. Wells on the site provide water needed at the facility.

ITEM 3. LEGAL PROCEEDINGS

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market Information

We completed an initial public offering, or “IPO”, of shares of our common stock in June 2007. Our common stock trades on the Nasdaq Capital Market under the symbol “BIOF.” The following table sets forth the high and low closing prices for the common stock as reported on the Nasdaq Capital Market for the quarterly periods indicated. These prices do not include retail markups, markdowns or commissions.

On March 6, 2012, the closing price of our common stock was $0.64. On March 6, 2012, there were approximately 32 stockholders of record of our common stock and 13 stockholders of record of our Class B common stock. We believe the number of beneficial owners is substantially greater than the number of record holders because a large portion of our outstanding common stock is held of record in broker “street names” for the benefit of individual investors. As of March 6, 2012, there were 104,573,689 common shares outstanding, net of 809,606 shares held in treasury, and 18,622,944 Class B common shares outstanding.

Dividend Policy

We have not paid any dividends since our inception and do not anticipate declaring or paying any cash dividends on our common stock in the foreseeable future. We currently anticipate that we will retain all of our available cash, if any, for use as working capital and for other general corporate purposes, including to service our debt and to fund the development and operation of our business. Payment of future dividends, if any, will be at the discretion of our Board of Directors and will depend on many factors, including general economic and business conditions, our strategic plans, our financial results and condition, legal requirements and other factors as our Board of Directors deems relevant. In addition, our bank facility imposes restrictions on the ability of the subsidiaries that own our Wood River and Fairmont plants to pay dividends or make other distributions to us, which will restrict our ability to pay dividends.

BioFuel Energy Corp. is a holding company and has no material assets other than its ownership of membership units in the LLC. We intend to cause the LLC to make distributions to BioFuel Energy Corp. in an amount sufficient to cover dividends, if any, declared by us. If the LLC makes such distributions, the historical LLC equity investors will be entitled to receive equivalent distributions from the LLC on their membership units. To ensure that our public stockholders are treated fairly with the historical LLC equity investors, our charter requires that all distributions received from the LLC, other than distributions to cover tax obligations and other corporate expenses, will be dividended to holders of our common stock.

Equity Compensation Plans

For the information required by this item concerning equity compensation plans, see “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of this Annual Report on Form 10-K.

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data of BioFuel Energy Corp. as of December 31, 2011 and 2010 and for the years then ended has been derived from the audited consolidated financial statements of BioFuel Energy Corp. included elsewhere in this Form 10-K.

You should read the selected historical financial data in conjunction with the information included under the heading “Management’s discussion and analysis of financial condition and results of operations” and the consolidated financial statements and accompanying notes included in this Form 10-K.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion in conjunction with the audited consolidated financial statements and the accompanying notes included in this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Specifically, forward-looking statements may be preceded by, followed by or may include such words as “estimate”, “plan”, “project”, “forecast”, “intend”, “expect”, “is to be”, “anticipate”, “goal”, “believe”, “seek”, “target” or other similar expressions. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this Form 10-K, or in the case of a document incorporated by reference, as of the date of that document. Except as required by law, we undertake no obligation to publicly update or release any revisions to these forward-looking statements to reflect any events or circumstances after the date of this Form 10-K or to reflect the occurrence of unanticipated events. Our actual results may differ materially from those discussed in or implied by any of the forward-looking statements as a result of various factors, including but not limited to those listed elsewhere in this Form 10-K and those listed in other documents we have filed with the Securities and Exchange Commission.

Overview

BioFuel Energy Corp. produces and sells ethanol and distillers grain through its two ethanol production facilities located in Wood River, Nebraska and Fairmont, Minnesota. Each of these plants has an undenatured nameplate production capacity of approximately 110 million gallons per year (“Mmgy”). We work closely with Cargill, Inc., one of the world’s leading agribusiness companies, with whom we have an extensive commercial relationship. The two plant locations were selected primarily based on access to corn supplies, the availability of rail transportation and natural gas and Cargill’s competitive position in the area. At each location, Cargill has a strong local presence and owns adjacent grain storage and handling facilities, which we lease from them. Cargill provides corn procurement services, markets the ethanol we produce and provides transportation logistics for our two plants under long-term contracts.

We are a holding company with no operations of our own, and are the sole managing member of BioFuel Energy, LLC (the “LLC”), which is itself a holding company and indirectly owns all of our operating assets. As the sole managing member of the LLC, BioFuel Energy Corp. operates and controls all of the business and affairs of the LLC and its subsidiaries. The Company’s ethanol plants are owned and operated by the Operating Subsidiaries of the LLC.

In February 2011, we completed a Rights Offering to the Company’s common stockholders of rights to purchase 63,773,603 depositary shares representing fractional interests in shares of Series A Non-Voting Convertible Preferred Stock (“Preferred Stock”). Concurrent with the Rights Offering, the LLC conducted a private placement of LLC interests that was structured to provide the holders of the membership interests in the LLC (other than the Company) with a private placement that was economically equivalent to the Rights Offering. On February 2, 2011, the Company’s stockholders approved an increase in the number of authorized shares of common stock of the Company, which resulted in the automatic conversion of shares of the Preferred Stock into shares of the Company’s common stock such that subscribers in the Rights Offering were issued one share of common stock in lieu of each depositary share subscribed for. These transactions were completed, and 63,773,603 shares of common stock and 18,369,262 LLC interests (along with an equivalent number of shares of Class B common stock) were issued, on February 4, 2011, and the aggregate gross proceeds of the Rights Offering and the concurrent private placement were $46.0 million. In contemplation of the Rights Offering, on September 23, 2010 we entered into a Letter Agreement with Cargill pursuant to which we issued 6,597,790 shares of common stock to Cargill on February 15, 2011, in exchange for the extinguishment of certain indebtedness.    See “— Liquidity and capital resources — Rights Offering and LLC Concurrent Private Placement”.

In June 2011 the Company terminated its long-term Distillers Grains Marketing Agreements with Cargill.  The Company has entered into separate marketing agreements with independent third party marketers for its dry and wet distillers grains.  These agreements are for a term of one year, with options to renew for subsequent years, and contain other customary commercial terms.

During 2011, the Company decided to install corn oil extraction systems at each of its ethanol plants so that it could begin producing corn oil as an additional co-product. These systems were installed using certain patented technology we have licensed from Greenshift Corporation for which we pay a royalty. On October 28, 2011, the Company’s Operating Subsidiaries received funding under an operating lease each Operating Subsidiary entered into with Farnam Street Financial, Inc.  These operating leases provided the funding to pay for most of the costs of installing the corn oil extraction systems at each Operating Subsidiary. The installation in Wood River was completed in December 2011 and the installation in Fairmont was completed in January 2012. Both Operating Subsidiaries began generating revenues from corn oil sales early in the first quarter of 2012.

Liquidity Considerations

Our operations and cash flows are subject to wide and unpredictable fluctuations primarily due to changes in commodity prices, specifically, the price of our main commodity input, corn, relative to the price of our main commodity product, ethanol, which is known in the industry as the “crush spread”. The prices of these commodities are volatile and beyond our control. As a result of the volatility of the prices for these and other items, our results fluctuate substantially and in ways that are largely beyond our control. For example, as shown in the accompanying consolidated financial statements, the Company was profitable during the last half of 2011, with net income of $7.0 million, as commodity margins improved significantly from earlier in the year.  However, primarily due to narrow commodity margins in the first half of the year, the Company incurred a net loss of $10.4 million for the year ended December 31, 2011.

Narrow commodity margins present a significant risk to our cash flows and liquidity. We have had, and continue to have, limited liquidity, with $15.1 million of cash and cash equivalents as of December 31, 2011. In addition, we have relied upon extensions of payment terms by Cargill as an additional source of liquidity and working capital. See " — Liquidity and capital resources".

Commodity margins have narrowed since the end of 2011and, should current commodity margins continue for an extended period of time, we may not generate sufficient cash flow from operations to both service our debt and operate our plants. We are required to make, under the terms of our Senior Debt Facility, quarterly principal payments in a minimum amount of $3,150,000, plus accrued interest. We cannot predict when or if crush spreads will fluctuate again or if the current commodity margins will improve or worsen. If crush spreads were to remain at current levels for an extended period of time, we may expend all of our sources of liquidity, in which event we would not be able to pay principal and interest on our debt.  Any inability to pay principal and interest on our debt would lead to an event of default under our Senior Debt Facility, which, in the absence of forbearance, debt service abeyance or other accommodations from our lenders, could require us to seek relief through a filing under the U.S. Bankruptcy Code. We expect fluctuations in the crush spread to continue.

Since we commenced operations, we have from time to time entered into derivative financial instruments such as futures contracts, swaps and options contracts with the objective of limiting our exposure to changes in commodities prices. In the past, we have only been able to conduct such hedging activities on a limited basis due to our lack of financial resources and, while we are currently engaged in some hedging activities, we may not have the financial resources to increase or conduct hedging activities in the future.

Revenues

Our primary source of revenue is the sale of ethanol. The selling prices we realize for our ethanol are largely determined by the market supply and demand for ethanol, which, in turn, is influenced by industry and other factors, including government policy and regulations, over which we have little control. Ethanol prices are extremely volatile.  Ethanol revenues are recorded net of transportation and storage charges, and net of marketing commissions we pay to Cargill.

We also receive revenue from the sale of distillers grain, which is a residual co-product of the processed corn used in the production of ethanol and is sold as animal feed. The selling prices we realize for our distillers grain are largely determined by the market supply and demand, primarily from livestock operators and marketing companies in the U.S. and internationally. Distillers grain is sold by the ton and, based upon the amount of moisture retained in the product, can either be sold “wet” or “dry”.

The corn oil produced at our plants is used primarily as a feedstock for the production of biodiesel and as an animal feed ingredient. The corn oil produced in Wood River is being sold to the same independent third party marketer that purchases our dried distillers grain from that facility. The corn oil produced in Fairmont is being sold to a biodiesel producer under an off-take agreement.

Cost of goods sold and gross profit (loss)

Our gross profit (loss) is derived from our revenues less our cost of goods sold. Our cost of goods sold is affected primarily by the cost of corn and natural gas. The prices of both corn and natural gas are volatile and can vary as a result of a wide variety of factors, including weather, market demand, regulation and general economic conditions, all of which are outside of our control.

Corn is our most significant raw material cost. Rising corn prices may result in lower profit margins because changes in ethanol prices are not necessarily correlated with changes in corn prices, therefore producers are not always able to pass along increased corn costs to customers. The price and availability of corn is influenced by weather conditions and other factors affecting crop yields, farmer planting decisions and general economic, market and regulatory factors. These factors include government policies and subsidies with respect to agriculture and international trade, and global and local demand and supply for corn and for other agricultural commodities for which it may be substituted, such as soybeans. Historically, the cash price we pay for corn, relative to the spot price of corn, tends to rise during the spring planting season in April and May as the local basis (i.e., discount) contracts, and tends to decrease relative to the spot price during the fall harvest in October and November as the local basis expands.

We also purchase natural gas to power steam generation in our ethanol production process and as fuel for our dryers to dry our distillers grain. Natural gas represents our second largest operating cost after corn, and natural gas prices are extremely volatile. Historically, the spot price of natural gas tends to be highest during the heating and cooling seasons and tends to decrease during the spring and fall.

Corn procurement fees paid to Cargill are included in our cost of goods sold. Other cost of goods sold primarily consists of our cost of chemicals and enzymes, electricity, depreciation, manufacturing overhead and rail car lease expenses.

General and administrative expenses

General and administrative expenses consist of salaries and benefits paid to our management and administrative employees, expenses relating to third party services, travel, office rent, marketing and other expenses, including expenses associated with being a public company, such as fees paid to our independent auditors associated with our annual audit and quarterly reviews, directors’ fees, and listing and transfer agent fees.

Results of operations

The following discussion summarizes the significant factors affecting the consolidated operating results of the Company for the years ended December 31, 2011 and 2010. This discussion should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements contained in this Annual Report on Form 10-K.

At December 31, 2011, the Company owned 85.0% of the LLC membership units with the remaining 15.0% owned by certain individuals and by certain investment funds affiliated with some of the original equity investors of the LLC. As a result, the Company consolidates the results of the LLC. The amount of income or loss allocable to the 15.0% holders is reported as noncontrolling interest in our consolidated statements of operations.

The following table sets forth net sales, expenses and net loss, as well as the percentage relationship to net sales of certain items in our consolidated statements of operations:

The following table sets forth key operational data for the years ended December 31, 2011 and 2010 that we believe are important indicators of our results of operations:

Year Ended December 31, 2011 Compared to the Year Ended December 31, 2010

Net Sales:   Net Sales were $653.1 million for the year ended December 31, 2011 compared to $453.4 million for the year ended December 31, 2010, an increase of $199.7 million or 44.0%. This increase was primarily attributable to an increase in ethanol revenues of $151.9 million and an increase in distillers grain revenues of $47.8 million. The increase in both ethanol and distillers grain revenue was primarily due to an increase in the per unit price we received for each product, reflecting increases in their respective market prices compared to the prior year. This increase was partially offset by lower production of each product as compared to the prior year resulting primarily from reduced grind rates due to a tightened corn supply in the third quarter.

Cost of goods sold:   The following table sets forth the components of cost of goods sold for the years ended December 31, 2011 and December 31, 2010:

Cost of goods sold was $642.5 million for the year ended December 31, 2011 compared to $454.6 million for the year ended December 31, 2010, an increase of $187.9 million or 41.3%. The increase was primarily attributable to a $202.4 million increase in the cost of corn, partially offset by decreases in natural gas expenses of $5.7 million and general operating expenses of $6.3 million. The increase in corn cost was attributable to an increase in the price per bushel paid for corn, reflecting an increase in the market price compared to the prior year. The decrease in natural gas expenses resulted from decreased production of dry distillers grain compared to the prior year as more wet distillers grain was marketed, while the decrease in general operating expenses resulted primarily from lower lease costs for our rail cars and grain elevators.

General and administrative expenses:   General and administrative expenses decreased $1.6 million or 12.9%, to $10.8 million for the year ended December 31, 2011, compared to $12.4 million for the year ended December 31, 2010. The decrease was primarily due to the Company incurring $0.9 million of legal and financial advisory expenses related to negotiations with the lenders under the Senior Debt facility during the year ended December 31, 2010 while no such costs were incurred during the year ended December 31, 2011.

Interest expense:   Interest expense was $10.1 million for the year ended December 31, 2011, compared to $11.6 million for the year ended December 31, 2010, a decrease of $1.5 million or 12.9%. The decrease in interest expense was primarily attributable to the Company’s average outstanding debt balance being lower during the year ended December 31, 2011 as compared to the prior year, resulting primarily from the Company paying off its subordinated debt and bridge loan in the first quarter of 2011.

Liquidity and capital resources

Our cash flows from operating, investing and financing activities during the years ended December 31, 2011 and 2010 are summarized below (in thousands):

Cash provided by operating activities.   Net cash provided by operating activities was $23.6 million for the year ended December 31, 2011, compared to $12.9 million for the year ended December 31, 2010.  For the year ended December 31, 2011, the amount was primarily comprised of a net loss of $10.4 million which was offset by working capital sources of $2.8 million and non-cash charges of $31.2 million, which were primarily depreciation and amortization. Working capital sources primarily related to a decrease in accounts receivables which was partially offset by an increase in inventories and a decrease in accounts payable. For the year ended December 31, 2010, the amount was primarily comprised of a net loss of $25.2 million which was offset by working capital sources of $6.2 million and non-cash charges of $31.9 million, which were primarily depreciation and amortization.

Cash used in investing activities.   Net cash used in investing activities was $2.8 million for the year ended December 31, 2011, compared to $4.6 million for the year ended December 31, 2010. The net cash used in investing activities during both periods was for capital expenditures related to various plant improvement projects.

Cash used in financing activities.   Net cash used in financing activities was $13.0 million for the year ended December 31, 2011, compared to $7.0 million for the year ended December 31, 2010. For the year ended December 31, 2011, the amount was primarily comprised of $46.0 million of proceeds related to our Rights Offering and LLC concurrent private placement, offset by $12.6 million in principal payments under our term loan facility, a $21.5 million payment to pay off our Subordinated Debt, a $20.0 million payment to pay off our Bridge Loan, $3.2 million in payments of notes payable and capital leases, and $1.7 million in payments for debt and equity issuance costs. For the year ended December 31, 2010, the amount was primarily comprised of $6.6 million of borrowings under our term loan facility, $1.5 million of borrowings under our working capital facility, and $19.4 million of borrowings under our bridge loan, which were offset by $12.6 million in payments under our term loan facility, $18.0 million in payments under our working capital facility, $1.1 million in payments of notes payable and capital leases, and $2.8 million in payments for debt and equity issuance costs.

Our principal source of liquidity at December 31, 2011 consisted of cash generated from operations and cash and cash equivalents of $15.1 million. We have also relied upon extensions of payment terms by Cargill as an additional source of liquidity and working capital. As of December 31, 2011 we had payables to Cargill of $5.6 million related to corn purchases. Pursuant to an arrangement with Cargill, we have been permitted to extend corn payment terms beyond the $10.0 million contractual limit so long as the amounts Cargill owes us for ethanol exceed the accounts payable balance by an amount that is satisfactory to Cargill. This arrangement may be terminated at any time on little or no notice, in which case we would need to use cash on hand or other sources of liquidity, if available, to fund our operations.

Our principal liquidity needs are expected to be funding our plant operations, capital expenditures, debt service requirements, and general corporate purposes. As noted elsewhere in this Annual Report, the Company was profitable during the last half of 2011, with net income of $7.0 million, as commodity margins improved significantly from earlier in the year.  However, primarily due to the narrow commodity margins in the first half of the year, the Company incurred a net loss of $10.4 million for the year ended December 31, 2011. We have had, and continue to have, limited liquidity. We cannot predict when or if crush spreads will fluctuate again or if the current commodity margins will improve or worsen. Commodity margins have narrowed since the end of 2011. If crush spreads were to remain at current levels for an extended period of time, we may expend all of our sources of liquidity, in which event we would not be able to pay principal or interest on our debt.  Any inability to pay principal or interest on our debt would lead to an event of default under our Senior Debt Facility and, in the absence of forbearance, debt service abeyance or other accommodations from our lenders could require us to seek relief through a filing under the U.S. Bankruptcy Code.

Senior Debt Facility

In September 2006, the Operating Subsidiaries entered into the Senior Debt Facility providing for the availability of $230.0 million of borrowings with a syndicate of lenders to finance the construction of and provide working capital to operate our ethanol plants. Neither the Company nor the LLC is a borrower under the Senior Debt Facility, although the equity interests and assets of our subsidiaries are pledged as collateral to secure the debt under the facility. Principal payments under the Senior Debt Facility are payable quarterly at a minimum amount of $3,150,000, with additional pre-payments to be made out of available cash flow. As of December 31, 2011 there remained $176.8 million in aggregate principal amount outstanding under the Senior Debt Facility. These term loans mature in September 2014.

The Senior Debt Facility included a working capital facility of up to $20.0 million, which had a maturity date of September 25, 2010. On September 24, 2010, the Company paid off the $17.9 million outstanding working capital facility balance with proceeds from a Bridge Loan, as described below.

Interest rates on the Senior Debt Facility are, at management’s option, set at: i) a base rate, which is the higher of the federal funds rate plus 0.5% or the administrative agent’s prime rate, in each case plus a margin of 2.0%; or ii) at LIBOR plus 3.0%. Interest on base rate loans is payable quarterly and, depending on the LIBOR rate elected, as frequently as monthly on LIBOR loans, but no less frequently than quarterly. The weighted average interest rate in effect on the borrowings at December 31, 2011 was 3.3%.

The Senior Debt Facility is secured by a first priority lien on all right, title and interest in and to the Wood River and Fairmont plants and any accounts receivable or property associated with those plants and a pledge of all of our equity interests in the Operating Subsidiaries. The Operating Subsidiaries have established collateral deposit accounts maintained by an agent of the banks, into which our revenues are deposited, subject to security interests to secure any outstanding obligations under the Senior Debt Facility. These funds are then allocated into various sweep accounts held by the collateral agent, including accounts that provide funds for the operating expenses of the Operating Subsidiaries. The collateral accounts have various provisions, including historical and prospective debt service coverage ratios and debt service reserve requirements, which determine whether there is, and the amount of, cash available to the LLC from the collateral accounts each month. The terms of the Senior Debt Facility also include covenants that impose certain limitations on, among other things, the ability of the Operating Subsidiaries to incur additional debt, grant liens or encumbrances, declare or pay dividends or distributions, conduct asset sales or other dispositions, merge or consolidate, and conduct transactions with affiliates. The terms of the Senior Debt Facility also include customary events of default including failure to meet payment obligations, failure to pay financial obligations, failure of the Operating Subsidiaries of the LLC to remain solvent and failure to obtain or maintain required governmental approvals. Under the terms of separate management services agreements between our Operating Subsidiaries and the LLC, the Operating Subsidiaries pay a monthly management fee of $869,000 to the LLC to cover salaries, rent, and other operating expenses of the LLC, which payments are unaffected by the terms of the Senior Debt Facility or the collateral accounts.

Debt issuance fees and expenses of $7.9 million ($2.7 million, net of accumulated amortization) have been incurred in connection with the Senior Debt Facility through December 31, 2011. These costs have been deferred and are being amortized and expensed over the term of the Senior Debt Facility.

Subordinated Debt agreement

The LLC was the borrower of Subordinated Debt under a loan agreement dated September 25, 2006, entered into with certain affiliates of Greenlight Capital, Inc. and Third Point LLC, both of which are related parties, the proceeds of which were used to fund a portion of the development and construction of our plants and for general corporate purposes. On February 4, 2011, the Company paid off the outstanding Subordinated Debt balance of $21.5 million, including accrued interest, with a portion of the proceeds from its Rights Offering and LLC Concurrent Private Placement. See “— Rights Offering and LLC Concurrent Private Placement.”

Debt issuance costs associated with the Subordinated Debt were deferred and amortized and expensed as interest over the term of the agreement. The remaining unamortized fees and expenses totaling $1.1 million were expensed when the Subordinated Debt balance was paid off in February 2011.

Cargill debt agreement

In January 2009, the LLC and Cargill entered into an agreement with Cargill which finalized the payment terms for $17.4 million owed to Cargill by the LLC related to hedging losses with respect to corn hedging contracts that had been incurred in the third quarter of 2008. The Cargill Debt was being accounted for as a troubled debt restructuring and as of December 31, 2010 the carrying amount of the debt was $14.4 million. On February 4, 2011, the Company paid Cargill $2.8 million with a portion of the proceeds from the Rights Offering and, pursuant to the original terms of the Cargill Debt, Cargill forgave $2.8 million of the principal balance plus accrued interest on the $2.8 million of principal forgiven. On February 15, 2011, pursuant to a Letter Agreement dated September 23, 2010, the Company discharged the remaining amount owed to Cargill, which totaled $6.8 million, by issuing 6,597,790 shares of Company common stock to Cargill. An additional $2.0 million that was carried on our balance sheet at December 31, 2010 due to troubled debt restructuring accounting was also extinguished. This amount, in addition to the $2.8 million forgiven, was accounted for as a capital contribution to additional paid-in capital due to Cargill being considered a related party of the Company. See “— Rights Offering and LLC Concurrent Private Placement.”

Bridge Loan facility

On September 24, 2010, the Company entered into a Bridge Loan Agreement with certain affiliates of Greenlight Capital, Inc. and certain affiliates of Third Point LLC (together, the “Bridge Loan Lenders”) pursuant to which the Company borrowed $19.4 million (the “Bridge Loan”). The proceeds of the Bridge Loan were used (i) to repay the $17.9 million in outstanding working capital loans under the Senior Debt Facility, and (ii) to pay certain fees and expenses of the transaction, which consisted of a bridge loan funding fee of $0.8 million and a backstop commitment fee of $0.7 million. On February 4, 2011, the Company paid off the outstanding Bridge Loan balance of $20.3 million, including accrued interest, with a portion of the proceeds from its Rights Offering and LLC Concurrent Private Placement. See “— Rights Offering and LLC Concurrent Private Placement.” Debt issuance costs associated with the Bridge Loan were deferred and expensed as interest over the term of the agreement. In February 2011 the remaining unamortized fees and expenses totaling $0.4 million were expensed when the Bridge Loan balance was paid off.

Capital lease

The LLC, through its subsidiary that constructed the Fairmont plant, has entered into an agreement with the local utility pursuant to which the utility has built and owns and operates a substation and distribution facility in order to supply electricity to the plant. The LLC is paying a fixed facilities charge based on the cost of the substation and distribution facility of $34,000 per month, over the 30-year term of the agreement. This fixed facilities charge is being accounted for as a capital lease in the accompanying financial statements. The agreement also includes a $25,000 monthly minimum energy charge that also began in the first quarter of 2008.

Notes payable

Notes payable relate to certain financing agreements in place at each of our sites, as well as the Cargill Debt prior to its repayment. The Operating Subsidiaries entered into financing agreements in the first quarter of 2008 for the purchase of certain rolling stock equipment to be used at the facilities for $748,000. The notes have fixed interest rates (weighted average rate of approximately 5.6%) and require 48 monthly payments of principal and interest, maturing in the first and second quarter of 2012. In addition, the subsidiary of the LLC that constructed the Wood River facility had entered into a note payable for $2,220,000 with a fixed interest rate of 11.8% for the purchase of our natural gas pipeline. The note required 36 monthly payments of principal and interest and matured in the first quarter of 2011. In addition, the subsidiary of the LLC that constructed the Wood River facility has entered into a note payable for $419,000 with the City of Wood River for special assessments related to street, water, and sanitary improvements at our Wood River facility. This note requires ten annual payments of $58,000, including interest at 6.5% per annum, and matures in 2018.

Tax increment financing

In February 2007, the subsidiary of the LLC that constructed the Wood River plant received $6.0 million from the proceeds of a tax increment revenue note issued by the City of Wood River, Nebraska. The proceeds funded improvements to property owned by the subsidiary. The City of Wood River will pay the principal and interest of the note from the incremental increase in the property taxes related to the improvements made to the property. The proceeds have been recorded as a liability which is reduced as the subsidiary of the LLC remits property taxes to the City of Wood River, which began in 2008 and will continue through 2021. The LLC has guaranteed the principal and interest of the tax increment revenue note if, for any reason, the City of Wood River fails to make the required payments to the holder of the note or the subsidiary of the LLC fails to make the required payments to the City of Wood River.

Rights Offering and LLC Concurrent Private Placement

In connection with the Bridge Loan Agreement, on September 24, 2010, the Company entered into a Rights Offering Letter Agreement with the Bridge Loan Lenders pursuant to which the Company agreed to commence a rights offering to its stockholders (the “Rights Offering”). The Rights Offering entailed a distribution to the Company’s common stockholders of rights to purchase depositary shares representing fractional interests in shares of Series A Non-Voting Convertible Preferred Stock (“Preferred Stock”). Concurrent with the Rights Offering, the LLC conducted a private placement of LLC interests that was structured to provide the holders of the membership interests in the LLC (other than the Company) with a private placement that was economically equivalent to the Rights Offering. On February 2, 2011, the Company’s stockholders approved an increase in the number of authorized shares of common stock of the Company, which resulted in the automatic conversion of shares of the Preferred Stock into shares of the Company’s common stock such that subscribers in the Rights Offering were issued one share of common stock in lieu of each depositary share subscribed for. These transactions were completed, and 63,773,603 shares of common stock and 18,369,262 LLC interests (along with an equivalent number of shares of Class B common stock) were issued, on February 4, 2011, and the aggregate gross proceeds of the Rights Offering and the concurrent private placement were $46.0 million. The proceeds of the transaction were used to (i) repay in full the Bridge Loan, (ii) repay in full the Company’s obligations under the Subordinated Debt, (iii) repay a portion of the Cargill Debt, and (iv) pay certain fees and expenses incurred in connection with the Rights Offering and the LLC’s concurrent private placement.

The Bridge Loan Lenders agreed to (i) participate in the Rights Offering for their full pro rata share and participate in the LLC’s concurrent private placement for their full basic purchase privileges, which we refer to as their “Basic Commitment” and (ii) purchase all of the available depositary shares not otherwise sold in the Rights Offering and/or all of the available preferred membership interests in the LLC not sold in the concurrent private placement, which we refer to as their “Backstop Commitment”. The Bridge Loan Lenders purchased $0.9 million of depositary shares not otherwise sold in the Rights Offering pursuant to their Backstop Commitment. In consideration of their Backstop Commitment, the Company paid the Bridge Loan Lenders $0.9 million.

In contemplation of the Rights Offering, on September 23, 2010, we entered into a Letter Agreement with Cargill pursuant to which we agreed to (i) use a portion of the proceeds from the Rights Offering to repay a portion of the Cargill Debt, upon which Cargill would forgive a like amount of principal and any accrued interest on such forgiven principal according to its original terms, and (ii) upon successful completion of the Rights Offering, issue a number of depositary shares in exchange for their forgiveness of the remaining principal balance of the Cargill Debt, the number of shares to be determined by the weighted average price of the Company’s common stock for the 10 consecutive trading days following completion of the Rights Offering. On February 15, 2011, the Company issued 6,597,790 shares of common stock to Cargill in exchange for the extinguishment of the remaining principal amount of the Cargill Debt.

Off-balance sheet arrangements

Except for our operating leases, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Summary of critical accounting policies and significant estimates

The consolidated financial statements of BioFuel Energy Corp. included in this Form 10-K have been prepared in conformity with accounting principles generally accepted in the United States. Note 2 to these consolidated financial statements contains a summary of our significant accounting policies, certain of which require the use of estimates and assumptions. Accounting estimates are an integral part of the preparation of financial statements and are based on judgments by management using its knowledge and experience about the past and current events and assumptions regarding future events, all of which we consider to be reasonable. These judgments and estimates reflect the effects of matters that are inherently uncertain and that affect the carrying value of our assets and liabilities, the disclosure of contingent liabilities and reported amounts of expenses during the reporting period.

The accounting estimates and assumptions discussed in this section are those that we believe involve significant judgments and the most uncertainty. Changes in these estimates or assumptions could materially affect our financial position and results of operations and are therefore important to an understanding of our consolidated financial statements.

Revenues

The Company sells its ethanol and distillers grain products under the terms of marketing agreements. Revenue is recognized when risk of loss and title transfers upon shipment of ethanol and distillers grain. In accordance with our marketing agreements, the Company records its revenues based on the amounts payable to us at the time of our sales of ethanol and distillers grain. For our ethanol that is sold within the United States, the amount payable is equal to the average delivered price per gallon received by the marketing pool from Cargill’s customers, less average transportation and storage charges incurred by Cargill, and less a commission. We also sell a portion of our ethanol production to Cargill for export, which sales are shipped undenatured and are excluded from the marketing pool. For exported ethanol sales, the amount payable is equal to the contracted delivered price per gallon, less transportation and storage charges, and less a commission. The amount payable for distillers grain is equal to the market price of distillers grain at the time of sale less a commission.

Recoverability of property, plant and equipment

The Company has two asset groups, its ethanol facility in Fairmont and its ethanol facility in Wood River, which are evaluated separately when considering whether the carrying value of these assets has been impaired. The Company continually monitors whether or not events or circumstances exist that would warrant impairment testing of its long-lived assets. In evaluating whether impairment testing should be performed, the Company considers several factors including the carrying value of its long-lived assets, projected production volumes at its facilities, projected ethanol and distillers grain prices that we expect to receive, and projected corn and natural gas costs we expect to incur. In the ethanol industry, operating margins, and consequently undiscounted future cash flows, are primarily driven by the crush spread. In the event that the crush spread is sufficiently depressed to result in negative operating cash flow at its facilities for an extended time period, the Company will evaluate whether or not an impairment of its long-lived assets may have occurred. Recoverability is measured by comparing the carrying value of an asset with estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. An impairment loss is reflected as the amount by which the carrying amount of the asset exceeds the fair value of the asset. Fair value is determined based on the present value of estimated expected future cash flows using a discount rate commensurate with the risk involved, quoted market prices or appraised values, depending on the nature of the assets. As of December 31, 2011 no circumstances existed that would indicate the carrying value of long-lived assets may not be fully recoverable. Therefore, no recoverability test was performed.

Income Taxes

The Company accounts for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The Company regularly reviews historical and anticipated future pre-tax results of operations to determine whether the Company will be able to realize the benefit of its deferred tax assets. A valuation allowance is required to reduce the potential deferred tax asset when it is more likely than not that all or some portion of the potential deferred tax asset will not be realized due to the lack of sufficient taxable income. The most significant component of our deferred tax asset balance relates to our net operating loss and credit carryforwards. As the Company has incurred losses since its inception and expects to continue to incur tax losses for the foreseeable future, we will provide a valuation allowance against deferred tax assets until the Company believes that such assets will be realized.

Recent accounting pronouncements

From time to time, new accounting pronouncements are issued by standards setting bodies that are adopted by us as of the specified effective date. Unless otherwise discussed, our management believes that the impact of recently issued standards that are not yet effective will not have a material impact on our consolidated financial statements upon adoption.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to significant risks relating to the prices of four primary commodities: corn and natural gas, our principal production inputs, and ethanol and distillers grain, our principal products. These commodities are also subject to geographic basis differentials, which can vary considerably. In recent years, ethanol prices have been primarily influenced by gasoline prices, the availability of other gasoline additives and federal, state and local laws, regulations, subsidies and tariffs. Distillers grain prices tend to be influenced by the prices of alternative animal feeds.

We expect that lower ethanol prices will tend to result in lower profit margins even when corn prices decrease due to the significance of fixed costs. The price of ethanol is subject to wide fluctuations due to domestic and international supply and demand, infrastructure, government policies, including subsidies and tariffs, and numerous other factors. Ethanol prices are extremely volatile. From January 1, 2010 to December 31, 2011, the Chicago Board of Trade (“CBOT”) ethanol prices have fluctuated from a low of $1.47 per gallon in June 2010 to a high of $3.07 per gallon in July 2011 and averaged $2.18 per gallon during this period.

We expect that lower distillers grain prices will tend to result in lower profit margins. The selling prices we realize for our distillers grain are largely determined by market supply and demand, primarily from livestock operators and marketing companies in the U.S. and internationally. Distillers grain is sold by the ton and can either be sold “wet” or “dry”.

We anticipate that higher corn prices will tend to result in lower profit margins, as it is unlikely that such an increase in costs can be passed on to ethanol customers. The availability as well as the price of corn is subject to wide fluctuations due to weather, carry-over supplies from the previous year or years, current crop yields, government agriculture policies, international supply and demand and numerous other factors. Using recent corn prices of $6.00 per bushel, we estimate that corn will represent approximately 84% of our operating costs. Historically, the spot price of corn tends to rise during the spring planting season in April and May and tends to decrease during the fall harvest in October and November. From January 1, 2010 to December 31, 2011 the CBOT price of corn has fluctuated from a low of $3.25 per bushel in June 2010 to a high of $7.86 per bushel in June 2011 and averaged $5.45 per bushel during this period.

Higher natural gas prices will tend to reduce our profit margin, as it is unlikely that such an increase in costs can be passed on to ethanol customers. Natural gas prices and availability are affected by weather, overall economic conditions, oil prices and numerous other factors. Using recent corn prices of $6.00 per bushel and recent natural gas prices of $3.25 per Mmbtu, we estimate that natural gas will represent approximately 4% of our operating costs. Historically, the spot price of natural gas tends to be highest during the heating and cooling seasons and tends to decrease during the spring and fall. From January 1, 2010 to December 31, 2011, the New York Mercantile Exchange (“NYMEX”) price of natural gas has fluctuated from a low of $3.00 per Mmbtu in December 2011 to a high of $6.01 per Mmbtu in January 2010 and averaged $4.24 per Mmbtu during this period.

To reduce the risks implicit in price fluctuations of these four principal commodities and variations in interest rates, we plan to continuously monitor these markets and to hedge a portion of our exposure, provided we have the financial resources to do so. In hedging, we may buy or sell exchange-traded commodities futures or options, or enter into swaps or other hedging arrangements. While there is an active futures market for corn and natural gas, the futures market for ethanol is still in its infancy and very illiquid, and we do not believe a futures market for distillers grain currently exists. Although we will attempt to link our hedging activities such that sales of ethanol and distillers grain match pricing of corn and natural gas, there is a limited ability to do this against the current forward or futures market for ethanol and corn. Consequently, our hedging of ethanol and distillers grain may be limited or have limited effectiveness due to the nature of these markets. Due to the Company’s limited liquidity resources and the potential for required postings of significant cash collateral or margin deposits resulting from changes in commodity prices associated with hedging activities, the Company is currently able to engage in such hedging activities only on a limited basis. We also may vary the amount of hedging activities we undertake, and may choose to not engage in hedging transactions at all. As a result, our operations and financial position may be adversely affected by increases in the price of corn or natural gas or decreases in the price of ethanol or unleaded gasoline.

We have prepared a sensitivity analysis as set forth below to estimate our exposure to market risk with respect to our projected corn and natural gas requirements and our ethanol and distillers grain sales for 2012. Market risk related to these factors is estimated as the potential change in pre-tax income, resulting from a hypothetical 10% adverse change in each of our four primary commodities, independently, based on current prices as of December 31, 2011, excluding activity we may undertake related to forward and futures contracts used to hedge our market risk. The following amounts reflect the Company’s expected 2012 production. Actual results may vary from these amounts due to various factors including significant increases or decreases in the LLC’s production capacity during 2012.

We are subject to interest rate risk in connection with our Senior Debt facility. Under the facility, our bank borrowings bear interest at a floating rate based, at our option, on LIBOR or an alternate base rate. As of December 31, 2011, we had borrowed $176.8 million under our Senior Debt facility. A hypothetical 100 basis points increase in interest rates under our Senior Debt facility would result in an increase of $1,768,000 on our annual interest expense.

At December 31, 2011, we had $15.1 million of cash and cash equivalents invested in both standard cash accounts and money market mutual funds held at three financial institutions, which is in excess of FDIC insurance limits.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements

Financial Statements of BioFuel Energy Corp. 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders of

BioFuel Energy Corp.

We have audited the accompanying consolidated balance sheets of BioFuel Energy Corp. (a Delaware corporation) and subsidiaries (collectively, the “Company”) as of December 31, 2011 and 2010, and the related consolidated statements of operations, changes in equity, and cash flows for the years then ended. Our audits of the basic financial statements included the financial statement schedule listed in the index appearing under Item 8. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of BioFuel Energy Corp. and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ GRANT THORNTON LLP

Denver, Colorado

March 16, 2012

BioFuel Energy Corp.

Consolidated Balance Sheets

(in thousands, except share data)

The accompanying notes are an integral part of these financial statements.

BioFuel Energy Corp.

Consolidated Statements of Operations

(in thousands, except per share data)

The accompanying notes are an integral part of these financial statements.

BioFuel Energy Corp.

Consolidated Statement of Changes in Equity

Years Ended December 31, 2011 and December 31, 2010

(in thousands, except share data)

The accompanying notes are an integral part of these financial statements.

BioFuel Energy Corp.

Consolidated Statements of Cash Flows

(in thousands)

The accompanying notes are an integral part of these financial statements.

BioFuel Energy Corp.

Notes to Consolidated Financial Statements

Organization and Nature of Business

BioFuel Energy Corp. (the “Company”, “we”, “our” or “us”) produces and sells ethanol and distillers grain through its two ethanol production facilities located in Wood River, Nebraska (“Wood River”) and Fairmont, Minnesota (“Fairmont”). Both facilities, with a combined annual undenatured nameplate production capacity of approximately 220 million gallons per year (“Mmgy”), commenced start-up and began commercial operations in June 2008. At each location Cargill, Incorporated (“Cargill”), with whom we have an extensive commercial relationship, has a strong local presence and owns adjacent grain storage and handling facilities. Cargill provides corn procurement services, purchases the ethanol we produce and provides transportation logistics for our two plants under long-term contracts. In addition, we lease their adjacent grain storage and handling facilities at each of our plants.

We were incorporated as a Delaware corporation on April 11, 2006 to invest solely in BioFuel Energy, LLC (the “LLC”), a limited liability company organized on January 25, 2006 to build and operate ethanol production facilities in the Midwestern United States. The Company’s headquarters are located in Denver, Colorado.

At December 31, 2011, the Company owned 85.0% of the LLC membership units with the remaining 15.0% owned by certain individuals and by certain investment funds affiliated with some of the original equity investors of the LLC. The Class B common shares of the Company are held by the same individuals and investment funds who held 18,622,944 membership units in the LLC as of December 31, 2011 that, together with the corresponding Class B shares, can be exchanged for newly issued shares of common stock of the Company on a one-for-one basis. The proportionate value of the LLC membership units held by individuals or entities other than the Company are recorded as noncontrolling interest on the consolidated balance sheets. Holders of shares of Class B common stock have no economic rights but are entitled to one vote for each share held. Shares of Class B common stock are retired upon exchange of the related membership units in the LLC.

The aggregate book value of the assets of the LLC at December 31, 2011 and December 31, 2010 was $309.2 million and $335.1 million, respectively, and such assets are collateral for the LLC’s subsidiaries’ obligations under our Senior Debt facility with a group of lenders (see Note 5 — Long-Term Debt). Our Senior Debt facility also imposes restrictions on the ability of the LLC’s subsidiaries that own and operate our Wood River and Fairmont plants to pay dividends or make other distributions to us, which restricts our ability to pay dividends.

Liquidity Considerations

Our operations and cash flows are subject to wide and unpredictable fluctuations primarily due to changes in commodity prices, specifically, the price of our main commodity input, corn, relative to the price of our main commodity product, ethanol, which is known in the industry as the “crush spread”. The prices of these commodities are volatile and beyond our control. As a result of the volatility of the prices for these and other items, our results fluctuate substantially and in ways that are largely beyond our control. For example, as shown in the accompanying consolidated financial statements, the Company was profitable during the last half of 2011, with net income of $7.0 million, as commodity margins improved significantly from earlier in the year.  However, primarily due to narrow commodity margins in the first half of the year, the Company incurred a net loss of $10.4 million for the year ended December 31, 2011.

Narrow commodity margins present a significant risk to our cash flows and liquidity. We have had, and continue to have, limited liquidity, with $15.1 million of cash and cash equivalents as of December 31, 2011.  In addition, we have relied upon extensions of payment terms by Cargill as an additional source of liquidity and working capital.   As of December 31, 2011 we had payables to Cargill of $5.6 million related to corn purchases. Pursuant to an arrangement with Cargill, we have been permitted to extend corn payment terms beyond the $10.0 million contractual limit so long as the amounts Cargill owes us for ethanol exceed the accounts payable balance by an amount that is satisfactory to Cargill. This arrangement may be terminated at any time on little or no notice, in which case we would need to use cash on hand or other sources of liquidity, if available, to fund our operations.

Commodity margins have narrowed since the end of 2011 and, should current commodity margins continue for an extended period of time, we may not generate sufficient cash flow from operations to both service our debt and operate our plants.  We are required to make, under the terms of our Senior Debt facility, quarterly principal payments in a minimum amount of $3,150,000, plus accrued interest. We cannot predict when or if crush spreads will fluctuate again or if the current commodity margins will improve or worsen. If crush spreads were to remain at current levels for an extended period of time, we may expend all of our sources of liquidity, in which event we would not be able to pay principal and interest on our debt.  Any inability to pay principal and interest on our debt would lead to an event of default under our Senior Debt facility, which, in the absence of forbearance, debt service abeyance or other accommodations from our lenders, could require us to seek relief through a filing under the U.S. Bankruptcy Code. We expect fluctuations in the crush spread to continue.

Since we commenced operations, we have from time to time entered into derivative financial instruments such as futures contracts, swaps and options contracts with the objective of limiting our exposure to changes in commodities prices. In the past, we have only been able to conduct such hedging activities on a limited basis due to our lack of financial resources and, while we are currently engaged in some hedging activities, we may not have the financial resources to increase or conduct hedging activities in the future.

BioFuel Energy Corp.

Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies

Principles of Consolidation and Noncontrolling Interest

The accompanying consolidated financial statements include the Company, the LLC and its wholly owned subsidiaries: BFE Holdings, LLC; BFE Operating Company, LLC; Buffalo Lake Energy, LLC; and Pioneer Trail Energy, LLC. All inter-company balances and transactions have been eliminated in consolidation. The Company treats all exchanges of LLC membership units for Company common stock as equity transactions, with any difference between the fair value of the Company’s common stock and the amount by which the noncontrolling interest is adjusted being recognized in equity.

Use of Estimates

Preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosures in the accompanying notes at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition

The Company sells its ethanol and distillers grain products under the terms of marketing agreements. Revenue is recognized when risk of loss and title transfers upon shipment of ethanol and distillers grain. In accordance with our marketing agreements, the Company records its revenues based on the amounts payable to us at the time of our sales of ethanol and distillers grain. For our ethanol that is sold within the United States, the amount payable is equal to the average delivered price per gallon received by the marketing pool from Cargill’s customers, less average transportation and storage charges incurred by Cargill, and less a commission. We also sell a portion of our ethanol production to Cargill for export, which sales are shipped undenatured and are excluded from the marketing pool. For exported ethanol sales, the amount payable is equal to the contracted delivered price per gallon, less transportation and storage charges, and less a commission. The amount payable for distillers grain is equal to the market price of distillers grain at the time of sale less a commission.

Cost of goods sold

Cost of goods sold primarily includes costs of raw materials (primarily corn from Cargill and natural gas), purchasing and receiving costs, inspection costs, shipping costs, other distribution expenses, plant management, certain compensation costs and general facility overhead charges, including depreciation expense.

General and administrative expenses

General and administrative expenses consist of salaries and benefits paid to our management and administrative employees, expenses relating to third party services, travel, office rent, marketing and other expenses, including certain expenses associated with being a public company, such as fees paid to our independent auditors associated with our annual audit and quarterly reviews, directors’ fees, and listing and transfer agent fees.

Cash and Cash Equivalents

Cash and cash equivalents include highly liquid investments with an original maturity of three months or less. Cash equivalents are currently comprised of money market mutual funds. At December 31, 2011, we had $15.1 million held at three financial institutions, which is in excess of FDIC insurance limits.

BioFuel Energy Corp.

Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies – (continued)

Accounts Receivable

Accounts receivable are carried at original invoice amount less an estimate made for doubtful accounts based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history and current economic conditions. Receivables are written off when deemed uncollectible. Recoveries of receivables previously written off are recorded as a reduction to bad debt expense when received. As of December 31, 2011 and 2010, no allowance was considered necessary.

Concentrations of Credit Risk

Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. Concentrations of credit risk, whether on- or off-balance sheet, that arise from financial instruments exist for groups of customers or counterparties when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions described below.

During the years ended December 31, 2011 and 2010, the Company recorded sales to Cargill representing 88% and 99%, respectively, of total net sales. As of December 31, 2011 and 2010, the LLC, through its subsidiaries, had receivables from Cargill of $12.0 million and $27.4 million, respectively, representing 88% and 99% of total accounts receivable, respectively.

The LLC, through its subsidiaries, purchases corn, its largest cost component in producing ethanol, from Cargill. During the years ended December 31, 2011 and 2010, corn purchases from Cargill totaled $528.1 million and $326.3 million, respectively. As of December 31, 2011 and 2010, the LLC, through its subsidiaries, had payables to Cargill of $5.6 million and $11.6 million, respectively, related to corn purchases.

BioFuel Energy Corp.

Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies – (continued)

Inventories

Raw materials inventories, which consist primarily of corn, denaturant, supplies and chemicals, and work in process inventories are valued at the lower-of-cost-or-market, with cost determined on a first-in, first-out basis. Finished goods inventories consist of ethanol and distillers grain and are stated at lower of average cost or market.

A summary of inventories is as follows (in thousands):

Derivative Instruments and Hedging Activities

Derivatives are recognized on the balance sheet at their fair value and are included in the accompanying balance sheets as “derivative financial instruments”. On the date the derivative contract is entered into, the Company may designate the derivative as a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow” hedge). Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a cash flow hedge are recorded in other comprehensive income, net of tax effect, until earnings are affected by the variability of cash flows (e.g., when periodic settlements on a variable rate asset or liability are recorded in earnings). Changes in the fair value of undesignated derivative instruments or derivatives that do not qualify for hedge accounting are recognized in current period operations.

BioFuel Energy Corp.

Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies – (continued)

Accounting guidance for derivatives requires a company to evaluate contracts to determine whether the contracts are derivatives. Certain contracts that 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. The Company’s contracts for corn and natural gas purchases and ethanol sales that meet these requirements and are designated as either normal purchase or normal sale contracts are exempted from the derivative accounting and reporting requirements.

Property, Plant and Equipment

Property, plant and equipment is recorded at cost. All costs related to purchasing and developing land or the engineering, design and construction of a plant are capitalized. Maintenance, repairs and minor replacements are charged to operating expenses while major replacements and improvements are capitalized. Depreciation is computed by the straight line method over the following estimated useful lives:

Debt Issuance Costs

Debt issuance costs are stated at cost, less accumulated amortization. Debt issuance costs included in noncurrent assets at December 31, 2011 represent costs incurred related to the Company’s Senior Debt facility and tax increment financing agreements. These costs are being amortized through interest expense over the term of the related debt. Debt issuance costs included in noncurrent assets at December 31, 2010 also included costs related to the Company’s subordinated debt. Debt issuance costs included in other current assets at December 31, 2010 totaled $507,000, net of accumulated amortization, and represented costs related to the Bridge Loan. Unamortized debt issuance costs related to the subordinated debt and the Bridge Loan debt were expensed in February 2011 when the related debt was paid off. Estimated future debt issuance cost amortization as of December 31, 2011 is as follows (in thousands):

BioFuel Energy Corp.

Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies – (continued)

Impairment of Long-Lived Assets

The Company has two asset groups, its ethanol facility in Fairmont and its ethanol facility in Wood River, which are evaluated separately when considering whether the carrying value of these assets has been impaired. The Company continually monitors whether or not events or circumstances exist that would warrant impairment testing of its long-lived assets. In evaluating whether impairment testing should be performed, the Company considers several factors including the carrying value of the long-lived assets, projected production volumes at its facilities, projected ethanol and distillers grain prices that we expect to receive, and projected corn and natural gas costs we expect to incur. In the ethanol industry, operating margins, and consequently undiscounted future cash flows, are primarily driven by the crush spread. In the event that the crush spread is sufficiently depressed to result in negative operating cash flow at its facilities for an extended time period, the Company will evaluate whether or not an impairment of its long-lived assets may have occurred.

Recoverability is measured by comparing the carrying value of an asset with estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. An impairment loss is reflected as the amount by which the carrying amount of the asset exceeds the fair value of the asset. Fair value is determined based on the present value of estimated expected future cash flows using a discount rate commensurate with the risk involved, quoted market prices or appraised values, depending on the nature of the assets. As of December 31, 2011 no circumstances existed that would indicate the carrying value of long-lived assets may not be fully recoverable. Therefore, no recoverability test was performed.

Stock-Based Compensation

Expense associated with stock-based awards and other forms of equity compensation is based on fair value at grant and recognized on a straight line basis in the financial statements over the requisite service period for those awards that are expected to vest.

Asset Retirement Obligations

Asset retirement obligations are recognized when a contractual or legal obligation exists and a reasonable estimate of the amount can be made. Changes to the asset retirement obligation resulting from revisions to the timing or the amount of the original undiscounted cash flow estimates shall be recognized as an increase or decrease to both the carrying amount of the asset retirement obligation and the related asset retirement cost capitalized as part of the related property, plant and equipment. At December 31, 2011, the Company had accrued asset retirement obligation liabilities of $144,000 and $181,000 for its plants at Wood River and Fairmont, respectively. At December 31, 2010, the Company had accrued asset retirement obligation liabilities of $139,000 and $175,000 for its plants at Wood River and Fairmont, respectively.

The asset retirement obligations accrued for Wood River relate to the obligations in our contracts with Cargill and Union Pacific Railroad (“Union Pacific”). According to the grain elevator lease with Cargill, the equipment that is adjacent to the grain elevator may be required at Cargill’s discretion to be removed at the end of the lease. In addition, according to the contract with Union Pacific, the buildings that are built near their land in Wood River may be required at Union Pacific’s request to be removed at the end of our contract with them. The asset retirement obligations accrued for Fairmont relate to the obligations in our contracts with Cargill and in our water permit issued by the state of Minnesota. According to the grain elevator lease with Cargill, the equipment that is adjacent to the grain elevator being leased may be required at Cargill’s discretion to be removed at the end of the lease. In addition, the water permit in Fairmont requires that we secure all above ground storage tanks whenever we discontinue the use of our equipment for an extended period of time in Fairmont. The estimated costs of these obligations have been accrued at the current net present value of these obligations at the end of an estimated 20 year life for each of the plants. These liabilities have corresponding assets recorded in property, plant and equipment, which are being depreciated over 20 years.

Income Taxes

The Company accounts for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company regularly reviews historical and anticipated future pre-tax results of operations to determine whether the Company will be able to realize the benefit of its deferred tax assets. A valuation allowance is required to reduce the potential deferred tax asset when it is more likely than not that all or some portion of the potential deferred tax asset will not be realized due to the lack of sufficient taxable income. The Company establishes reserves for uncertain tax positions that reflect its best estimate of deductions and credits that may not be sustained on a more likely than not basis. As the Company has incurred losses since its inception and expects to continue to incur tax losses for the foreseeable future, we will provide a valuation allowance against deferred tax assets until the Company believes that such assets will be realized. The Company includes interest on tax deficiencies and income tax penalties in the provision for income taxes.

Fair Value of Financial Instruments

The Company’s financial instruments, including cash and cash equivalents, accounts receivable, and accounts payable are carried at cost, which approximates their fair value because of the short-term maturity of these instruments. Any derivative financial instruments are carried at fair value. The fair value of the Company’s senior debt and notes payable are not materially different from their carrying amounts based on anticipated interest rates that management believes would currently be available to the Company for similar issues of debt, taking into account the current credit risk of the Company and other market factors.

Segment Reporting

Operating segments are defined as components of an enterprise for which separate financial information is available and is evaluated regularly by the chief operating decision maker or decision making group in deciding how to allocate resources and in assessing performance. Each of our plants is considered its own unique operating segment under these criteria. However, when two or more operating segments have similar economic characteristics, accounting guidance allows for them to be aggregated into a single operating segment for purposes of financial reporting. Our two plants are very similar in all characteristics and accordingly, the Company presents a single reportable segment, the manufacture of fuel-grade ethanol and the co-products of the ethanol production process.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standards setting bodies that are adopted by us as of the specified effective date. Unless otherwise discussed, our management believes that the impact of recently issued standards that are not yet effective will not have a material impact on our consolidated financial statements upon adoption.

BioFuel Energy Corp.

Notes to Consolidated Financial Statements

3. Property, Plant and Equipment

Property, plant and equipment, stated at cost, consist of the following at December 31, 2011 and 2010 (in thousands):

Depreciation expense related to property, plant and equipment was $26,995,000 and $26,894,000 for the years ended December 31, 2011 and 2010, respectively.

4. Earnings Per Share

Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding during each period. Diluted earnings per share are calculated using the treasury stock method and includes the effect of all dilutive securities, including stock options, restricted stock and Class B common shares. For those periods in which the Company incurred a net loss, the inclusion of the potentially dilutive shares in the computation of diluted weighted average shares outstanding would have been anti-dilutive to the Company’s loss per share, and, accordingly, all potentially dilutive shares have been excluded from the computation of diluted weighted average shares outstanding in those periods.

For the years ended December 31, 2011 and 2010, 1,447,118 shares and 1,770,305 shares, respectively, issuable upon the exercise of stock options were excluded from the computation of diluted earnings per share as their effect would have been anti-dilutive.

A summary of the reconciliation of basic weighted average shares outstanding to diluted weighted average shares outstanding follows:

BioFuel Energy Corp.

Notes to Consolidated Financial Statements

5. Long-Term Debt

The following table summarizes long-term debt as of December 31, 2011 and 2010 (in thousands):

Senior Debt Facility

In September 2006, certain subsidiaries of the LLC (the “Operating Subsidiaries”) entered into a Senior Secured Credit Facility providing for the availability of $230.0 million of borrowings (“Senior Debt Facility”) with a syndicate of lenders to finance the construction of and provide working capital to operate our ethanol plants. Neither the Company nor the LLC is a borrower under the Senior Debt Facility, although the equity interests and assets of our subsidiaries are pledged as collateral to secure the debt under the facility. Principal payments under the Senior Debt Facility are payable quarterly at a minimum amount of $3,150,000, with additional pre-payments to be made out of available cash flow. As of December 31, 2011 there remained $176.8 million in aggregate principal amounts outstanding under the Senior Debt Facility. These term loans mature in September 2014.

The Senior Debt Facility included a working capital facility of up to $20.0 million, which had a maturity date of September 25, 2010. On September 24, 2010, the Company paid off the outstanding working capital facility balance of $17.9 million with proceeds from a Bridge Loan, as described below.

Interest rates on the Senior Debt Facility are, at management’s option, set at: i) a base rate, which is the higher of the federal funds rate plus 0.5% or the administrative agent’s prime rate, in each case plus a margin of 2.0%; or ii) at LIBOR plus 3.0%. Interest on base rate loans is payable quarterly and, depending on the LIBOR rate elected, as frequently as monthly on LIBOR loans, but no less frequently than quarterly. The weighted average interest rate in effect on the borrowings at December 31, 2011 was 3.3%.

The Senior Debt Facility is secured by a first priority lien on all right, title and interest in and to the Wood River and Fairmont plants and any accounts receivable or property associated with those plants and a pledge of all of our equity interests in the Operating Subsidiaries. The Operating Subsidiaries have established collateral deposit accounts maintained by an agent of the banks, into which our revenues are deposited, subject to security interests to secure any outstanding obligations under the Senior Debt Facility. These funds are then allocated into various sweep accounts held by the collateral agent, including accounts that provide funds for the operating expenses of the Operating Subsidiaries. The collateral accounts have various provisions, including historical and prospective debt service coverage ratios and debt service reserve requirements, which determine whether there is, and the amount of, cash available to the LLC from the collateral accounts each month. The terms of the Senior Debt Facility also include covenants that impose certain limitations on, among other things, the ability of the Operating Subsidiaries to incur additional debt, grant liens or encumbrances, declare or pay dividends or distributions, conduct asset sales or other dispositions, merge or consolidate, and conduct transactions with affiliates. The terms of the Senior Debt Facility also include customary events of default including failure to meet payment obligations, failure to pay financial obligations, failure of the Operating Subsidiaries of the LLC to remain solvent and failure to obtain or maintain required governmental approvals. Under the terms of separate management services agreements between our Operating Subsidiaries and the LLC, the Operating Subsidiaries pay a monthly management fee of $869,000 to the LLC to cover salaries, rent, and other operating expenses of the LLC, which payments are unaffected by the terms of the Senior Debt Facility or the collateral accounts.

BioFuel Energy Corp.

Notes to Consolidated Financial Statements

5. Long-Term Debt – (continued)

Debt issuance fees and expenses of $7.9 million ($2.7 million, net of accumulated amortization) have been incurred in connection with the Senior Debt Facility through December 31, 2011. These costs have been deferred and are being amortized and expensed as interest over the term of the Senior Debt Facility.

Subordinated Debt

The LLC was the borrower of Subordinated Debt under a loan agreement dated September 25, 2006, entered into with certain affiliates of Greenlight Capital, Inc. and Third Point LLC (the “Sub Lenders”), both of which are related parties, the proceeds of which were used to fund a portion of the development and construction of our plants and for general corporate purposes. On February 4, 2011, the Company paid off the outstanding Subordinated Debt balance of $21.5 million, including accrued interest, with a portion of the proceeds from its Rights Offering and LLC Concurrent Private Placement, as described in Note 7 — Stockholders’ Equity.

Debt issuance costs associated with the Subordinated Debt were deferred and amortized and expensed as interest over the term of the agreement. The remaining unamortized fees and expenses totaling $1.1 million were expensed when the Subordinated Debt balance was paid off in February 2011.

Cargill Debt

In January 2009, the LLC and Cargill entered into an agreement (“Cargill Agreement”) which finalized the payment terms for $17.4 million owed to Cargill (“Cargill Debt”) by the LLC related to hedging losses with respect to corn hedging contracts that had been incurred in the third quarter of 2008. The Cargill Agreement required an initial payment of $3.0 million on the outstanding balance, which was paid on December 5, 2008. Upon the initial payment of $3.0 million, Cargill also forgave $3.0 million. Effective December 1, 2008, interest on the Cargill Debt began accruing at a 5.0% annual rate compounded quarterly. Future payments to Cargill of both principal and interest were contingent upon the receipt by the LLC of available cash, as defined in the Cargill Agreement. Cargill was to forgive, on a dollar for dollar basis, a further $2.8 million as it received the next $2.8 million of principal payments. The Cargill Debt was accounted for as a troubled debt restructuring. As the future cash payments specified by the terms of the Cargill Agreement exceeded the carrying amount of the debt before the $3.0 million was forgiven, the carrying amount of the debt was not reduced and no gain was recorded. On February 4, 2011, the Company paid Cargill $2.8 million with a portion of the proceeds from its Rights Offering and LLC Concurrent Private Placement (as described in Note 7 — Stockholders’ Equity) and Cargill forgave $2.8 million of the principal balance plus accrued interest on the $2.8 million of principal forgiven. On February 15, 2011, pursuant to a Letter Agreement dated September 23, 2010, the Company discharged the remaining amount owed to Cargill, which totaled $6.8 million, by issuing 6,597,790 shares of Company common stock to Cargill. An additional $2.0 million that was carried on our balance sheet at December 31, 2010 due to troubled debt restructuring accounting was also extinguished. This amount, in addition to the $2.8 million forgiven, was accounted for as a capital contribution to additional paid-in capital due to Cargill being considered a related party of the Company.

BioFuel Energy Corp.

Notes to Consolidated Financial Statements

5. Long-Term Debt – (continued)

Bridge Loan

On September 24, 2010, the Company entered into a Bridge Loan Agreement with certain affiliates of Greenlight Capital, Inc. and certain affiliates of Third Point LLC (together, the “Bridge Loan Lenders”) pursuant to which the Company borrowed $19.4 million (the “Bridge Loan”). The proceeds of the Bridge Loan were used (i) to repay the $17.9 million in outstanding working capital loans under the Senior Debt facility, and (ii) to pay certain fees and expenses of the transaction, which consisted of a bridge loan funding fee of $0.8 million and a backstop commitment fee of $0.7 million. The bridge loan funding fee and the backstop commitment fee were included in other current assets. The Bridge Loan was secured by a pledge of the Company's equity interest in the LLC. The Bridge Loan accrued interest at a rate of 12.5% per annum, compounded quarterly. On February 4, 2011, the Company paid off the outstanding Bridge Loan balance of $20.3 million, including accrued interest, with a portion of the proceeds from its Rights Offering and LLC Concurrent Private Placement, as described in Note 7 — Stockholders’ Equity. Debt issuance costs associated with the Bridge Loan were deferred and expensed as interest over the term of the agreement. In February 2011 the remaining unamortized fees and expenses totaling $0.4 million were expensed when the Bridge Loan balance was paid off.

Capital Lease

The LLC, through its subsidiary that constructed the Fairmont plant, has entered into an agreement with the local utility pursuant to which the utility has built and owns and operates a substation and distribution facility in order to supply electricity to the plant. The LLC is paying a fixed facilities charge based on the cost of the substation and distribution facility of $34,000 per month, over the 30-year term of the agreement. This fixed facilities charge is being accounted for as a capital lease in the accompanying financial statements. The agreement also includes a $25,000 monthly minimum energy charge that also began in the first quarter of 2008.

Notes Payable

Notes payable relate to certain financing agreements in place at each of our sites, as well as the Cargill Debt prior to its repayment. The subsidiaries of the LLC that constructed the plants entered into financing agreements in the first quarter of 2008 for the purchase of certain rolling stock equipment to be used at the facilities for $748,000. The notes have fixed interest rates (weighted average rate of approximately 5.6%) and require 48 monthly payments of principal and interest, maturing in the first and second quarter of 2012. In addition, the subsidiary of the LLC that constructed the Wood River facility had entered into a note payable for $2,220,000 with a fixed interest rate of 11.8% for the purchase of our natural gas pipeline. The note required 36 monthly payments of principal and interest and matured in the first quarter of 2011. In addition, the subsidiary of the LLC that constructed the Wood River facility has entered into a note payable for $419,000 with the City of Wood River for special assessments related to street, water, and sanitary improvements at our Wood River facility. This note requires ten annual payments of $58,000, including interest at 6.5% per annum, and matures in 2018.

The following table summarizes the aggregate maturities of our long-term debt as of December 31, 2011 (in thousands):

BioFuel Energy Corp.

Notes to Consolidated Financial Statements

6. Tax Increment Financing

In February 2007, the subsidiary of the LLC that constructed the Wood River plant received $6.0 million from the proceeds of a tax increment revenue note issued by the City of Wood River, Nebraska. The proceeds funded improvements to property owned by the subsidiary. The City of Wood River will pay the principal and interest of the note from the incremental increase in the property taxes related to the improvements made to the property. The interest rate on the note is 7.85%. The proceeds have been recorded as a liability which is reduced as the subsidiary of the LLC remits property taxes to the City of Wood River, which began in 2008 and will continue through 2021. The LLC has guaranteed the principal and interest of the tax increment revenue note if, for any reason, the City of Wood River fails to make the required payments to the holder of the note or the subsidiary of the LLC fails to make the required payments to the City of Wood River. Due to lower than anticipated assessed property values, the subsidiary of the LLC was required to pay $91,000 and $93,000 in 2011 and 2010, respectively, as a portion of the note payments.

The following table summarizes the aggregate maturities of the tax increment financing debt as of December 31, 2011 (in thousands):

7. Stockholders’ Equity

Rights Offering and LLC Concurrent Private Placement

In connection with the Bridge Loan Agreement, on September 24, 2010, the Company entered into a Rights Offering Letter Agreement with the Bridge Loan Lenders pursuant to which the Company conducted a rights offering to its stockholders (the “Rights Offering”). The Rights Offering entailed a distribution to our common stockholders of rights to purchase depositary shares representing fractional interests in shares of Series A Non-Voting Convertible Preferred Stock (the “Preferred Stock”). Concurrent with the Rights Offering, the LLC conducted a private placement of LLC interests that was structured to provide the holders of the membership interests in the LLC (other than the Company) with a private placement that was economically equivalent to the Rights Offering. On February 2, 2011, the Company’s stockholders approved an increase in the number of authorized shares of common stock of the Company, which resulted in the automatic conversion of shares of the Preferred Stock into shares of the Company’s common stock such that subscribers in the Rights Offering were issued one share of common stock in lieu of each depositary share subscribed for. These transactions were completed, and 63,773,603 shares of common stock and 18,369,262 LLC membership interests (along with an equivalent number of shares of Class B common stock) were issued, on February 4, 2011, and the aggregate gross proceeds of the Rights Offering and the concurrent private placement were $46.0 million. The proceeds of the transaction were used to (i) repay in full the Bridge Loan, (ii) repay in full the Company’s obligations under the Subordinated Debt, (iii) repay a portion of the Cargill Debt, and (iv) pay certain fees and expenses incurred in connection with the Rights Offering and the LLC’s concurrent private placement.

The Bridge Loan Lenders agreed to (i) participate in the Rights Offering for their full pro rata share and participate in the LLC’s concurrent private placement for their full basic purchase privileges, which we refer to as their “Basic Commitment”, and (ii) purchase all of the available depositary shares not otherwise sold in the Rights Offering and/or all of the available preferred membership interests in the LLC not sold in the concurrent private placement, which we refer to as their “Backstop Commitment”. The Bridge Loan Lenders purchased $0.9 million of depositary shares not otherwise sold in the Rights Offering pursuant to their Backstop Commitment. In consideration of the Backstop Commitment, the Company paid the Bridge Loan Lenders $0.9 million.

BioFuel Energy Corp.

Notes to Consolidated Financial Statements

7. Stockholders’ Equity – (continued)

In contemplation of the Rights Offering, on September 23, 2010, we entered into a Letter Agreement with Cargill pursuant to which we agreed to (i) use a portion of the proceeds from the Rights Offering (to the extent available) to repay a portion of the Cargill Debt, upon which Cargill would forgive a like amount of principal and any accrued interest on such forgiven principal according to its original terms, and (ii) upon successful completion of the Rights Offering, issue a number of depositary shares in exchange for forgiveness by Cargill of the remaining principal balance of the Cargill Debt, the number of shares to be determined by the weighted average price of the Company’s common stock for the 10 consecutive trading days following completion of the Rights Offering. On February 15, 2011, the Company issued 6,597,790 shares of common stock to Cargill in exchange for the extinguishment of the remaining amount owed to Cargill. An additional $2.0 million that was carried on our balance sheet at December 31, 2010 due to troubled debt restructuring accounting was also extinguished. This amount, in addition to the $2.8 million forgiven, was accounted for as a capital contribution to additional paid-in capital due to the related party nature of the Company and Cargill.

Stock Repurchase Plan

On October 15, 2007, the Company announced the adoption of a stock repurchase plan authorizing the repurchase of up to $7.5 million of the Company’s common stock. Purchases will be funded out of cash on hand and made from time to time in the open market. From the inception of the buyback program through September 30, 2011, the Company had repurchased 809,606 shares at an average price of $5.30 per share, leaving $3,184,000 available under the repurchase plan. The shares repurchased are being held as treasury stock. As of December 31, 2011, there were no plans to repurchase any additional shares.

Dividends

The Company has not declared any dividends on its common stock and does not anticipate paying dividends in the foreseeable future. In addition, the terms of the Senior Debt facility contain restrictions on the ability of the Operating Subsidiaries of the LLC to pay dividends or other distributions, which will restrict the Company’s ability to pay dividends in the future.

8. Derivative Financial Instruments

BioFuel Energy Corp.

Notes to Consolidated Financial Statements

8. Derivative Financial Instruments  – (continued)

The effects of derivative instruments on our consolidated financial statements were as follows as of December 31, 2011 and 2010 and for the years then ended (in thousands) (amounts presented exclude any income tax effects and have not been adjusted for the amount attributable to the noncontrolling interest). The Company offsets amounts of cash collateral deposited with counterparties arising from certain derivative instruments executed with the same counterparty against the fair value amounts reported for those derivative instruments.

Fair Value of Derivative Instruments in Consolidated Balance Sheet

Effects of Derivative Instruments on Income and Other Comprehensive Income (Loss)

In accordance with these provisions, we have categorized our financial assets and liabilities, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy as set forth below. If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

Financial assets and liabilities recorded on the Company’s consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:

Level 1 — Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company has the ability to access at the measurement date. We currently do not have any Level 1 financial assets or liabilities.

Level 2 — Financial assets and liabilities whose values are based on quoted prices in markets where trading occurs infrequently or whose values are based on quoted prices of instruments with similar attributes in active markets. Level 2 inputs include the following:

BioFuel Energy Corp.

Notes to Consolidated Financial Statements

8. Derivative Financial Instruments  – (continued)

Level 3 — Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability. We currently do not have any Level 3 financial assets or liabilities.

9. Stock-Based Compensation

The following table summarizes the stock-based compensation expense incurred by the Company (in thousands):

2007 Equity Incentive Compensation Plan

Immediately prior to the Company’s initial public offering, the Company adopted the 2007 Equity Incentive Compensation Plan (“2007 Plan”). The 2007 Plan provides for the grant of options intended to qualify as incentive stock options, non-qualified stock options, stock appreciation rights or restricted stock awards and any other equity-based or equity-related awards. The 2007 Plan is administered by the Compensation Committee of the Board of Directors. Subject to adjustment for changes in capitalization, the aggregate number of shares that may be delivered pursuant to awards under the 2007 Plan was originally 3,000,000; however in March 2011 the Board of Directors approved an adjustment to such aggregate number of shares to account for the Rights Offering and related increase in the number of authorized shares of common stock of the Company, as described in Note 7 – Stockholders’ Equity.  As a result of this adjustment, the aggregate number of shares that may be delivered pursuant to awards under the 2007 Plan is 7,100,000.  The term of the 2007 Plan is ten years, expiring in June 2017.

Stock Options — Except as otherwise directed by the Compensation Committee, the exercise price for options cannot be less than the fair market value of our common stock on the grant date. Other than the stock options issued to Directors, the options will generally vest and become exercisable with respect to 30%, 30% and 40% of the shares of our common stock subject to such options on each of the first three anniversaries of the grant date. Compensation expense related to these options is expensed on a straight line basis over the three year vesting period. Options issued to Directors generally vest and become exercisable on the first anniversary of the grant date. All stock options have a five year term from the date of grant.

During the year ended December 31, 2011 the Company did not issue any stock options under the 2007 Plan. During the year ended December 31, 2010, the Company issued 768,932 stock options under the 2007 Plan to certain of our employees and non-employee Directors with a per share exercise price equal to the market price of the stock on the date of grant. The determination of the fair value of the stock option awards, using the Black-Scholes model, incorporated the assumptions in the following table for stock options granted during the year ended December 31, 2010. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant over the expected term. Expected volatility is based on the weighted average historical volatility of our common stock.

BioFuel Energy Corp.

Notes to Consolidated Financial Statements

9. Stock-Based Compensation – (continued)

The weighted average variables used in calculating fair value in the year ended December 31, 2010 is as follows:

A summary of stock option activity under the 2007 Plan as of December 31, 2011, and the changes during the year ended December 31, 2011 is as follows: