LAKE AREA CORN PROCESSORS LLC - Quarter Report: 2009 September (Form 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

x           Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

For the quarterly period ended September 30, 2009.

 

OR

 

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

 

For the transition period from               to               .

 

 

Commission File Number: 000-50254

 

LAKE AREA CORN PROCESSORS, LLC

(Exact name of registrant as specified in its charter)

 

 

46269 SD Highway 34

P.O. Box 100

Wentworth, South Dakota 57075

(Address of principal executive offices)

 

(605) 483-2679

(Registrant’s telephone number, including area code)

 

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:  As of November 12, 2009, there were 29,620,000 units outstanding.

 

 

Table of Contents

 

INDEX

 

		Page No.
PART I.     FINANCIAL INFORMATION		3
ITEM 1.  FINANCIAL STATEMENTS		3
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		15
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		26
ITEM 4.  CONTROLS AND PROCEDURES		27
PART II.     OTHER INFORMATION		28
ITEM 1.  LEGAL PROCEEDINGS		28
ITEM 1A.  RISK FACTORS		28
ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		29
ITEM 3.  DEFAULTS UPON SENIOR SECURITIES		29
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		29
ITEM 5.  OTHER INFORMATION		29
ITEM 6.  EXHIBITS		29
SIGNATURES		29

 

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PART I.     FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS.

 

LAKE AREA CORN PROCESSORS, LLC

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

		September 30,			December 31,
		2009			2008*
ASSETS
CURRENT ASSETS
Cash		$	148,990		$	488,517
Accounts receivable		2,566,903			2,769,458
Other receivables		193,272			166,667
Inventory		5,106,301			6,526,977
Due from broker		720,029			60
Derivative financial instruments		12,373			373,313
Prepaid expenses		84,666			289,444
Total current assets		8,832,534			10,614,436
PROPERTY AND EQUIPMENT
Land		676,097			676,097
Land improvements		2,665,358			2,665,358
Buildings		8,088,853			8,088,853
Equipment		40,768,265			38,882,582
Construction in progress		—			1,256,194
		52,198,573			51,569,084
Less accumulated depreciation		(19,070,653		)	(17,037,417		)
Net property and equipment		33,127,920			34,531,667
OTHER ASSETS
Goodwill		10,395,766			10,395,766
Investments		2,219,017			2,507,074
Guarantee premium		104,632			141,263
Other		7,192			16,242
Total other assets		12,726,607			13,060,345
		$	54,687,061		$	58,206,448

 

* Derived from audited financial statements

 

See Notes to Unaudited Consolidated Financial Statements

 

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LAKE AREA CORN PROCESSORS, LLC

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

		September 30,			December 31,
		2009			2008*
LIABILITIES AND MEMBERS’ EQUITY
CURRENT LIABILITIES
Outstanding checks in excess of bank balance		$	501,871		$	400,918
Accounts payable		3,257,821			7,858,935
Accrued liabilities		2,181,902			3,199,234
Derivative financial instruments		902,398			97,912
Current portion of guarantee payable		81,882			60,678
Current portion of notes payable		2,671,170			2,065,357
Total current liabilities		9,597,044			13,683,034
LONG-TERM LIABILITIES
Notes payable, net of current maturities		6,396,843			5,201,498
Guarantee payable, net of current portion		200,278			200,278
Other		325,575			262,500
Total long-term liabilities		6,922,696			5,664,276
COMMITMENTS AND CONTINGENCIES
MEMBERS’ EQUITY
Capital units, $0.50 stated value, 29,620,000 units issued and outstanding		14,810,000			14,810,000
Additional paid-in capital		96,400			96,400
Retained earnings		23,260,921			23,952,738
Total members’ equity		38,167,321			38,859,138
		$	54,687,061		$	58,206,448

 

* Derived from audited financial statements

 

See Notes to Unaudited Consolidated Financial Statements

 

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LAKE AREA CORN PROCESSORS, LLC

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 

		Three Months			Three Months			Nine Months			Nine Months
		Ended			Ended			Ended			Ended
		September 30,			September 30,			September 30,			September 30,
		2009			2008			2009			2008
REVENUES		$	20,705,138		$	31,200,349		$	64,167,144		$	87,594,816
COST OF REVENUES		19,450,052			51,617,247			61,843,069			84,318,670
GROSS PROFIT (LOSS)		1,255,086			(20,416,898		)	2,324,075			3,276,146
OPERATING EXPENSES		686,714			835,866			2,136,319			2,925,572
INCOME (LOSS) FROM OPERATIONS		568,372			(21,252,764		)	187,756			350,574
OTHER INCOME (EXPENSE)
Interest and other income		15,388			23,828			31,883			48,383
Equity in net income(loss) of investment		(2,317		)	—			(288,058		)	—
Interest and other expense		(205,892		)	(130,919		)	(623,398		)	(519,993		)
Total other income (expense)		(192,821		)	(107,091		)	(879,573		)	(471,610		)
NET INCOME (LOSS)		$	375,551		$	(21,359,855	)	$	(691,817	)	$	(121,036	)
BASIC AND DILUTED EARNINGS (LOSS) PER UNIT		$	0.01		$	(0.72	)	$	(0.02	)	$	(0.00	)
WEIGHTED AVERAGE UNITS OUTSTANDING FOR THE CALCULATION OF BASIC AND DILUTED EARNINGS (LOSS) PER UNIT		29,620,000			29,620,000			29,620,000			29,620,000
DISTRIBUTIONS DECLARED PER UNIT		$	—		$	—		$	—		$	0.05

 

See Notes to Unaudited Consolidated Financial Statements

 

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LAKE AREA CORN PROCESSORS, LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

 

		2009			2008
OPERATING ACTIVITIES
Net (loss)		$	(691,817	)	$	(121,036	)
Changes not affecting cash
Depreciation and amortization		2,078,917			2,085,656
Equity in net loss of investments		288,057			—
Unrealized (gain) on purchase commitments		(1,121,204		)	—
Decrease in
Receivables		175,950			2,392,152
Inventory		1,420,676			538,039
Prepaid expenses		204,778			244,098
Derivative financial instruments and due from broker		445,457			10,166,352
Increase (decrease) in
Accounts payable		(4,197,274		)	(3,234,414		)
Accrued liabilities		166,947			(225,626		)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		(1,229,513		)	11,845,221
INVESTING ACTIVITIES
Purchase of property and equipment		(1,033,329		)	(944,038		)
Purchase of investment		—			(1,558,029		)
NET CASH (USED IN) INVESTING ACTIVITIES		(1,033,329		)	(2,502,067		)
FINANCING ACTIVITIES
Increase in outstanding checks in excess of bank balance		100,953			—
Long-term notes payable issued		3,339,000			—
Principal payments on long-term notes payable		(1,516,638		)	(3,619,548		)
Distributions paid to LACP members		—			(1,481,000		)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		1,923,315			(5,100,548		)
NET INCREASE (DECREASE)  IN CASH		(339,527		)	4,242,606
CASH AT BEGINNING OF PERIOD		488,517			361,122
CASH AT END OF PERIOD		$	148,990		$	4,603,728
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest		$	511,797		$	542,280

 

See Notes to Unaudited Consolidated Financial Statements

 

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LAKE AREA CORN PROCESSORS, LLC

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2009 AND 2008

 

NOTE 1 -        NATURE OF OPERATIONS

 

Principal Business Activity

 

Lake Area Corn Processors, LLC (the Company) is a South Dakota limited liability company located in Wentworth, South Dakota. The Company was organized by investors to provide a portion of the corn supply for a 40 million-gallon (annual capacity) ethanol plant, owned by Dakota Ethanol, LLC (Dakota Ethanol). On September 4, 2001, the ethanol plant commenced its principal operations. The Company sells ethanol and related products to customers located in North America.

 

NOTE 2 -        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The unaudited financial statements contained herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America.

 

In the opinion of management, all adjustments considered necessary for a fair presentation have been included in the accompanying financial statements. The results of operations for the nine and three months ended September 30, 2009 and 2008 are not necessarily indicative of the results to be expected for a full year.

 

These financial statements should be read in conjunction with the financial statements and notes included in the Company’s financial statements for the year ended December 31, 2008, contained in the annual report on Form 10-K for 2008.

 

Principles of Consolidation

 

The consolidated financial statements of the Company include the accounts of its subsidiary, Dakota Ethanol. All significant inter-company transactions and balances have been eliminated in consolidation.

 

Revenue Recognition

 

Revenue from the production of ethanol and related products is recorded when title transfers to customers, net of allowances for estimated returns. Generally, ethanol and related products are shipped FOB shipping point, based on written contract terms between Dakota Ethanol and it customers.  Collectibility of revenue is reasonably assured based on historical evidence of collectibility between Dakota Ethanol and its customers.  Interest income is recognized as earned.

 

Cost of Revenues

 

The primary components of cost of revenues from the production of ethanol and related co-product are corn expense, energy expense (natural gas and electricity), raw materials expense (chemicals and denaturant), and direct labor costs.

 

Shipping costs incurred in the sale of distiller’s grains are classified in net revenues.  Shipping costs on distiller’s grains were approximately $642,000 and $160,000 for the nine and three months ended September 30, 2009, respectively.  Shipping costs on distiller’s grains were approximately $1,459,000 and $481,000 for the nine and three months ended September 30, 2008, respectively.

 

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Inventory Valuation

 

Ethanol and related products are stated at net realizable value. Raw materials, work-in-process, and parts inventory are valued using methods which approximate the lower of cost (first-in, first-out) or market. In the valuation of inventories and purchase and sale commitments, market is based on current replacement values except that it does not exceed net realizable values and is not less than net realizable values reduced by allowances for approximate normal profit margin.

 

Investment in commodities contracts, derivative instruments and hedging activities

 

On January 1, 2009, the Company adopted new disclosure requirements, which require entities to provide greater transparency in interim and annual financial statements about how and why the entity uses derivative instruments, how the instruments and related hedged items are accounted for, and how the instruments and related hedged items affect the financial position, results of operations, and cash flows of the entity

 

We are exposed to certain risks related to our ongoing business operations.  The primary risks that we manage by using forward or derivative instruments are price risk on anticipated purchases of corn, natural gas and the sale of ethanol.

 

We are subject to market risk with respect to the price and availability of corn, the principal raw material we use to produce ethanol and ethanol by-products.  In general, rising corn prices result in lower profit margins and, therefore, represent unfavorable market conditions.  This is especially true when market conditions do not allow us to pass along increased corn costs to our customers.  The availability and price of corn is subject to wide fluctuations due to unpredictable factors such as weather conditions, farmer planting decisions, governmental policies with respect to agriculture and international trade and global demand and supply.

 

Certain contracts that literally meet the definition of a derivative may be exempted from derivative accounting as normal purchases or normal sales.  Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business.  Contracts that meet the requirements of normal purchases or sales are documented as normal and exempted from the accounting and reporting requirements of derivative accounting.  Effective January 1, 2008, we applied the normal purchase and sales exemption under derivative accounting for forward purchases of corn and sales of distiller’s grains.  Transactions initiated prior to January 1, 2008 are not exempted from the accounting and reporting requirements.  As of September 30, 2009, we are committed to purchasing 3.5 million bushels of corn on a forward contract basis with an average price of $4.20 per bushel, of which 1.1 million bushels are subject to derivative accounting treatment and 2.4 million bushels are accounted for as normal purchases, and accordingly, are not marked to market and are accounted for using lower of cost or market accounting.

 

We sometimes enter into firm-price purchase commitments with some of our natural gas suppliers under which we agree to buy natural gas at a price set in advance of the actual delivery of that natural gas to us.  Under these arrangements, we assume the risk of a price decrease in the market price of natural gas between the time this price is fixed and the time the natural gas is delivered.  At September 30, 2009, we are committed to purchasing 1,626,000 MMBtu’s of natural gas in advance at prices other than at market.  We account for these transactions as normal purchases, and accordingly, do not mark these transactions to market.

 

We enter into short-term forward, option and futures contracts as a means of securing corn and natural gas for the ethanol plant and managing exposure to changes in commodity and energy prices. We enter into short-term forward, option and futures contracts for sales of ethanol to manage exposure to changes in energy prices.  All of our derivatives are designated as non-hedge derivatives, and accordingly are recorded at fair value with changes in fair value recognized in net income. Although the contracts are considered economic hedges of specified risks, they are not designated as and accounted for as hedging instruments.

 

As part of our trading activity, we use futures and option contracts offered through regulated commodity exchanges to reduce risk and we are exposed to risk of loss in the market value of inventories. To reduce that risk, we generally take positions using forward and futures contracts and options.

 

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Derivatives not designated as hedging instruments at September 30, 2009 and December 31, 2008 were as follows:

 

		Balance Sheet		September 30,			December 31,
		Classification		2009			2008
Futures and options contracts		Current Assets		$	12,373		$	373,313
Forward contracts		(Current Liabilities)		$	(902,398	)	$	(97,912	)

 

Realized and unrealized gains and losses related to derivative contracts related to corn and natural gas purchases are included as a component of cost of revenues and derivative contracts related to ethanol sales are included as a component of revenues in the accompanying financial statements.

 

		Statement of Operations		Three Months Ended September 30,
		Classification		2009			2008
Net realized and unrealized (losses)  related to sales contracts:
Futures and options contracts		Revenues		$	(277,298	)	$	—
Net realized and unrealized (losses)  related to purchase contracts:
Futures and options contracts		Cost of Revenues		$	(550,443	)	$	(9,476,910	)
Forward contracts		Cost of Revenues		$	(1,354,253	)	$	(15,538,030	)
		Statement of Operations		Nine Months Ended September 30,
		Classification		2009			2008
Net realized and unrealized (losses)  related to sales contracts:
Futures and options contracts		Revenues		$	(277,298	)	$	—
Net realized and unrealized gains (losses)  related to purchase contracts:
Futures and options contracts		Cost of Revenues		$	(1,030,903	)	$	(8,046,447	)
Forward contracts		Cost of Revenues		$	596,344		$	(5,907,476	)

 

Investments

 

Dakota Ethanol has a less than 20% investment interest in three unlisted companies in related industries. These investments are being accounted for by the equity method of accounting under which the Company’s share of net income is recognized as income in the Company’s income statement and added to the investment account.  Distributions or dividends received from the investments are treated as a reduction of the investment account.  The Company consistently follows the practice of recognizing the net income based on the most recent reliable data.

 

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Dakota Ethanol has a less than 20% investment interest in the company’s ethanol marketer, Renewable Products Marketing Group, LLC (RPMG).  The net income which is reported in the Company’s income statement for RPMG is based on RPMG’s June 30, 2009 unaudited results.  The carrying amount of the Company’s investment was approximately $1,225,000 and $1,513,000 as of September 30, 2009 and December 31, 2008, respectively.

 

Dakota Ethanol has a less than 20% investment interest in Prairie Gold Venture Partnership, LLC (PGVP), a venture capital fund investing in cellulosic ethanol production.  The net income which is reported in the Company’s income statement for PGVP is based on PGVP’s June 30, 2009 unaudited results.  The carrying amount of the Company’s investment was approximately $994,000 as of September 30, 2009 and December 31, 2008.

 

Dakota Ethanol has a less than 20% investment interest in Corn Oil Bio-Solutions, LLC (COBS), a developmental stage bio-diesel refinery.  During the quarter ended December 31, 2008, the project was idled due to credit conditions, as such, the company reduced its investment to zero.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Environmental Liabilities

 

Dakota Ethanol’s operations are subject to environmental laws and regulations adopted by various governmental authorities in the jurisdiction in which it operates. These laws require Dakota Ethanol to investigate and remediate the effects of the release or disposal of materials at its locations. Accordingly, Dakota Ethanol has adopted policies, practices and procedures in the areas of pollution control, occupational health and the production, handling, storage and use of hazardous materials to prevent material environmental or other damage, and to limit the financial liability which could result from such events. Environmental liabilities are recorded when Dakota Ethanol’s liability is probable and the costs can be reasonably estimated.

 

Recent Accounting Pronouncements

 

In August 2009, the FASB issued an update to “Fair Value Measurements and Disclosures (Topic 820), Measuring Liabilities at Fair Value.”  The update provides clarification of valuation techniques to measure the fair value of a liability in circumstances which a quoted price in an active market for an identical liability is not available.  The update is effective for the first reporting period (including interim periods) after issuance. The Company does not expect that the adoption of this standard will have a material impact on the Company’s financial statements.

 

NOTE 3 -        INVENTORY

 

Inventory consisted of the following as of September 30, 2009 and December 31, 2008:

 

		September 30,			December 31,
		2009			2008*
Raw materials		$	2,143,806		$	3,937,873
Finished goods		1,238,665			825,878
Work in process		543,699			591,870
Parts inventory		1,180,131			1,171,356
		$	5,106,301		$	6,526,977

 

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Included in inventory is a lower of cost or market adjustment of approximately $0 and $1,139,000 at September 30, 2009 and December 31, 2008, respectively.

 

NOTE 4 -        SHORT-TERM NOTES PAYABLE

 

On June 18, 2009, Dakota Ethanol renewed a revolving promissory note from First National Bank of Omaha in the amount of $4,000,000.  The note expires on May 17, 2010 and the amount available is subject to certain restrictive covenants establishing minimum reporting requirements, ratios, working capital, net worth and borrowing base requirements. Interest on the outstanding principal balances will accrue at adjustable basis points above the lender’s base rate (5.25 percent at September 30, 2009). There is a commitment fee of 3/8 percent on the unused portion of the $4,000,000 availability. The note is collateralized by the ethanol plant, its accounts receivable and inventories.  On September 30, 2009, Dakota Ethanol had approximately $0 outstanding and $4,000,000 available to be drawn on the revolving promissory note.  On December 31, 2008, Dakota Ethanol had $0 outstanding and $3,000,000 available to be drawn on the revolving promissory note.

 

NOTE 5 -        LONG-TERM NOTES PAYABLE

 

On January 16, 2009, we entered into an amendment to our credit agreements with FNBO.  The primary purposes of this amendment were to increase our revolving line of credit with FNBO from $3,000,000 to $5,000,000 and to make changes to the covenants applicable to our credit agreements.  We agreed to provide FNBO more information regarding our hedging transactions and to make adjustments to our hedging strategies.  We also agreed to raise an additional $2,000,000 in subordinated debt by March 31, 2009 and to secure alternate financing for our corn oil extraction equipment by April 30, 2009.  In addition, we agreed not to make any distributions to our members without FNBO’s prior approval.

 

In order to comply with the conditions FNBO imposed regarding raising additional subordinated debt financing, we conducted a private placement offering of subordinated unsecured debt securities which closed on May 30, 2009.  The securities mature two years from the date of issuance.  Interest on the outstanding balances will accrue at a fixed rate of 9 percent.  Interest will be paid annually on January 30th of each year beginning on January 30, 2010.  As of September 30, 2009, we have raised $1,439,000 in subordinated debt through this offering.

 

On July 24, 2009 Dakota Ethanol issued an additional $700,000 in subordinated secured debt to Guardian Eagle Investments, LLC.  The note has a fixed interest rate of 9.0%.  The note requires monthly installments of principal and interest and matures in April 2012.

 

As of September 30, 2009, we have raised $2,139,000 in subordinated debt.  FNBO has agreed that the additional subordinated financing we have secured is sufficient to satisfy the requirement in our amended credit agreements.

 

On May 22, 2009, Dakota Ethanol entered into two loan agreements for alternative financing for our corn oil extraction equipment as we had agreed with FNBO; one loan with Rural Electric Economic Development, Inc (REED) and the other loan with First District Development Company (FDDC).

 

The note to REED for $1 million has a fixed interest rate of 4.7%.  The note requires monthly installments of principal and interest and matures on May 25, 2014.  The note is secured by the oil extraction equipment.

 

The note to FDDC for $200,000 has a fixed interest rate of 5.5%.  The note requires monthly installments of principal and interest and matures on May 22, 2014.  The note is secured by the oil extraction equipment.

 

FNBO has agreed that the $1.2 million in additional financing we have secured for the corn oil extraction equipment is sufficient to satisfy the requirement in our amended credit agreements.

 

We are in compliance with our financial covenants as of September 30, 2009.

 

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The balances of the notes payable are as follows:

 

		September 30,			December 31,
		2009			2008*
Note payable to First National Bank of Omaha
Term Note 2		$	3,368,339		$	4,816,855
Term Note 5		2,000,000			2,000,000
Note payable - Land		450,000			450,000
Note payable - Subordinated notes		1,439,000			—
Note payable - REED		940,910			—
Note payable - FDDC		188,306			—
Note payable -Guardian Eagle		681,458			—
		9,068,013			7,266,855
Less current portion		(2,671,170		)	(2,065,357		)
		$	6,396,843		$	5,201,498

 

* Derived from audited financial statements

 

The interest rate on the outstanding principal balances of term note 5 was 5.0 percent at September 30, 2009.

 

Minimum principal payments for the next five years are estimated as follows:

 

 

NOTE 6 -        FAIR VALUE MEASUREMENTS

 

Effective January 1, 2009, the Company completely adopted the fair value measurements and disclosures standard which defines fair value, establishes a framework for measuring fair value, and expands disclosure for those assets and liabilities carried on the balance sheet on a fair value basis.

 

The Company’s balance sheet contains derivative financial instruments that are recorded at fair value on a recurring basis.  Fair value measurements and disclosures require that assets and liabilities carried at fair value be classified and disclosed according to the process for determining fair value.  There are three levels of determining fair value.

 

Level 1 uses quoted market prices in active markets for identical assets or liabilities.

 

Level 2 uses observable market based inputs or unobservable inputs that are corroborated by market data.

 

Level 3 uses unobservable inputs that are not corroborated by market data.

 

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation

 

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methodologies were applied to all of the Company’s financial assets and financial liabilities carried at fair value effective January 1, 2008.

 

Derivative financial instruments. Commodity futures and options contracts are reported at fair value utilizing Level 1 inputs. For these contracts, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the CBOT and NYMEX markets.  Over-the-counter commodity options contracts are reported at fair value utilizing Level 2 inputs.  For these contracts, the Company obtains fair value measurements from an independent pricing service.  The fair value measurements consider observable data that may include dealer quotes and live trading levels from the over-the-counter markets.  Forward purchase contracts are reported at fair value utilizing Level 2 inputs.  For these contracts, the Company obtains fair value measurements from local grain terminal bid values. The fair value measurements consider observable data that may include live trading bids from local elevators and processing plants which are based off the CBOT markets.

 

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2009, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 

		Total			Level 1			Level 2			Level 3
Assets:
Derivative financial instruments		$	12,373		$	12,373		$	—		$	—
Liabilities:
Derivative financial instruments		902,398			279,625			622,773			—

 

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets and financial liabilities measured at fair value on a non-recurring basis were not significant at September 30, 2009.

 

Disclosure requirements for fair value of financial instruments require disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis.  The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non recurring basis are discussed above.  The methodologies for other financial assets and financial liabilities are discussed below.

 

The Company believes the carrying amount of cash, cash equivalents, accounts receivable, due from broker, derivative instruments, and accounts payable approximates fair value due to the short maturity of these instruments.

 

The carrying amount of long-term obligations at September 30, 2009 of $9,328,969 had an estimated fair value of approximately $9,418,061 based on estimated interest rates for comparable debt.  The carrying amount and fair value were $7,527,811 and $7,700,926 respectively at December 31, 2008.

 

The Company believes the carrying amount of the short-term note payable at September 30, 2009 approximates fair value due to the short maturity of the instrument.

 

NOTE 7 -        COMMITMENTS, CONTINGENCIES AND AGREEMENTS

 

Environmental — During the year ended December 31, 2002, management became aware that the ethanol plant may have exceeded certain emission levels allowed by their operating permit. The Company has disclosed the situation to the appropriate state regulatory agency and has taken steps to reduce the emissions to acceptable levels. Management has not accrued a liability for environmental remediation costs since the costs, if any, cannot be estimated.

 

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NOTE 8 -        RELATED PARTY TRANSACTIONS

 

Dakota Ethanol owns a 9% interest in RPMG, in which Dakota Ethanol has entered into an ethanol marketing agreement for the exclusive rights to market, sell and distribute the entire ethanol inventory produced by Dakota Ethanol.  The marketing fees are included in net revenues.

 

On August 1, 2008, Dakota Ethanol entered into a dried distiller’s grains marketing agreement with RPMG for the exclusive rights to market, sell and distribute the entire dried distiller’s grains inventory produced by Dakota Ethanol.

 

Sales and marketing fees related to the agreements are as follows:

 

		Three Months Ended							Nine Months Ended
		September 30,							September 30,
		2009			2008				2009			2008
Sales ethanol		$	17,511,781		$	26,638,443			$	35,053,846		$	76,958,279
Sales distiller’s grains		1,276,491			696,864				2,437,293			696,864
Marketing fees ethanol		52,452			48,315				158,247			138,686
Marketing fees distillers grains		33,080			10,437				76,584			10,437
		September 30,			December 31,
		2009			2008
Amounts due included in accounts receivable		$	2,104,432		$	2,049,739

 

NOTE 9 -        SUBSEQUENT EVENTS

 

Subsequent events have been evaluated through November 13, 2009, the date the financial statements are filed with the Securities and Exchange Commission.  Through that date, there were no events requiring disclosure.

 

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

We prepared the following discussion and analysis to help you better understand our financial condition, changes in our financial condition, and results of operations for the three and nine month periods ended September 30, 2009, compared to the same periods of the prior fiscal year. This discussion should be read in conjunction with the consolidated financial statements and the Management’s Discussion and Analysis section for the fiscal year ended December 31, 2008, included in the Company’s Annual Report on Form 10-K.

 

Disclosure Regarding Forward-Looking Statements

 

This report contains historical information, as well as forward-looking statements that involve known and unknown risks and relate to future events, our future financial performance, or our expected future operations and actions.  In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “future,” “intend,” “could,” “hope,” “predict,” “target,” “potential,” “continue” or the negative of these terms or other similar expressions.  These forward-looking statements are only our predictions based on current information and involve numerous assumptions, risks and uncertainties.  Our actual results or actions may differ materially from these forward-looking statements for many reasons, including the reasons described in this report.  While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include:

 

·	Availability and costs of raw materials, particularly corn and natural gas;
·	Changes in the price and market for ethanol, distiller’s grains and corn oil;
·	Decreases in the price of gasoline or decreased gasoline demand;
·	Changes in the availability and cost of credit;
·	Changes and advances in ethanol production technology;
·	The effectiveness of our hedging strategy to offset increases in the price of our raw materials and decreases in the prices of our products;
·	Overcapacity within the ethanol industry causing supply to exceed demand;
·	Our ability to market and our reliance on third parties to market our products;
·	The decrease or elimination of governmental incentives which support the ethanol industry;
·	Changes in the weather or general economic conditions impacting the availability and price of corn;
·	Our ability to generate free cash flow to invest in our business and service our debt;
·	Changes in plant production capacity or technical difficulties in operating the plant;
·	Changes in our business strategy, capital improvements or development plans;
·	Our ability to retain key employees and maintain labor relations;
·	Our liability resulting from litigation;
·	Competition from alternative fuels and alternative fuel additives; and
·	Other factors described elsewhere in this report.

 

The cautionary statements referred to in this section also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf.  We undertake no duty to update these forward-looking statements, even though our situation may change in the future.

 

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Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements.  We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report.  You should read this report and the documents that we reference in this report and have filed as exhibits completely and with the understanding that our actual future results may be materially different from what we currently expect.  We qualify all of our forward-looking statements by these cautionary statements.

 

Overview

 

Lake Area Corn Processors, LLC is a South Dakota limited liability company that owns and manages its wholly-owned subsidiary, Dakota Ethanol, LLC.  Dakota Ethanol, LLC owns and operates an ethanol plant located near Wentworth, South Dakota that has a nameplate production capacity of 40 million gallons of ethanol per year.  Lake Area Corn Processors, LLC is referred to in this report as “LACP,” the “company,” “we,” or “us.”  Dakota Ethanol, LLC is referred to in this report as “Dakota Ethanol” “we” “us” or the “ethanol plant.”

 

Our revenue is derived from the sale and distribution of our ethanol, distiller’s grains and corn oil.  The ethanol plant currently operates in excess of its nameplate capacity, producing approximately 47 million gallons of ethanol per year.  Corn is supplied to us primarily from our members who are local agricultural producers and from purchases of corn on the open market.

 

We recently completed installation of corn oil extraction equipment which allows us to remove some of the corn oil contained in our distiller’s grains.  This allows us to sell the corn oil separately from the distiller’s grains that we produce.  We used cash from our revolving lines of credit to finance the corn oil extraction equipment.  We recently secured $1.2 million in subordinated financing to offset part of the cost of installing the corn oil extraction equipment.

 

On August 11, 2009, we executed a corn oil marketing agreement with RPMG, Inc., which is the same entity that markets our ethanol and distiller’s grains.  Pursuant to the agreement, RPMG agreed to market all of the corn oil we expect to produce.  The initial term of the agreement is for one year.  The agreement automatically renews for additional one year terms unless either party gives 180 days notice that the agreement will not be renewed.  We agreed to pay RPMG a commission based on each pound of  our corn oil that is sold by RPMG.

 

The production of corn oil presents a new source of revenue for us.  We are continuing to improve the efficiency of our corn oil extraction equipment in order to maximize this additional revenue.

 

Results of Operations for the Three Months Ended September 30, 2009 and 2008

 

The following table shows the results of our operations and the percentage of revenues, cost of revenues, operating expenses and other items in relation to total revenues in our consolidated statements of operations for the three months ended September 30, 2009 and 2008:

 

		September 30, 2009					September 30, 2008
Income Statement Data		Amount			%		Amount			%
Revenues		$	20,705,138		100.0		$	31,200,349		100.0
Cost of Revenues		$	19,450,052		93.9		$	51,617,247		165.4
Gross Profit (Loss)		$	1,255,086		6.1		$	(20,416,898	)	(65.4	)
Operating Expenses		$	686,714		3.3		$	835,866		2.7
Income (Loss) from Operations		$	568,372		2.7		$	(21,252,764	)	(68.1	)
Other Expense		$	(192,821	)	(0.9	)	$	(107,091	)	(0.3	)
Net Income (Loss)		$	375,551		1.8		$	(21,359,855	)	(68.5	)

 

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Revenues.  Our ethanol revenue decreased by approximately 34% during the third quarter of 2009 compared to the same period of 2008, which in real terms equaled a decrease of approximately $9,127,000.  Our total distiller’s grains revenue decreased by approximately 39% for the third quarter of 2009 compared to the same period of 2008.  In real terms, this equaled a decrease of approximately $1,646,000 in total distiller’s grains revenue.  We also experienced an increase in our other revenues of approximately $277,000 for the third quarter of 2009 compared to the same period of 2008, primarily related to our corn oil sales.

 

Ethanol

 

Our decreased ethanol revenue was primarily the result of a combination of decreased ethanol prices and production during the third quarter of 2009 compared to the same period of 2008.  The average price we received for our ethanol during the third quarter of 2009 was approximately 32% lower, or approximately $0.70 per gallon, compared to the third quarter of 2008.  Management attributes this decrease in the average price we received for our ethanol with lower energy prices during the 2009 period compared to 2008.  During the beginning of our third quarter of 2008, energy prices, including ethanol prices, peaked as a result of a general spike in commodities prices.  These commodities prices fell significantly after this peak in early July 2008.  Following the peak in July 2008, we have experienced much lower ethanol prices.  During the third quarter of 2009, we experienced ethanol prices that stabilized and gradually increased.  Management believes that ethanol prices increased during the quarter as a result of increased fuel demand due to seasonal driving increases and increasing corn prices which management believes has a positive effect on ethanol prices.  Following the end of our third quarter of 2009, ethanol prices have continued to increase.

 

Management anticipates that ethanol prices during our fourth quarter of 2009 will plateau and then decrease going into the end of the year.  Management anticipates this will be the result of decreased seasonal gasoline demand which affects ethanol prices.  However, should corn prices continue to increase along with other commodity prices, management anticipates this will positively impact ethanol prices.  Further, management anticipates that energy demand may increase in the near future should the world economy continue to recover which could positively impact ethanol prices.

 

Management believes that the ethanol industry must continue to grow demand for ethanol in order to maintain profitability in the industry.  Management believes that there is currently excess ethanol supply capacity which has resulted in lower ethanol prices.  This has also caused some ethanol producers to reduce production or cease production altogether.  Further, ethanol demand may be capped due to what is commonly referred to as the “blending wall.”  Currently, ethanol is blended with conventional gasoline for use in standard (non-flex fuel) vehicles to create a blend which is 10% ethanol and 90% conventional gasoline.  Estimates indicate that approximately 135 billion gallons of gasoline are sold in the United States each year.  Assuming that all gasoline in the United States is blended at a rate of 10% ethanol and 90% gasoline, the maximum demand for ethanol is 13.5 billion gallons.  This is commonly referred to as the “blending wall,” which represents a theoretical limit where more ethanol cannot be blended into the national gasoline pool.  Many believe that the ethanol industry will reach this blending wall in 2009 or 2010.  Without an expansion of the percentage of ethanol that is blended for use in conventional automobiles, or increased demand for higher ethanol blends such as E85, demand for ethanol may not exceed this 13.5 billion gallon limit.  Currently, proposals have been introduced in Congress that would allow ethanol blends up to 15% for use in standard vehicles.  This could significantly increase demand for ethanol and would increase the total amount of ethanol that could be blended in the United States.  However, there is significant opposition to this proposed measure.  Without an expansion of ethanol demand, management anticipates that the ethanol industry will continue to experience idled ethanol plants or ethanol plants reducing production.

 

In addition to the decrease in ethanol prices, we experienced lower ethanol production during the third quarter of 2009 compared to the same period of 2008.  Our total ethanol sales decreased by approximately 4% for the third quarter of 2009 compared to the same period of 2008.  In real terms, this was a decrease in ethanol sales of approximately 423,000 gallons of ethanol.  Management attributes this decrease in ethanol sales during the third quarter of 2009 with decreased ethanol production during the 2009 period.  We had a longer plant shutdown for maintenance in September 2009 compared to September 2008.  This resulted in a decrease in ethanol production during the third quarter of 2009 compared to 2008.  The ethanol plant is currently operating at full capacity.  We anticipate that during the fourth quarter of 2009 we may have additional plant downtime for maintenance which may

 

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somewhat reduce our fourth quarter ethanol production.  However, we anticipate that this decrease in production will not be significant.

 

Distiller’s Grains

 

For the third quarter of 2009, our total distiller’s grains revenue decreased by approximately 39%, or $1,646,000, compared to the third quarter of 2008.  We attribute this decrease in distiller’s grains revenue to a combination of decreased distiller’s grains sales and significantly decreased market prices for distiller’s grains during the third quarter of 2009 compared to the same period of 2008.  We sold a total of 15,789 tons of dried distiller’s grains and 16,364 dry-equivalent tons of modified/wet distiller’s grains in the third quarter of 2009 compared to 12,587 tons of dried distiller’s grains and 20,626 dry-equivalent tons of modified/wet distiller’s grains in the third quarter of 2008.  Management attributes this increase in dried distiller’s grains sales during the third quarter of 2009 compared to the same period of 2008 with decreased demand for modified/wet distiller’s grains in our local market.  We market our modified/wet distiller’s grains locally without a third-party marketer.  Management believes that demand for modified/wet distiller’s grains in our local market decreased during the third quarter of 2009 as a result of decreased cattle feeding in our local market along with increased local distiller’s grains supplies.  As result of this decrease in the local demand for modified/wet distiller’s grains, we have been marketing more dried distiller’s grains outside of our local market through RPMG, our third-party distiller’s grains marketer.  Management anticipates continuing to assess our mixture of dried distiller’s grains versus modified/wet distiller’s grains sales based on market conditions.

 

We experienced a significant decrease in distiller’s grains prices, both for dried and modified/wet distiller’s grains, during the third quarter of 2009 compared to the third quarter of 2008.  The average price we received for our dried distiller’s grains decreased by approximately 33% or $39 per ton for the third quarter of 2009 compared to the same period of 2008.  In addition, the average price we received for our modified/wet distiller’s grains decreased by approximately 39% or approximately $52 per ton on a dry-equivalent basis for our third quarter of 2009 compared to the same period of 2008.

 

We experienced a slight decrease in total distiller’s grains sales during the third quarter of 2009 compared to the same period of 2008.  Management attributes this decrease in distiller’s grains sales with decreased ethanol production during the third quarter of 2009 compared to the same period of 2008 due to a longer maintenance shutdown in September 2009 compared to September 2008 and due to the fact that we are now selling corn oil separate from our distiller’s grains which reduces the total tons of distiller’s grains we sell.  We anticipate that future distiller’s grains production will be comparable to historical averages.

 

Corn Oil

 

During the third quarter of 2009, we continued to operate our corn oil extraction equipment.  We had not yet installed our corn oil extraction equipment during the third quarter of 2008, therefore, we did not have any corn oil sales during the third quarter of 2008.  We had revenue of approximately $270,000 related to corn oil sales during the third quarter of 2009.  Corn oil prices stabilized and increased during the third quarter of 2009 and continued to increase following the end of the third quarter.  Management anticipates that corn oil prices will continue to increase if commodities prices continue to rise and the economic recovery continues.  We are continuing to refine our operation of the corn oil extraction equipment and anticipate that this may lead to increased production in the future.

 

Cost of Revenues.  We experienced a very significant decrease in our cost of revenues for the third quarter of 2009 compared to the third quarter of 2008.  Management attributes this significant decrease in cost of revenues with significant losses on our derivative instruments and forward raw material purchase contracts during the third quarter of 2008.  During our 2008 fiscal year, we changed the manner in which we accounted for our derivative instruments, including our forward purchase contracts.  This resulted in significant unrealized gains during the first six months of our 2008 fiscal year and significant unrealized losses during the third quarter of 2008.  These losses were included in our cost of revenues for the third quarter of 2008 and significantly increased our cost of revenues in that time period.

 

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Our total cost per bushel of corn, including derivative instruments, was approximately 62% lower for the third quarter of 2009 compared to the same period of 2008.  Our average cost per bushel of corn during the third quarter of 2008, including our derivative instruments, was approximately $9.75 per bushel, compared to approximately $3.69 per bushel during the third quarter of 2009.  On a cash basis, disregarding our derivative instrument positions, our corn cost per bushel decreased by approximately 27% for the third quarter of 2009 compared to the third quarter of 2008.  In real terms, this was a decrease of approximately $1.19 per bushel of corn on a cash basis.

 

Market corn prices were volatile during our third quarter of 2009.  However, market corn prices increased significantly at the end of our third quarter of 2009 and continued to increase following the end of our third quarter.  Management attributes this increase in corn prices to poor weather conditions in the Midwest which has delayed the harvest significantly.  Management anticipates that weather conditions will continue to affect corn prices.  We purchased a significant amount of our corn during the third quarter of 2009 at current market prices as we had not entered into a significant amount of derivatives positions during that time period.  This was a result of the significant volatility we experienced in the second half of our 2008 fiscal year related to the fall in commodities prices and the effect that had on our derivative instruments.

 

We anticipate that our corn costs will increase during our fourth quarter of 2009 as a result of corn forward purchase contracts for delivery during the fourth quarter of 2009 at prices above current market prices.  Many of these positions were established in 2008 during the time period when commodities prices were increasing rapidly.  Further, we anticipate that if harvest continues to be delayed by poor weather conditions, market corn prices may continue to increase and hold into the beginning of 2010.

 

Our total cost of revenue associated with natural gas was approximately 66% lower for the third quarter of 2009 compared to the third quarter of 2008.  Our average natural gas cost, which includes costs associated with our derivative instrument positions, for the third quarter of 2009 was approximately $5.25 per MMBtu compared to approximately $15.07 per MMBtu for the third quarter of 2008.  We experienced a significant decrease in commodities prices, including natural gas, starting at the beginning of the third quarter of 2008.  These low energy prices have persisted which has resulted in sustained low natural gas prices.  During the third quarter of 2009, our natural gas prices were stable, however, they have been increasing during the beginning of the fourth quarter of 2009.  Natural gas prices typically increase during the winter months as demand increases due to heating requirements in colder climates.  As a result, we anticipate that natural gas prices will continue to increase during the fourth quarter of 2009 and the first quarter of 2010.  Management anticipates that natural gas prices may continue to increase after this time period if we experience continued economic improvement.  This may increase demand for energy which could cause natural gas prices to continue to increase.

 

Our total natural gas costs also decreased during the third quarter of 2009 compared to the same period of 2008 as a result of decreased natural gas consumption during the 2009 period.  We attribute this decrease in natural gas consumption with decreased production by the ethanol plant and energy savings associated with our corn oil extraction.  We experienced a decrease of approximately 1% in the total amount of natural gas we consumed during the third quarter of 2009 compared to the same period of 2008.  In real terms, this was a decrease of approximately 5,000 MMBtu of natural gas.  We anticipate that in the future, our natural gas consumption will be comparable to current natural gas usage.  However, should we continue to produce more dried distiller’s grains as opposed to modified/wet distiller’s grains, we expect our natural gas consumption will increase as natural gas is used to fire our distiller’s grains dryers.

 

Operating Expenses.  Our operating expenses decreased significantly for the third quarter of 2009 compared to the third quarter of 2008.  This reduction was primarily the result of lower environmental compliance costs and decreased expenses related to public relations that we experienced during the third quarter of 2009 compared to the same period of 2008.

 

Other Expense.  Our total other expense increased significantly for the third quarter of 2009 compared to the third quarter of 2008.  We experienced a significant increase in interest expense for the third quarter of 2009 compared to the same period of 2008 as a result of having more debt outstanding during the 2009 period.  This is from a combination of our increased borrowing on our revolving lines of credit as well as issuing subordinated debt for working capital and our corn oil extraction equipment at the beginning of our 2009 fiscal year.

 

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Results of Operations for the Nine Months Ended September 30, 2009 and 2008

 

The following table shows the results of our operations and the percentage of revenues, cost of revenues, operating expenses and other items in relation to total revenues in our consolidated statements of operations for the nine months ended September 30, 2009 and 2008:

 

		September 30, 2009					September 30, 2008
Income Statement Data		Amount			%		Amount			%
Revenues		$	64,167,144		100.0		$	87,594,816		100.0
Cost of Revenues		$	61,843,069		96.4		$	84,318,670		96.3
Gross Profit		$	2,324,075		3.6		$	3,276,146		3.7
Operating Expenses		$	2,136,319		3.3		$	2,925,572		3.3
Income from Operations		$	187,756		0.3		$	350,574		0.4
Other Expense		$	(879,573	)	(1.4	)	$	(471,610	)	(0.5	)
Net Income (Loss)		$	(691,817	)	(1.1	)	$	(121,036	)	(0.1	)

 

Revenues.  Our total revenues were lower for the nine months ended September 30, 2009 compared to the same period of 2008.  We attribute this decrease primarily to decreased commodity prices we experienced during our 2009 fiscal year compared to our 2008 fiscal year.  Our total ethanol sales revenue was approximately 32% lower for the nine month period ended September 30, 2009 compared to the same period of 2008.  In real terms, this equaled an approximately $24,393,000 decrease in ethanol revenue.  The average price we received for our ethanol during the first nine months of 2009 was approximately $1.49 per gallon compared to approximately $2.22 per gallon for the comparable period of 2008.  Management attributes this decrease in the average price we received for our ethanol during the first nine months of 2009 compared to the same period of 2008 with decreased commodity prices generally in 2009, including energy and corn prices.  Management believes this was a result of the worldwide economic slow down that commenced in the middle of 2008 which resulted in a steep decrease in market energy prices, including ethanol.  In addition, management believes that corn prices have an effect on the market price of ethanol.  Corn prices fell significantly following the beginning of July 2008 which management believes resulted in lower ethanol prices.

 

Our total ethanol sales for the first nine months of 2009 were approximately 1% higher compared to the same period of 2008.  In real terms, this equaled an increase in ethanol sales of approximately 495,000 gallons.  Management attributes this increase in ethanol sales with equipment problems the ethanol plant experienced in 2008 which decreased ethanol production.  These equipment problems have since been rectified.

 

We experienced an increase in our total distiller’s grains revenue for the nine month period ended September 30, 2009 compared to the same period of 2008.  For the 2009 period, we experienced a decrease in modified/wet distiller’s grains revenue of approximately 6%, or approximately $434,000, while at the same time we experienced an increase in dried distiller’s grains revenue of approximately 30%, or approximately $857,000 compared to the 2008 period.  For the nine month period ended September 30, 2009 compared to the same period of 2008, the average price we received for our dried distiller’s grains increased by approximately $4 per ton or approximately 4%.  We attribute this increase in the average price we received for our dried distiller’s grains for the first nine months of 2009 compared to the same period of 2008 with some distiller’s grains contracts that we entered into when commodity prices were high in the middle of 2008 that were delivered during 2009.  Our average modified/wet distiller’s grains price for the nine month period ended September 30, 2009 decreased by approximately 2% or approximately $2 per ton compared to the first nine months of 2008.

 

We experienced an increase of approximately 25%, or approximately 7,000 tons, of dried distiller’s grains we sold during the first nine months of 2009 compared to the same period of 2008.  We attribute this increase in the

 

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tons of dried distiller’s grains we sold with a drop in demand for modified/wet distiller’s grains in our local market which resulted in us producing more dried distiller’s grains for sale outside of our local market.  Our total sales of modified/wet distiller’s grains decreased by approximately 4% or approximately 3,000 tons on a dry-equivalent basis for the nine month period ended September 30, 2009 compared to the same period of 2008.

 

In 2009, we experienced a significant increase in our other sales revenue as a result of the fact that we started selling corn oil separate from our distiller’s grains.  We completed installation of this corn oil separation equipment during the first quarter of our 2009 fiscal year.  As a result, we had no corn oil sales revenue during 2008.  For the nine month period ended September 30, 2009, we experienced total corn oil sales of approximately $469,000.

 

Cost of Revenues.  Our total cost of revenue decreased significantly for the first nine months of 2009 compared to the same period of 2008.  We attribute this decrease primarily with commodity prices generally that decreased from highs we experienced during the middle of 2008.  Our cost of revenue related to corn expense, including derivative instrument costs, decreased by approximately 20% for the nine months ended September 30, 2009 compared to the same period of 2008.  In real terms this was a decrease of approximately $12.5 million.  The average price we paid per bushel of corn, including derivative instrument costs, was approximately $3.86 per bushel for the first nine months of 2009 compared to approximately $5.03 per bushel for the same period of 2008.  We also experienced a decrease in our natural gas costs of approximately 49% for the nine months ended September 30, 2009 compared to the same period of 2008.  The average price we paid for natural gas for the first nine months of 2009 was approximately $6.10 per MMBtu compared to approximately $11.73 per MMBtu for the comparable period of 2008.

 

Due to increased production by the ethanol plant during the first nine months of 2009 compared to the same period of 2008, we experienced an approximately 4% increase in our corn consumption, or approximately 463,000 bushels of corn.  However, our total natural gas consumption for the first nine months of 2009 was approximately 1% lower compared to the same period of 2008, a decrease of approximately 10,000 MMBtu.

 

Our total cost of revenues was significantly lower for the first nine months of 2009 compared to the same period of 2008 as a result of significant derivative instrument losses we experienced in 2008.  These losses were primarily the result of a significant decrease in commodities prices that occurred following highs in the middle of 2008.  These losses significantly increased our cost of revenues for the 2008 period.

 

General and Administrative Expense.  Our general and administrative expenses decreased significantly for the nine month period ended September 30, 2009 compared to the same period of 2008.  We attribute this significant decrease to decreased wages and bonuses we paid to our employees as well as decreased environmental compliance costs, professional fees and business promotions for the first nine months of 2009 compared to the same period of 2008.

 

Other Expense.  Our total other expense for the nine month period ended September 30, 2009 increased significantly compared to the same period of 2008, primarily as a result of a reduction in the value of our investment in RPMG, our ethanol, distiller’s grains and corn oil marketer, which we recorded during the first fiscal quarter of 2009.  We also experienced increased interest expenses due to increased borrowing on our line of credit for the nine month period ended September 30, 2009 compared to the same period of 2008.

 

Changes in Financial Condition for the Nine Months Ended September 30, 2009

 

We experienced a significant decrease in our current assets at September 30, 2009 compared to December 31, 2008.  We had more cash on hand at December 31, 2008 compared to September 30, 2009 primarily as a result of our corn providers deferring payments for corn deliveries until January 2009 which resulted in an increase in our accounts payable and our cash on hand.

 

We experienced a significant decrease in the value of our inventory at September 30, 2009 compared to December 31, 2008, primarily as a result of a significant decrease in the value of our raw materials, somewhat offset by a smaller increase in the value of our finished goods.  We attribute the decrease in the value of our raw materials inventory at September 30, 2009 compared to December 31, 2008 with a significant decrease in the amount of corn

 

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we had on hand at September 30, 2009 compared to December 31, 2008.  We attribute the increase in the value of our finished goods inventory at September 30, 2009 compared to December 31, 2008 with a combination of having more finished goods on hand and higher prices at September 30, 2009 compared to December 31, 2008.

 

At September 30, 2009, we had significantly more cash due from our commodities broker compared to December 31, 2008.  Our commodities broker maintains a margin account which is used to offset losses that we may experience on our derivative instruments.  During October 2008, we liquidated all of our derivative instrument positions in order to preserve our cash position.  Further, as of December 31, 2008, we predominantly had option contracts through our commodities broker which did not require us to maintain a significant amount of cash in our margin account.  Our futures and options contracts represented an asset on our balance sheet at both September 30, 2009 and December 31, 2008.  However, the asset value of these futures and options was lower at September 30, 2009 compared to December 31, 2008.

 

We experienced a decrease in our prepaid expenses at September 30, 2009 compared to December 31, 2008 as a result of an insurance payment that is made in October each year that represents our insurance premium for the entire year.  This prepaid insurance premium is amortized into our income statement throughout the year.

 

We experienced a slight increase in the value of our equipment at September 30, 2009 compared to December 31, 2008 as a result of the installation of our corn oil extraction equipment.  This increase was offset by a larger increase in our accumulated depreciation as of September 30, 2009 compared to December 31, 2008, which resulted in a decrease in the net value of our property and equipment.

 

Our current liabilities were lower at September 30, 2009 compared to December 31, 2008.  We experienced a significant decrease in our accounts payable at September 30, 2009 compared to December 31, 2008 as a result of our corn suppliers seeking to defer payment for corn deliveries at the end of 2008 until early January 2009.  This resulted in a larger than normal amount of accounts payable at December 31, 2008.  The amount of accounts payable at September 30, 2009 is comparable to what we typically have outstanding.

 

We experienced a significant decrease in our accrued liabilities at September 30, 2009 compared to December 31, 2008 as a result of a decrease in the lower of cost or market impairment adjustment that we had on our balance sheet at December 31, 2008.  We had a lower of cost or market impairment related to our corn forward purchases of approximately $2.7 million on December 31, 2008, and we had a lower of cost or market impairment of approximately $1.6 million for our corn forward purchases at September 30, 2009.

 

At September 30, 2009, we had a significantly larger liability associated with our derivative financial instruments compared to December 31, 2008.  This was a result of changes in the price of corn which resulted in our future corn purchase contracts creating a larger liability on our balance sheet.  When the market price of corn decreases in relation to the amount we agreed to pay for corn which will be delivered in the future, this creates a liability on our balance sheet until that corn is actually delivered and used.  We also experienced an increase in the current amount of our notes payable which represents the portion of our loans which will be paid within one year.  This was a result of our increased borrowing during the beginning of our 2009 fiscal year.

 

We experienced an increase in the amount of our long-term liabilities at September 30, 2009 compared to December 31, 2008 as a result of issuing a significant amount of subordinated debt in the early part of our 2009 fiscal year for working capital and to help offset the cost of our corn oil extraction equipment.  Our other long-term liability was larger at September 30, 2009 compared to December 31, 2008 as a resulted of increases in the projected repair costs associated with our leased railcars.  We anticipate being required to repair damage to certain railcars that we are leasing when the leases expire in 2010.  We are including this anticipated cost as a long-term liability on our balance sheet.

 

Liquidity and Capital Resources

 

Our main sources of liquidity are cash from our continuing operations and amounts we have available to draw on our revolving lines of credit.  As a result of unfavorable operating conditions we experienced during the end of our 2008 fiscal year and the beginning on our 2009 fiscal year, we raised additional subordinated debt financing in order to provide more working capital for our operations and to supplement our liquidity.  Management does not

 

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