LAKE AREA CORN PROCESSORS LLC - Quarter Report: 2010 September (Form 10-Q)

Table of Contents

 

 

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, 2010.

 

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 15, 2010, there were 29,620,000 membership units outstanding.

 

 

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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	16
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	28
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	28
ITEM 4. (REMOVED AND RESERVED)	28
ITEM 5. OTHER INFORMATION	28
ITEM 6. EXHIBITS	28
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,
		2010			2009*
ASSETS
CURRENT ASSETS
Cash		$	236,647		$	365,066
Accounts receivable		3,581,833			3,456,380
Other receivables		228,961			276,273
Inventory		8,751,909			7,580,174
Due from broker		4,241,101			1,494,653
Derivative financial instruments		111,975			—
Prepaid expenses		101,743			167,954
Total current assets		17,254,169			13,340,500
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			40,768,265
		52,198,573			52,198,573
Less accumulated depreciation		(21,792,581		)	(19,752,594		)
Net property and equipment		30,405,992			32,445,979
OTHER ASSETS
Goodwill		10,395,766			10,395,766
Investments		2,541,326			2,345,300
Other		259,194			97,675
Total other assets		13,196,286			12,838,741
		$	60,856,447		$	58,625,220

 

* 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,
		2010			2009*
LIABILITIES AND MEMBERS’ EQUITY
CURRENT LIABILITIES
Oustanding checks in excess of bank balance		$	1,349,371		$	285,804
Accounts payable		2,261,282			6,245,418
Accrued liabilities		822,821			1,045,279
Derivative financial instruments		2,826,300			610,991
Short term notes payable		1,458,000			—
Current portion of guarantee payable		80,611			52,485
Current portion of notes payable		2,082,443			2,727,740
Total current liabilities		10,880,828			10,967,717
LONG-TERM LIABILITIES
Notes payable, net of current maturities		1,173,441			3,609,203
Guarantee payable, net of current portion		147,793			147,793
Other		197,837			166,600
Total long-term liabilities		1,519,071			3,923,596
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		33,550,148			28,827,507
Total members’ equity		48,456,548			43,733,907
		$	60,856,447		$	58,625,220

 

* 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,
		2010			2009			2010			2009
REVENUES		$	24,502,954		$	20,705,138		$	67,587,399		$	64,167,144
COST OF REVENUES		22,586,663			19,450,052			60,611,330			61,843,069
GROSS PROFIT		1,916,291			1,255,086			6,976,069			2,324,075
OPERATING EXPENSES		679,107			686,714			2,147,119			2,136,319
INCOME FROM OPERATIONS		1,237,184			568,372			4,828,950			187,756
OTHER INCOME (EXPENSE)
Interest and other income		5,425			15,388			21,735			31,883
Equity in net income(loss) of investment		51,702			(2,317		)	196,026			(288,058		)
Interest and other expense		(81,198		)	(205,892		)	(324,071		)	(623,398		)
Total other (expense)		(24,071		)	(192,821		)	(106,310		)	(879,573		)
NET INCOME (LOSS)		$	1,213,113		$	375,551		$	4,722,640		$	(691,817	)
BASIC AND DILUTED EARNINGS (LOSS) PER UNIT		$	0.04		$	0.01		$	0.16		$	(0.02	)
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

 

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, 2010 AND 2009

 

		2010			2009
OPERATING ACTIVITIES
Net income (loss)		$	4,722,640		$	(691,817	)
Changes to net income (loss) not affecting cash
Depreciation and amortization		2,073,283			2,078,917
Equity in net (income) loss of investments		(196,026		)	288,057
Unrealized loss on purchase commitments		—			(1,121,204		)
Lower of cost or market adjustment on inventory		—			—
(Increase) decrease in
Receivables		(78,140		)	175,950
Inventory		(1,171,734		)	1,420,676
Prepaid expenses		66,211			204,778
Derivative financial instruments and due from broker		(643,115		)	445,457
Increase (decrease) in
Accounts payable		(3,984,135		)	(4,197,274		)
Accrued liabilities		(191,221		)	166,947
NET CASH FROM (USED FOR) OPERATING ACTIVITIES		597,763			(1,229,513		)
INVESTING ACTIVITIES
Change in other assets		(47,712		)	—
Purchase of property and equipment		—			(1,033,329		)
NET CASH USED FOR INVESTING ACTIVITIES		(47,712		)	(1,033,329		)
FINANCING ACTIVITIES
Increase in outstanding checks in excess of bank balance		1,063,567			100,953
Short-term notes payable issued		1,458,000			—
Long-term notes payable issued		—			3,339,000
Principal payments on long-term notes payable		(3,200,037		)	(1,516,638		)
NET CASH FROM (USED FOR) FINANCING ACTIVITIES		(678,470		)	1,923,315
NET DECREASE IN CASH		(128,419		)	(339,527		)
CASH AT BEGINNING OF PERIOD		365,066			488,517
CASH AT END OF PERIOD		$	236,647		$	148,990
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest		$	434,524		$	511,797

 

See Notes to Unaudited Consolidated Financial Statements

 

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LAKE AREA CORN PROCESSORS, LLC

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2010 AND 2009

 

NOTE 1 -         NATURE OF OPERATIONS

 

Principal Business Activity

 

Lake Area Corn Processors, LLC and subsidiary (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). 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, 2010 and 2009 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 audited financial statements for the year ended December 31, 2009, contained in the annual report on Form 10-K  for 2009.

 

Principles of Consolidation

 

The consolidated financial statements of the Company include the accounts of its wholly owned 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 its customers.  Collectability of revenue is reasonably assured based on historical evidence of collectability between Dakota Ethanol and its customers.  Interest income is recognized as earned.

 

Shipping costs incurred by the Company in the sale of ethanol, dried distillers grains and corn oil are not specifically identifiable and as a result, revenue from the sale of these products is recorded based on the net selling price reported to the Company from the marketer.

 

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 dried distiller’s grains are classified in net revenues.  Shipping costs on modified and wet distiller’s grains are included in cost of revenues.  Shipping costs were approximately $442,000 and $122,000 for the nine and three months ended September 30, 2010, respectively.  Shipping costs were approximately $642,000 and $160,000 for the nine and three months ended September 30, 2009, respectively.

 

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LAKE AREA CORN PROCESSORS, LLC

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2010 AND 2009

 

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, 2010, we are committed to purchasing 3.6 million bushels of corn on a forward contract basis with an average price of $3.73 per bushel, of which 200,000 bushels are subject to derivative accounting treatment and 3.4 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.  Dakota Ethanol has a derivative financial instrument asset of approximately $112,000 related to the forward contracted purchases of corn.  The corn purchase contracts represent 23% of the annual corn usage.

 

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, 2010, we are committed to purchasing 180,000 MMBtu’s of natural gas with an average price of $4.16 per MMBtu.  We account for these transactions as normal purchases, and accordingly, do not mark these transactions to market.  The natural gas purchase contracts represent 12% of the annual natural gas usage for the next twelve months.

 

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

 

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LAKE AREA CORN PROCESSORS, LLC

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2010 AND 2009

 

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.

 

Derivatives not designated as hedging instruments at September 30, 2010 and December 31, 2009 were as follows:

 

		Balance Sheet		September 30,			December 31,
		Classification		2010			2009*
Futures and options contracts		(Current Liabilities)		$	(2,826,300	)	$	(551,420	)
Forward contracts		Current Assets		$	111,975		$	—
Forward contracts		(Current Liabilities)		$	—		$	(59,571	)

 

* Derived from audited financial statements

 

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.

 

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LAKE AREA CORN PROCESSORS, LLC

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2010 AND 2009

 

		Statement of Operations		Three Months Ended September 30,
		Classification		2010			2009
Net realized and unrealized gains (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		$	(5,010,977	)	$	550,443
Forward contracts		Cost of Revenues		$	739,384		$	(1,354,253	)

 

		Statement of Operations		Nine Months Ended September 30,
		Classification		2010			2009
Net realized and unrealized gains (losses) related to sales contracts:
Futures and options contracts		Revenues		$	443,149		$	(277,298	)
Net realized and unrealized gains (losses) related to purchase contracts:
Futures and options contracts		Cost of Revenues		$	(2,164,572	)	$	1,030,903
Forward contracts		Cost of Revenues		$	171,546		$	596,344

 

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.

 

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LAKE AREA CORN PROCESSORS, LLC

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2010 AND 2009

 

Recent Accounting Pronouncements

 

In January 2010, the FASB issued an update to “Fair Value Measurements and Disclosures (Topic 820), Improving Disclosures about Fair Value Measurements.”  The update requires new disclosures about transfers in and out of Levels 1 and 2 and Activity in Level 3.  The update also provides clarification of disclosures about the level of disaggregation and the inputs and valuation techniques used.

 

The Company is evaluating the effect, if any, that the adoption of this new accounting standard will have on its results of operations, financial position, and the related disclosures.

 

NOTE 3 -         INVENTORY

 

Inventory consisted of the following as of September 30, 2010 and December 31, 2009: 

 

		September 30,			December 31,
		2010			2009*
Raw materials		$	5,989,978		$	5,049,737
Finished goods		1,196,509			855,745
Work in process		586,839			679,817
Parts inventory		978,583			994,875
		$	8,751,909		$	7,580,174

 

* Derived from audited financial statements

 

Included in inventory is a lower of cost or market adjustment of approximately $0 and $212,000 at September 30, 2010 and December 31, 2009 respectively.

 

NOTE 4 -         SHORT-TERM NOTE PAYABLE

 

On May 13, 2010, Dakota Ethanol renewed a revolving promissory note from First National Bank of Omaha in the amount of $5,000,000.  The note expires on May 12, 2011 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 350 basis points above the 1 month LIBOR rate (4.50 percent at September 30, 2010).  The rate is subject to a floor of 4.5 percent.    There is a commitment fee of 1/2 percent on the unused portion of the $5,000,000 availability. In addition, the bank draws the checking account balance to a minimum balance on a daily basis. The excess cash pays down or the shortfall is drawn upon the note as needed.  The note is collateralized by the ethanol plant, its accounts receivable and inventories.  On September 30, 2010 Dakota Ethanol had $1,458,000 outstanding and $3,542,000 available to be drawn on the revolving promissory note.  On December 31, 2009, Dakota Ethanol had $0 outstanding and $4,000,000 available to be drawn on the revolving promissory note.

 

NOTE 5 -         LONG-TERM NOTES PAYABLE

 

Dakota Ethanol has two notes payable to First National Bank of Omaha, Nebraska (the Bank) (Term Notes 2 and 5).

 

As part of the note payable agreements, Dakota Ethanol is subject to certain restrictive covenants establishing minimum reporting requirements, ratios, working capital and net worth requirements. The notes are collateralized by the ethanol plant and equipment, its accounts receivable and inventories. Term note 2 is subject to prepayment penalties based on the cost incurred by the Bank to break its fixed interest rate commitment.

 

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LAKE AREA CORN PROCESSORS, LLC

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2010 AND 2009

 

The balance of Term Note 2 is due and payable in quarterly installments of $581,690 through September 1, 2011. Interest on outstanding principal balances will accrue at a fixed rate of 9 percent.  In July 2010, Dakota Ethanol paid off the outstanding principal on Term Note 2.

 

On May 13, 2010, Dakota Ethanol restructured Term Note 5.  Term Note 5 is a reducing revolving note with an availability of $5,000,000.  Interest on outstanding principal balances will accrue at 400 basis points above the 1 month LIBOR rate (5.0 percent at September 30, 2010).  The rate is subject to a floor of 5.0 percent.  Dakota Ethanol may elect to borrow any principal amount repaid on Term Note 5 up to $5,000,000 subject to the terms of the agreement. Should Dakota Ethanol elect not to utilize this feature, the lender will assess an unused commitment fee of 1/2 percent on the unused portion of the note.  Term Note 5 has a reducing feature through which the available amount of the note is reduced by $1,000,000 on the anniversary of the note.  The note matures on May 1, 2013.  On September 30, 2010, Dakota Ethanol had $0 outstanding and $5,000,000 available to be drawn on Term Note 5.  On December 31, 2009, Dakota Ethanol had $0 outstanding and $5,000,000 available to be drawn on Term Note 5.

 

During December 2008, Dakota Ethanol issued a note payable related to the purchase of land adjacent to the plant site.  The note was issued for $450,000.  The note matures on December 1, 2012.  The note is payable in annual installments of $112,500 plus interest.  Interest on outstanding principal balances will accrue at a fixed rate of 7.0 percent.

 

Dakota Ethanol 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.  We issued $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.

 

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.

 

We are in compliance with our financial covenants as of September 30, 2010.

 

The balances of the notes payable are as follows:

 

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LAKE AREA CORN PROCESSORS, LLC

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2010 AND 2009

 

		September 30,			December 31,
		2010			2009*
Note payable to First National Bank, Omaha Term Note 2		$	—		$	2,864,121
Note payable - Land		337,500			337,500
Note payable - Subordinated notes		1,439,000			1,439,000
Note payable - REED		756,382			895,586
Note payable - FDDC		151,911			179,394
Note payable -Guardian Eagle		432,694			621,342
Note payable -Other		138,397			—
		3,255,884			6,336,943
Less current portion		(2,082,443		)	(2,727,740		)
		$	1,173,441		$	3,609,203

 

* Derived from audited financial statements

 

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

 

Years Ending September 30,		Amount
2011		$	2,082,443
2012		544,775
2013		397,658
2014		209,210
2015		21,798

 

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.

 

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

 

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LAKE AREA CORN PROCESSORS, LLC

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2010 AND 2009

 

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, 2010 and December 31, 2009, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 

September 30, 2010		Total			Level 1			Level 2			Level 3
Assets:
Derivative financial instruments		$	111,975		$	—		$	111,975		$	—
Liabilities:
Derivative financial instruments		$	2,826,300		$	2,826,300		$	—		$	—

 

December 31, 2009*
Liabilities:
Derivative financial instruments		$	610,991		$	551,420		$	59,571		$	—

 

* Derived from audited financial statements

 

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, 2010.

 

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, 2010 of $3,484,288 had an estimated fair value of approximately $3,459,553 based on estimated interest rates for comparable debt.  The carrying amount and fair value were $6,537,221 and $6,602,314 respectively at December 31, 2009.

 

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LAKE AREA CORN PROCESSORS, LLC

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2010 AND 2009

 

NOTE 7 -         RELATED PARTY TRANSACTIONS

 

Dakota Ethanol owns a 8% interest in RPMG, in which Dakota Ethanol has entered into marketing agreements for the exclusive rights to market, sell and distribute the entire ethanol and dried distiller’s grains inventories produced by Dakota Ethanol.  The marketing fees are included in net revenues.

 

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

 

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2010			2009			2010			2009
Sales ethanol		$	20,864,223		$	17,789,079		$	56,553,530		$	52,842,925
Sales distiller’s grains		2,201,118			1,546,781			5,803,893			4,182,880
Marketing fees ethanol		53,203			52,452			160,196			158,247
Marketing fees distillers grains		25,503			33,088			69,257			76,584

 

		September 30,			December 31,
		2010			2009
Amounts due included in accounts receivable		$	3,199,348		$	2,973,282

 

NOTE 8 -         SUBSEQUENT EVENTS

 

During November 2010, the Company declared and paid a distribution to its members of $2,962,000, or $.10 per capital unit with a distribution date of November 12, 2010.

 

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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, 2010, 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, 2009, 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, distillers 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;
·		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. 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

 

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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, L.L.C.  Dakota Ethanol, L.L.C. 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, L.L.C. 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, distillers 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 have engaged RPMG, Inc. to market all of the ethanol and corn oil that we produce at the plant.  Further, RPMG, Inc. markets all of the distillers grains that we produce that we do not market internally to local customers.

 

United States ethanol production is currently benefited by a 54 cent per gallon tariff imposed on ethanol imported into the United States.  However, the 54 cent per gallon tariff is set to expire at the end of the 2010 calendar year.  Elimination of the tariff could lead to the importation of ethanol produced in other countries, especially in areas of the United States that are easily accessible by international shipping ports.  Ethanol imported from other countries may be a less expensive alternative to domestically produced ethanol, especially if corn prices continue to increase, and may affect our ability to sell our ethanol profitably.

 

Ethanol production in the United States is also benefited by various tax incentives.  The most significant of these tax incentives is the federal Volumetric Ethanol Excise Tax Credit (VEETC).  VEETC provides a volumetric ethanol excise tax credit of 4.5 cents per gallon of gasoline that contains at least 10% ethanol (total credit of 45 cents per gallon of ethanol blended which is 4.5 divided by the 10% blend).  VEETC is scheduled to expire on December 31, 2010.  If this tax credit is not renewed, it likely would have a negative impact on the price of ethanol and demand for ethanol in the marketplace.

 

Demand for ethanol has been negatively affected by what is commonly referred to as the “blending wall.” The blending wall is an artificial cap on ethanol demand at approximately 13.5 billion gallons.  Currently, ethanol is blended with conventional gasoline for use in standard vehicles to create a blend which is 10% ethanol and 90% 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 per year.

 

In order to expand demand for ethanol and meet the requirements of the Federal Renewable Fuels Standard (RFS), the ethanol industry has been pushing for an increase in the percentage of ethanol that can be used in standard (non-flex fuel) vehicles.  Recently, the EPA allowed the use of E15, gasoline which is blended at a rate of 15% ethanol and 85% gasoline, in vehicles manufactured in the model year 2007 and later.  The EPA is expected to make a ruling on allowing E15 for use in vehicles produced in model year 2001 and later by the end of 2010.  However, management believes that many gasoline retailers will refuse to provide E15 due to the fact that not all standard vehicles will be allowed to use E15 and due to the labeling requirements the EPA may impose.  The EPA is considering instituting labeling requirements associated with E15 which may unfairly discourage consumers from purchasing E15.  As a result, the approval of E15 may not significantly increase demand for ethanol.  In addition to E15, the ethanol industry is pushing the use of an intermediate blend of 12% ethanol and 88% gasoline called E12.  Management believes that E12 may be more beneficial to the ethanol industry than E15 because many believe that E12 could be approved for use in all standard vehicles.  Management believes this will make it easier for retailers to supply E12 compared to E15.

 

The USDA recently announced that it will provide financial assistance to help implement more “blender pumps” in the United States in order to increase demand for ethanol and to help offset the cost of introducing mid-

 

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level ethanol blends into the United States retail gasoline market.  A blender pump is a gasoline pump that can dispense a variety of different ethanol/gasoline blends.  Blender pumps typically can dispense E10, E20, E30, E40, and E85.  Blender pumps create the different ethanol/gasoline blends by internally mixing ethanol and gasoline which are held in separate tanks at the retail gas stations.  Many in the ethanol industry believe that increased use of blender pumps will increase demand for ethanol by allowing gasoline retailers to provide various mid-level ethanol blends in a cost effective manner and allowing consumers to purchase more ethanol through these mid-level blends.  However, blender pumps cost approximately $25,000 each, so it may take time before they become widely available in the retail gasoline market.

 

In February 2010, the EPA issued new regulations governing the Renewable Fuels Standard (RFS), which new regulations are commonly referred to as RFS2.  The most controversial part of RFS2 involves the lifecycle analysis of greenhouse gas emissions.  Specifically, the EPA adopted rules to determine which renewable fuels provided sufficient reductions in greenhouse gases, compared to conventional gasoline, to qualify as a renewable fuel under the RFS program.  RFS2 establishes a tiered approach, where regular renewable fuels are required to accomplish a 20% greenhouse gas reduction compared to gasoline, advanced biofuels and biomass-based biodiesel must accomplish a 50% reduction in greenhouse gases, and cellulosic biofuels must accomplish a 60% reduction in greenhouse gases.  Any fuels that fail to meet this standard cannot be used by fuel blenders to satisfy their obligations under the RFS program.  The scientific method of calculating these greenhouse gas reductions has been a contentious issue.  Many in the ethanol industry were concerned that corn based ethanol would not meet the 20% greenhouse gas reduction requirement based on certain parts of the environmental impact model that many in the ethanol industry believe is scientifically suspect.  However, RFS2 as adopted by the EPA provides that corn-based ethanol from modern ethanol production processes does meet the definition of a renewable fuel under the RFS program.  Our ethanol plant was grandfathered into the RFS due to the fact that it was constructed prior to the effective date of the lifecycle greenhouse gas requirement and is not required to prove compliance with the lifecycle greenhouse gas reductions.  In addition, certain provisions of RFS2 as adopted by the EPA may disproportionately benefit ethanol produced from sugarcane.  This could make sugarcane based ethanol, which is primarily produced in Brazil, more competitive in the United States ethanol market.  If this were to occur, it could reduce demand for the corn based ethanol that we produce.

 

In addition to RFS2 which included greenhouse gas reduction requirements, in 2009, California passed a Low Carbon Fuels Standard (LCFS).  The California LCFS requires that renewable fuels used in California must accomplish certain reductions in greenhouse gases, measured using a lifecycle analysis similar to RFS2.  Management believes that this lifecycle analysis is based on unsound scientific principles that unfairly disadvantages corn based ethanol.  Management believes that these new regulations may preclude corn based ethanol from being used in California.  California represents a significant ethanol demand market.  If we are unable to supply ethanol to California, it could significantly reduce demand for the ethanol we produce.  Several lawsuits have been filed challenging the California LCFS.

 

Following our quarter end, on November 9, 2010, our board of directors declared a distribution of $0.10 per unit to our members of record as of October 1, 2010.  Management anticipates that this distribution will be paid in the middle of November 2010.

 

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Results of Operations for the Three Months Ended September 30, 2010 and 2009

 

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, 2010 and 2009:

 

		September 30, 2010  (unaudited)					September 30, 2009  (unaudited)
Income Statement Data		Amount			%		Amount			%
Revenues		$	24,502,954		100.0		$	20,705,138		100.0
Cost of Revenues		22,586,663			92.2		19,450,052			94.0
Gross Profit		1,916,291			7.8		1,255,086			6.1
Operating Expenses		679,107			2.8		686,714			3.3
Income from Operations		1,237,184			5.0		568,372			2.7
Other Income (Expense)		(24,071		)	0.1		(192,821		)	0.9
Net Income		1,213,113			5.0		375,551			1.8

 

Revenues

 

Our ethanol revenue increased by approximately 19% for the third quarter of 2010 compared to the same period of 2009, which in real terms equaled an increase of approximately $3.4 million.  Our total distillers grains revenue increased by approximately 12% for the third quarter of 2010 compared to the same period of 2009.  In real terms, this equaled an increase of approximately $312,000 in total distillers grains revenue.  Our other sales increased by approximately $133,000 for the third quarter of 2010 compared to the same period of 2009, primarily related to our corn oil sales.

 

Ethanol

 

Our ethanol revenue increased during the third quarter of 2010 compared to the third quarter of 2009 due to increased market ethanol prices and a slight increase in the gallons of ethanol that we sold.  The average price we received per gallon of ethanol during the third quarter of 2010 was approximately 17% higher than the third quarter of 2009, an increase of approximately $0.26 per gallon of ethanol.  Management attributes this increase in the average price we received per gallon of ethanol with an increase in corn prices during the 2010 period and a generally improved energy market.  The total gallons of ethanol we sold during the third quarter of 2010 was approximately 1% greater, an increase of approximately 167,000 gallons of ethanol, compared to the total gallons of ethanol we sold during the third quarter of 2009.

 

Management anticipates that ethanol prices for the remaining quarter of 2010 will remain strong.  Management believes the ethanol industry must continue to grow demand for ethanol in order to offset anticipated increases in ethanol supply.  The ethanol plant is currently operating at capacity.  Management anticipates that ethanol production will continue at operating capacity for the remaining quarter of 2010.

 

Distillers Grains

 

For the third quarter of 2010, total distillers grains revenue increased by approximately 12% compared to the same period of 2009.  This increase was primarily the result of increased market distillers grains prices and increased distillers grains sales.  The average price we received per ton of dried distillers grains during the third quarter of 2010 was approximately 11% higher than during the third quarter of 2009, an increase of approximately $9 per ton of dried distillers grains.  Similarly, the average price we received for our modified/wet distillers grains was approximately 1% higher during the third quarter of 2010 compared to the third quarter of 2009, an increase of

 

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approximately $1 per dry equivalent ton of modified/wet distillers grains.  Management attributes these increases in the average prices we received for our distillers grains with increased corn prices during the 2010 period along with strong distillers grains export demand.  Recently, distillers grains exports have increased, primarily to countries such as Mexico, Canada and China, which has positively impacted market distillers grains prices.

 

During the third quarter of 2010, we sold approximately 24% more tons of dried distillers grains than we sold in the third quarter of 2009.  This was an increase of approximately 4,000 tons of dried distillers grains.  This increase in dried distillers grains sales was related to market conditions that made it more favorable to sell our distillers grains in the dried form.  As a result, during the third quarter of 2010, we sold approximately 2,000 fewer tons (on a dry-equivalent basis) of modified/wet distillers grains compared to the third quarter of 2009.  This was a decrease of approximately 14%.  This caused a shift in the relative mix of distillers grains we sold during the third quarter of 2010 compared to the third quarter of 2009.  During the 2009 period, we sold more distillers grains in the modified/wet form compared to the dried form.  However, as a result of increased demand for dried distillers grains, we sold more distillers grains in the dried form during the third quarter of 2010 compared to the modified/wet form.

 

Corn Oil

 

During the third quarter of 2010, we sold approximately 1,857,000 pounds of corn oil compared to approximately 1,260,000 pounds of corn oil during the third quarter of 2009.  This increase in the number of pounds of corn oil that we sold was the result of increases in the amount of time we operated our corn oil extraction equipment and improved operating efficiency during the third quarter of 2010 compared to the same period of 2009.  The average price we received for our corn oil during the third quarter of 2010 was approximately 11% higher than the price we received for the third quarter of 2009.  This was an increase of approximately $0.02 per pound of corn oil sold.  Management attributes this increase in corn oil prices with higher prices in the energy and commodity markets.  Management anticipates that corn oil prices will remain relatively stable in the next several months.  We are continuing to refine our operation of the corn oil extraction equipment and anticipate that this may lead to increased corn oil production in the future.

 

Cost of Revenues

 

Our cost of revenues increased in the third quarter of 2010 compared to the third quarter of 2009, primarily as a result of increased corn costs, which was partially offset by a slight decrease in our natural gas costs.

 

Corn

 

Our total cost of corn was approximately 24% higher for the third quarter of 2010 compared to the same period of 2009.  Our average price per bushel of corn during the third quarter of 2010 was approximately $0.81 per bushel greater than for the third quarter of 2009.  This was an increase of approximately 24%.  Management attributes this increase in corn costs with increased market corn prices due to reductions in anticipated corn yields during the 2010 growing season.  The USDA issued crop reports during our third quarter of 2010 that reduced the anticipated corn yield and reduced anticipated carryover.  These crop reports resulted in significant increases in corn prices during our third quarter of 2010.  We anticipate that our corn costs will continue at the higher levels.  We consumed approximately 25,000 more bushels of corn during the third quarter of 2010 compared to the third quarter of 2009 which further increased our cost of revenues.

 

Natural Gas

 

Our total cost of revenues associated with natural gas was approximately 3% lower for the third quarter of 2010 compared to the third quarter of 2009.  Our average natural gas price for the third quarter of 2010 was approximately $4.75 per mmBtu compared to approximately $5.25 per mmBtu for the third quarter of 2009, a decrease of approximately 9%.  Management attributes this decrease in natural gas prices with sufficient natural gas supplies.  Management anticipates that natural gas prices will have seasonal increases, yet remain at levels lower than recent history.  However, prices may increase should the world economies continue to rebound which could result in increased natural gas demand.

 

Our natural gas consumption increased by approximately 7% during the third quarter of 2010 compared to

 

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the third quarter of 2009.  In real terms, this was an increase of approximately 24,000 mmBtu of natural gas for the third quarter of 2010 compared to the third quarter of 2009.  This increase in natural gas consumption was the result of increased dried distillers grains production by the ethanol plant during the third quarter of 2010 compared to the third quarter of 2009.  Production of dried distillers grains requires more natural gas than production of modified/wet distillers grains.  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 distillers grains as opposed to modified/wet distillers grains, we expect our natural gas consumption will increase as natural gas is used to fire our distillers grains dryers.

 

Operating Expenses

 

We did not experience any material changes in our operating expenses for the third quarter of 2010 compared to the third quarter of 2009.

 

Other Expense

 

Our total other expense was significantly lower during the third quarter of 2010 compared to the third quarter of 2009.  We paid significantly less interest during the third quarter of 2010 compared to the third quarter of 2009 as a result of our ongoing retirement of our long-term debt.  We also realized a greater equity interest in the net income of our investments during the third quarter of 2010 compared to the third quarter of 2009 due to our investment in RPMG.

 

Results of Operations for the Nine Months Ended September 30, 2010 and 2009

 

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, 2010 and 2009:

 

		September 30, 2010  (unaudited)					September 30, 2009  (unaudited)
Income Statement Data		Amount			%		Amount			%
Revenues		$	67,587,399		100.0		$	64,167,144		100.0
Cost of Revenues		60,611,330			89.7		61,843,069			96.4
Gross Profit		6,976,069			10.3		2,324,075			3.6
Operating Expenses		2,147,119			3.2		2,136,319			3.3
Income from Operations		4,828,950			7.1		187,756			0.3
Other Income (Expense)		(106,310		)	0.2		(879,573		)	1.4
Net Income (Loss)		4,722,640			7.0		(691,817		)	1.1

 

Revenues

 

Our total revenues increased for the nine month period ended September 30, 2010 compared to the same nine month period of 2009, primarily due to an increase in our ethanol revenue.  Our ethanol revenue increased by approximately 8% for the nine month period ended September 30, 2010 compared to the same period of 2009, which in real terms equaled an increase of approximately $4.2 million.  Our total distillers grains revenue decreased by approximately 15% for the nine month period ended September 30, 2010 compared to the same period of 2009.  In real terms, this equaled a decrease of approximately $1,547,000 in total distillers grains revenue.  Our other sales increased by approximately $698,000 for the nine month period ended September 30, 2010 compared to the same period of 2009, primarily related to our corn oil sales.

 

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