LAKE AREA CORN PROCESSORS LLC - Quarter Report: 2012 June (Form 10-Q)
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 fiscal quarter ended June 30, 2012 | |
o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
Commission file number 000-50254 | |
LAKE AREA CORN PROCESSORS, LLC | |||
(Exact name of registrant as specified in its charter) | |||
South Dakota | 46-0460790 | ||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||
46269 SD Highway 34 P.O. Box 100 Wentworth, South Dakota | 57075 | ||
(Address of principal executive offices) | (Zip Code) | ||
(605) 483-2676 | |||
(Registrant's telephone number, including area code) | |||
Securities registered pursuant to Section 12(b) of the Act: None | |||
Securities registered pursuant to Section 12(g) of the Act: Membership Units | |||
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 Website, 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).
x 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.
Large accelerated filer o | Accelerated filer o | |
Non-accelerated filer x | Smaller Reporting Company o | |
(Do not check if a smaller reporting company) | ||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes x No
As of August 14, 2012, there are 29,620,000 membership units of the registrant outstanding.
INDEX
Page No. | |
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LAKE AREA CORN PROCESSORS, LLC
Consolidated Balance Sheets (Unaudited)
June 30, 2012 | December 31, 2011* | ||||||
ASSETS | |||||||
CURRENT ASSETS | |||||||
Cash and cash equivalents | $ | 876,038 | $ | 11,225,659 | |||
Accounts receivable | 3,990,213 | 4,259,385 | |||||
Other receivables | 87,241 | 172,296 | |||||
Inventory | 12,679,696 | 10,680,451 | |||||
Due from broker | 4,087,107 | 907,349 | |||||
Derivative financial instruments | — | 29,263 | |||||
Prepaid expenses | 127,625 | 126,031 | |||||
Total current assets | 21,847,920 | 27,400,434 | |||||
PROPERTY AND EQUIPMENT | |||||||
Land | 676,097 | 676,097 | |||||
Land improvements | 2,665,358 | 2,665,358 | |||||
Buildings | 8,088,853 | 8,088,853 | |||||
Equipment | 39,172,503 | 39,097,266 | |||||
Construction in progress | 413,273 | — | |||||
51,016,084 | 50,527,574 | ||||||
Less accumulated depreciation | (25,350,482 | ) | (24,053,888 | ) | |||
Net property and equipment | 25,665,602 | 26,473,686 | |||||
OTHER ASSETS | |||||||
Goodwill | 10,395,766 | 10,395,766 | |||||
Investments | 3,003,386 | 2,972,091 | |||||
Other | 117,553 | 150,875 | |||||
Total other assets | 13,516,705 | 13,518,732 | |||||
TOTAL ASSETS | $ | 61,030,227 | $ | 67,392,852 | |||
* Derived from audited financial statements.
See Notes to Unaudited Consolidated Financial Statements.
3
June 30, 2012 | December 31, 2011* | ||||||
LIABILITIES AND MEMBERS’ EQUITY | |||||||
CURRENT LIABILITIES | |||||||
Outstanding checks in excess of bank balance | $ | 888,833 | $ | — | |||
Accounts payable | 3,153,997 | 10,778,861 | |||||
Accrued liabilities | 484,516 | 763,526 | |||||
Derivative financial instruments | 2,941,015 | 1,226,705 | |||||
Short-term notes payable | 1,430,000 | — | |||||
Current portion of guarantee payable | 52,145 | 52,145 | |||||
Current portion of notes payable | 281,727 | 387,489 | |||||
Total current liabilities | 9,232,233 | 13,208,726 | |||||
LONG-TERM LIABILITIES | |||||||
Notes payable, net of current maturities | 303,597 | 446,166 | |||||
Guarantee payable, net of current portion | 43,266 | 43,266 | |||||
Total long-term liabilities | 346,863 | 489,432 | |||||
COMMITMENTS AND CONTINGENCIES | |||||||
MEMBERS' EQUITY (29,620,000 units issued and outstanding) | 51,451,131 | 53,694,694 | |||||
TOTAL LIABILITIES AND MEMBERS' EQUITY | $ | 61,030,227 | $ | 67,392,852 | |||
* Derived from audited financial statements.
See Notes to Unaudited Consolidated Financial Statements.
4
LAKE AREA CORN PROCESSORS, LLC
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended June 30, 2012 | Three Months Ended June 30, 2011 | Six Months Ended June 30, 2012 | Six Months Ended June 30, 2011 | ||||||||||||
REVENUES | $ | 30,843,839 | $ | 37,159,150 | $ | 62,849,131 | $ | 72,400,807 | |||||||
COSTS OF REVENUES | 31,433,015 | 31,611,988 | 62,117,039 | 61,633,269 | |||||||||||
GROSS PROFIT (LOSS) | (589,176 | ) | 5,547,162 | 732,092 | 10,767,538 | ||||||||||
OPERATING EXPENSES | 759,221 | 725,979 | 1,527,393 | 1,524,149 | |||||||||||
INCOME (LOSS) FROM OPERATIONS | (1,348,397 | ) | 4,821,183 | (795,301 | ) | 9,243,389 | |||||||||
OTHER INCOME (EXPENSE) | |||||||||||||||
Interest and other income | 15,144 | 43,605 | 22,616 | 57,162 | |||||||||||
Equity in net income of investments | 11,754 | 48,958 | 31,295 | 112,091 | |||||||||||
Interest and other expense | (9,714 | ) | (41,096 | ) | (21,173 | ) | (105,498 | ) | |||||||
Total other income | 17,184 | 51,467 | 32,738 | 63,755 | |||||||||||
NET INCOME (LOSS) | $ | (1,331,213 | ) | $ | 4,872,650 | $ | (762,563 | ) | $ | 9,307,144 | |||||
BASIC AND DILUTED EARNINGS PER UNIT | $ | (0.04 | ) | $ | 0.16 | $ | (0.03 | ) | $ | 0.31 | |||||
WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING FOR THE CALCULATION OF BASIC & DILUTED EARNINGS PER UNIT | 29,620,000 | 29,620,000 | 29,620,000 | 29,620,000 | |||||||||||
DISTRIBUTIONS DECLARED PER UNIT | $ | 0.05 | $ | 0.10 | $ | 0.05 | $ | 0.10 | |||||||
See Notes to Unaudited Consolidated Financial Statements.
5
LAKE AREA CORN PROCESSORS, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30, 2012 | Six Months Ended June 30, 2011 | ||||||
OPERATING ACTIVITIES | |||||||
Net income (loss) | $ | (762,563 | ) | $ | 9,307,144 | ||
Changes to net income (loss) affecting cash and cash equivalents | |||||||
Depreciation and amortization | 1,329,915 | 1,397,799 | |||||
Equity in net income of investments | (31,295 | ) | (112,091 | ) | |||
Gain on sale of property and equipment | — | (9,300 | ) | ||||
(Increase) decrease in | |||||||
Receivables | 354,227 | (1,615,352 | ) | ||||
Inventory | (1,999,245 | ) | (2,012,252 | ) | |||
Prepaid expenses | (1,594 | ) | 7,542 | ||||
Derivative financial instruments and due from broker | (1,436,184 | ) | (599,557 | ) | |||
Increase (decrease) in | |||||||
Accounts payable | (7,624,865 | ) | (1,930,298 | ) | |||
Accrued and other liabilities | (279,010 | ) | (223,815 | ) | |||
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | (10,450,614 | ) | 4,209,820 | ||||
INVESTING ACTIVITIES | |||||||
Purchase of property and equipment | (488,510 | ) | — | ||||
Proceeds from sale of property and equipment | — | 9,300 | |||||
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | (488,510 | ) | 9,300 | ||||
FINANCING ACTIVITIES | |||||||
Increase in outstanding checks in excess of bank balance | 888,833 | 1,875,171 | |||||
Principal borrowings (payments) on short-term notes payable | 1,430,000 | (1,872,000 | ) | ||||
Principal payments on long-term notes payable | (248,330 | ) | (1,543,665 | ) | |||
Distributions paid to LACP members | (1,481,000 | ) | (2,962,000 | ) | |||
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | 589,503 | (4,502,494 | ) | ||||
NET (DECREASE) IN CASH | (10,349,621 | ) | (283,374 | ) | |||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 11,225,659 | 637,804 | |||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 876,038 | $ | 354,430 | |||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | |||||||
Cash paid during the period for interest | $ | 21,924 | $ | 220,481 | |||
See Notes to Unaudited Consolidated Financial Statements
6
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2012 and 2011
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 forty 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 although the Company believes that the disclosures are adequate to make the information not misleading.
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 three and six months ended June 30, 2012 and 2011 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, 2011, contained in the annual report on Form 10-K for 2011.
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. 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 distiller's grains and corn oil are not specifically identifiable and as a result, revenue from the sale of those 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 on modified and wet distiller's grains are included in cost of revenues.
Inventory Valuation
Ethanol inventory, raw materials, work-in-process, and parts inventory are valued using methods which approximate the lower of cost (first-in, first-out) or market. Distillers grains and related products are stated at net realizable value. 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.
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LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2012 and 2011
Investment in commodities contracts, derivative instruments and hedging activities
The Company is 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.
The Company is 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.
For transactions initiated prior to January 1, 2011, the Company applied the normal purchase and sales exemption under derivative accounting for forward purchases of corn. Corn purchase transactions initiated after December 31, 2010 are not exempted from the accounting and reporting requirements. As of June 30, 2012, the Company is committed to purchasing 3,700,000 bushels of corn on a forward contract basis with an average price of $6.09 per bushel. Dakota Ethanol has a derivative financial instrument liability of approximately $266,000 related to the forward contracted purchases of corn. The corn purchase contracts represent 21% of the annual plant corn usage.
The Company enters 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 June 30, 2012, we are committed to purchasing 240,000 MMBtu's of natural gas with an average price of $2.78 per MMBtu. We account for these transactions as normal purchases, and accordingly, do not mark these transactions to market. The natural gas purchases represent approximately 16% of the annual plant requirements.
The Company enters into short-term forward, option and futures contracts for corn and natural gas as a means of managing exposure to changes in commodity and energy prices. The Company enters 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, The Company uses 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 June 30, 2012 and December 31, 2011 were as follows:
Balance Sheet Classification | June 30, 2012 | December 31, 2011* | ||||||||
Forward contracts | Current Assets | $ | 576,056 | $ | 38,213 | |||||
Futures contracts | Current Assets | $ | 26,550 | $ | 1,012,825 | |||||
Forward contracts | (Current Liabilities) | $ | (842,096 | ) | $ | (1,264,918 | ) | |||
Futures contracts | (Current Liabilities) | $ | (2,701,525 | ) | $ | (983,562 | ) | |||
*Derived from audited financial statements.
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LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2012 and 2011
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 Income | Three Months Ended June 30, | |||||||||
Classification | 2012 | 2011 | ||||||||
Net realized and unrealized gains (losses) related to purchase contracts: | ||||||||||
Futures contracts | Cost of Revenues | $ | (1,209,496 | ) | $ | 4,297,045 | ||||
Forward contracts | Cost of Revenues | $ | 49,232 | $ | (3,448,197 | ) | ||||
Statement of Income | Six Months Ended June 30, | |||||||||
Classification | 2012 | 2011 | ||||||||
Net realized and unrealized gains (losses) related to purchase contracts: | ||||||||||
Futures contracts | Cost of Revenues | $ | (474,480 | ) | $ | 1,881,237 | ||||
Forward contracts | Cost of Revenues | $ | (758,378 | ) | $ | (3,126,680 | ) | |||
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.
Reclassifications
Certain amounts on the 2011 financial statements have been reclassified to conform to the current year classification. Such reclassifications had no effect on previously reported net income.
Recent Accounting Pronouncements
ASU 2012-02, Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. This ASU gives an entity the option in its annual indefinite-lived impairment test to first assess qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived asset is less than its carrying amount. The amendment is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Company does not expect that the adoption of the above guidance will have a material impact on the Company's consolidated financial position or results of operations.
9
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2012 and 2011
NOTE 3. INVENTORY
Inventory consisted of the following as of June 30, 2012 and December 31, 2011:
June 30, 2012 | December 31, 2011* | |||||||
Raw materials | $ | 9,212,068 | $ | 7,617,243 | ||||
Finished goods | 1,571,963 | 1,283,093 | ||||||
Work in process | 976,378 | 901,551 | ||||||
Parts inventory | 919,287 | 878,564 | ||||||
$ | 12,679,696 | $ | 10,680,451 | |||||
*Derived from audited financial statements.
NOTE 4. SHORT-TERM NOTE PAYABLE
Dakota Ethanol has a revolving promissory note from First National Bank of Omaha (FNBO) in the amount of $10,000,000. The note expires on May 1, 2013 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 315 basis points above the 1 month LIBOR rate and is not subject to a floor. The rate was 3.39% at June 30, 2012. There is a commitment fee of 0.25% on the unused portion of the $10,000,000 availability. In addition, the bank draws the checking account balance to a minimum balance on a daily basis. The excess cash pays down the balance or any shortfall is drawn upon the note as needed. The note is collateralized by the ethanol plant, its accounts receivable and inventory. On June 30, 2012, Dakota Ethanol had $1,430,000 outstanding and $8,570,000 available to be drawn on the revolving promissory note under the borrowing base. On December 31, 2011, Dakota Ethanol had $0 outstanding and $10,000,000 available to be drawn on the revolving promissory note under the borrowing base.
NOTE 5. LONG-TERM NOTES PAYABLE
Dakota Ethanol has a long-term note payable to FNBO (Term Note 5).
As part of the note payable agreement, Dakota Ethanol is subject to certain restrictive covenants establishing minimum reporting requirements, ratios, working capital and net worth requirements. The note is collateralized by the ethanol plant and equipment, its accounts receivable and inventory. We are in compliance with our financial covenants as of June 30, 2012.
Term Note 5 is a reducing revolving note with an availability of $5,000,000. Interest on the outstanding principal balance will accrue at 315 basis points above the 1 month LIBOR rate and is not subject to a floor. The rate was 3.39% at June 30, 2012. 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 0.25% 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 $500,000 on the anniversary of the note starting May 1, 2013. The note matures on May 1, 2017. On June 30, 2012 and December 31, 2011, Dakota Ethanol had $0 outstanding and $5,000,000 available to be drawn on Term Note 5.
Dakota Ethanol issued a note payable related to the purchase of land adjacent to the plant site. The note was originally issued for $450,000. The note was paid in full on February 8, 2012. The note was payable in annual installments of $112,500 plus interest. Interest on outstanding principal balances accrued at a fixed rate of 7.0%. The note was collateralized by the land.
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, originally for $1,000,000, has a fixed interest rate of 4.7%. The note requires monthly installments of $18,734 and matures on May 25, 2014. The note is secured by the oil extraction equipment.
10
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2012 and 2011
The note to FDDC, originally for $200,000, has a fixed interest rate of 5.5%. The note requires monthly installments of $3,820 and matures on May 22, 2014. The note is secured by the oil extraction equipment.
June 30, 2012 | December 31, 2011* | |||||||
Note payable to First National Bank, Omaha | ||||||||
Term Note 5 | $ | — | $ | — | ||||
Note payable - Land | — | 112,500 | ||||||
Note payable - REED | 411,878 | 513,210 | ||||||
Note payable - FDDC | 83,212 | 103,519 | ||||||
Note payable - Other | 90,234 | 104,426 | ||||||
585,324 | 833,655 | |||||||
Less current portion | (281,727 | ) | (387,489 | ) | ||||
$ | 303,597 | $ | 446,166 | |||||
*Derived from audited financial statements
Minimum principal payments for the next three years are estimated as follows:
Years Ending June 30, | Amount | |||
2013 | $ | 281,727 | ||
2014 | 273,811 | |||
2015 | 29,786 | |||
NOTE 6. FAIR VALUE MEASUREMENTS
The Company complies with 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 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
11
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2012 and 2011
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 June 30, 2012 and December 31, 2011, 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 | |||||||||||||
June 30, 2012 | ||||||||||||||||
Assets: | ||||||||||||||||
Derivative financial instruments, futures contracts | $ | 26,550 | $ | 26,550 | $ | — | $ | — | ||||||||
forward contracts | $ | 576,056 | $ | — | $ | 576,056 | $ | — | ||||||||
Liabilities: | ||||||||||||||||
Derivative financial instruments, futures contracts | $ | (2,701,525 | ) | $ | (2,701,525 | ) | $ | — | $ | — | ||||||
forward contracts | $ | (842,096 | ) | $ | — | $ | (842,096 | ) | $ | — | ||||||
December 31, 2011* | ||||||||||||||||
Assets: | ||||||||||||||||
Derivative financial instruments, futures contracts | $ | 1,012,825 | $ | 1,012,825 | $ | — | $ | — | ||||||||
forward contracts | $ | 38,213 | $ | — | $ | 38,213 | $ | — | ||||||||
Liabilities: | ||||||||||||||||
Derivative financial instruments, futures contracts | $ | (983,562 | ) | $ | (983,562 | ) | $ | — | $ | — | ||||||
forward contracts | $ | (1,264,918 | ) | $ | — | $ | (1,264,918 | ) | $ | — | ||||||
*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 June 30, 2012.
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 and cash equivalents (level 1), accounts receivable (level 2), other receivables (level 2), due from broker (level 1), accounts payable (level 2) and short-term debt (level 3) approximates fair value due to the short maturity of these instruments.
12
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2012 and 2011
The carrying amount of long-term obligations (level 3) at June 30, 2012 of $680,735 had an estimated fair value of approximately $681,808 based on estimated interest rates for comparable debt. The carrying amount of long-term obligations at December 31, 2011 of $929,066 had an estimated fair value of approximately $930,139 based on estimated interest rates for comparable debt.
NOTE 7. RELATED PARTY TRANSACTIONS
Dakota Ethanol has a 7% interest in RPMG, and 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.
Dakota Ethanol has 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. The marketing fees are included in net revenues.
Dakota Ethanol has entered into a corn oil marketing agreement with RPMG for the exclusive rights to market, sell and distribute the entire corn oil inventory 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 June 30, | Six Months Ended June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Sales ethanol | $ | 23,541,622 | $ | 30,338,079 | $ | 47,753,984 | $ | 59,940,385 | ||||||||
Sales distiller's grains and corn oil | 1,740,007 | 1,939,033 | 3,085,020 | 3,646,751 | ||||||||||||
Marketing fees ethanol | 45,911 | 57,036 | 92,624 | 117,791 | ||||||||||||
Marketing fees distillers grains and corn oil | 10,140 | 18,086 | 19,167 | 37,313 | ||||||||||||
June 30, 2012 | December 31, 2011 | |||||||||||||||
Amounts due included in accounts receivable | $ | 2,943,372 | $ | 3,142,616 | ||||||||||||
NOTE 8. COMMITMENTS, CONTINGENCIES AND AGREEMENTS
Construction Projects - Dakota Ethanol has entered into agreements for the construction of a platform scale and the upgrading of the plant control system . The total value of the projects is approximately $1,100,000. As of June 30, 2012, Dakota Ethanol has paid $413,000, with $687,000 yet to be completed. The scale is expected to be completed during the third quarter of 2012. The control system is expected to be completed during the fourth quarter of 2012. Dakota Ethanol plans to pay for the projects through short-term financing and cash flows from operations.
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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 six month periods ended June 30, 2012, compared to the same periods of the prior 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, 2011, included in the Company's Annual Report on Form 10-K for 2011.
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 and our annual report on Form 10-K for the fiscal year ended December 31, 2011.
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 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.
In May 2012, our board of managers declared and paid a distribution to our members of $0.05 per capital unit for a total distribution of $1,481,000.
The ethanol industry was previously impacted by the Volumetric Ethanol Tax Credit (VEETC) which is frequently referred to as the blenders' credit. This blenders' credit provided a tax credit of 45 cents per gallon of ethanol that was blended with gasoline. This incentive expired on December 31, 2011 and was not renewed. Management has not seen any significant effects of the expiration of VEETC and believes that the expiration will not have a significant effect on ethanol demand going forward provided gasoline prices remain high and the renewable fuels use requirement of the Federal Renewable Fuels Standard (RFS) is maintained. The RFS requires that a certain amount of renewable fuels, including ethanol, must be used in the United States each year. However, if the RFS is repealed, ethanol demand may be significantly impacted. Recently, there have been proposals in Congress to reduce or eliminate the RFS. Management does not believe that these proposals will be adopted in the near future. However, if the RFS is reduced or eliminated, the market price and demand for ethanol will likely decrease which could negatively impact our financial performance.
On May 7, 2012, we executed amended loan agreements with our primary lender, First National Bank of Omaha ("FNBO"). We executed a Third Amendment of First Amended and Restated Construction Loan Agreement, a Second Amended and Restated Promissory Note (Long Term Reducing Revolver) and a Second Amended and Restated Revolving Promissory Note (Operating
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Line of Credit). These amended loan agreements extended the maturity dates of our revolving lines of credit, removed the minimum interest rate provisions of our loans and reduced the fee we pay on the unused portions of our loans. These amended loan agreements were effective as of May 1, 2012.
We have been experiencing tight margins due to the fact that corn prices have been rising faster than ethanol prices. This has resulted in several ethanol producers reducing production or ceasing operations altogether. Further, some ethanol producers are experiencing difficulty securing the corn they require to operate which has caused some ethanol producers to reduce production or cease operating altogether. The tight margins resulted in us experiencing net losses during our 2012 fiscal year. Management attributes the recent net losses that we have experienced primarily to declining margins and losses we have experienced on our derivative instruments. If these tight margins persist, it may impact our ability to operate the ethanol plant. Management currently believes that we have secured enough corn to continue to operate until the new corn crop is harvested in the fall. Further, recent increases in ethanol prices have led to improved margins. The increases in the price of ethanol have been higher than the recent increases in corn prices.
Results of Operations
Comparison of the Fiscal Quarters Ended June 30, 2012 and 2011
The following table shows the results of our operations and the percentage of revenues, cost of revenues, operating expenses and other items to total revenues in our consolidated statements of operations for the fiscal quarters ended June 30, 2012 and 2011:
2012 | 2011 | |||||||||||||
Income Statement Data | Amount | % | Amount | % | ||||||||||
Revenue | $ | 30,843,839 | 100.0 | $ | 37,159,150 | 100.0 | ||||||||
Cost of Revenues | 31,433,015 | 101.9 | 31,611,988 | 85.1 | ||||||||||
Gross Profit (Loss) | (589,176 | ) | (1.9 | ) | 5,547,162 | 14.9 | ||||||||
Operating Expense | 759,221 | 2.5 | 725,979 | 2.0 | ||||||||||
Income (Loss) from Operations | (1,348,397 | ) | (4.4 | ) | 4,821,183 | 13.0 | ||||||||
Other Income | 17,184 | 0.1 | 51,467 | 0.1 | ||||||||||
Net Income (Loss) | $ | (1,331,213 | ) | (4.3 | ) | $ | 4,872,650 | 13.1 | ||||||
Revenues
Revenue from ethanol sales decreased by approximately 22% during our second quarter of 2012 compared to the same period of 2011. Revenue from distillers grains increased by approximately 9% during our second quarter of 2012 compared to the same period of 2011. Revenue from corn oil remained approximately the same during our second quarter of 2012 compared to the same period of 2011.
Ethanol
Our ethanol revenue was approximately $6.8 million less during our second quarter of 2012 compared to our second quarter of 2011, a decrease of approximately 22%. This decrease in ethanol revenue was due to a decrease in the average price we received for our ethanol of approximately $0.50 per gallon, a decrease of approximately 20%, during our second quarter of 2012 compared to our second quarter of 2011. Management attributes this decrease in ethanol prices with lower ethanol demand due to lower gasoline demand along with continued high ethanol stocks during our second quarter of 2012 compared to the same period of 2011. Following the end of our second quarter of 2012, ethanol prices increased. The ethanol price increases were greater than the corn price increases we had following the end of our second quarter of 2012 which has resulted in improved margins. Management anticipates that ethanol prices will remain higher due to higher corn prices along with the fact that ethanol production has decreased which has improved the supply and demand fundamentals in the ethanol industry.
In addition to this decrease in ethanol prices, ethanol sales were slightly lower during our second quarter of 2012 compared to the same period of 2011. Our total ethanol sales during our second quarter of 2012 were approximately 3% less than during
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the same period of 2011, a decrease of approximately 363,000 gallons. Management attributes this decrease in ethanol sales with more plant downtime and an effort to improve production efficiency which can result in decreased total ethanol production. Management anticipates that ethanol sales will be comparable to prior years going forward.
Distillers Grains
Our total distillers grains sales increased for our second quarter of 2012 compared to the same period of 2011. We sold less distillers grains in the dried form during our second quarter of 2012 compared to the same period of 2011. For our second quarter of 2012, we sold approximately 12% of our total distillers grains in the dried form and approximately 88% of our total distillers grains in the modified/wet form. For our second quarter of 2011, we sold approximately 19% of our total distillers grains in the dried form and approximately 81% of our total distillers grains in the modified/wet form. This change in the composition of our distillers grains sales was due to market conditions, including increased local demand. The average price we received for our dried distillers grains was approximately 31% greater during our second quarter of 2012 compared to the same period of 2011, an increase of approximately $45 per ton. The average price we received for our modified/wet distillers grains was approximately 13% greater for our second quarter of 2012 compared to the same period of 2011, an increase of approximately $22 per ton. Management attributes this increase in the selling price of our distillers grains with increased corn prices and correspondingly increased distillers grains demand. Since distillers grains are typically used as a feed substitute for corn, as the price of corn increases, the price of and demand for distillers grains typically also increase.
Management expects to continue to make decisions as to whether our distillers grains will be marketed as dried distillers grains as opposed to modified/wet distillers grains based on market conditions. These market conditions include supply and demand factors as well as the price difference between dried distillers grains and modified/wet distillers grains along with the higher natural gas costs associated with drying our distillers grains.
Corn Oil
Our total pounds of corn oil sold increased by approximately 3% during our second quarter of 2012 compared to the same period of 2011, an increase of approximately 67,000 pounds, primarily due to improved operation of the corn oil extraction equipment. Management anticipates that our corn oil sales will remain at their current levels into the foreseeable future. Offsetting the increase in corn oil sales slightly, the average price we received for our corn oil decreased by approximately 2% for our second quarter of 2012 compared to the same period of 2011, a decrease of approximately $0.01 per pound. Management anticipates corn oil prices will remain relatively steady for the remaining quarters of our 2012 fiscal year. Our corn oil is typically used to produce biodiesel. In the event biodiesel demand decreases, such as if the biodiesel use requirements of the RFS are decreased or eliminated, it may result in lower corn oil prices.
Cost of Revenues
The primary raw materials we use to produce ethanol and distillers grains are corn and natural gas. Our cost of revenues relating to corn was approximately 3% higher for our second quarter of 2012 compared to the same period of 2011. Our average cost per bushel of corn increased by approximately 5% for our second quarter of 2012 compared to our second quarter of 2011. Management attributes the increase in corn prices with higher market corn prices and a decreasing corn carryover from the prior year. Management anticipates that the corn harvest in the fall of 2012 will be lower than in previous years due to unfavorable weather conditions. This may reduce corn supplies in our area during our 2013 fiscal year which could cause higher corn prices during that time. Further, we may experience difficulty securing all of the corn we need to operate the ethanol plant at capacity in the future if a shortage of corn develops in our area. We used approximately 3% fewer bushels of corn during our second quarter of 2012 compared to the same period of 2011 due to improved operating efficiency at the ethanol plant and decreased ethanol production.
Our cost of revenues related to natural gas decreased by approximately $499,000, a decrease of approximately 33%, for our second quarter of 2012 compared to our second quarter of 2011. This decrease was due to a decrease in market natural gas prices during our second quarter of 2012 compared to the same period of 2011. Our average cost per MMBtu of natural gas during our second quarter of 2012 was the approximately 33% less per MMBtu compared to the price for our second quarter of 2011. The decrease in market price of natural gas was due to strong natural gas supplies and production. Management anticipates that natural gas prices will remain at their current low levels compared to prior years due to steady natural gas demand, strong supplies of natural gas and increased natural gas production. We anticipate higher natural gas prices during the winter months due to increased natural gas demand for heating needs which typically results in premium natural gas pricing during the winter months.
We used slightly less natural gas during our second quarter of 2012 compared to the same period of 2011 due to the fact that we were producing less distillers grains in the dried form. We used approximately 1% less natural gas, a decrease of
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approximately 4,000 MMBtu of natural gas, during our second quarter of 2012 compared to the same period of 2011. Management anticipates that our natural gas consumption will remain at current levels into the foreseeable future.
Operating Expense
Our operating expenses were higher for our second quarter of 2012 compared to the same period of 2011 due primarily to increases in professional and public relations fees. These increases were offset slightly by decreases in wages and bonuses.
Other Income and Expense
Our interest expense was lower for our second quarter of 2012 compared to the same period of 2011 because we had less debt outstanding and lower interest rates. We had less interest income during our second quarter of 2012 compared to the same period of 2011 due to having less cash on hand and having lower interest rates.
Comparison of the Six Months Ended June 30, 2012 and 2011
The following table shows the results of our operations and the percentage of revenues, cost of revenues, operating expenses and other items to total revenues in our consolidated statements of operations for the six months ended June 30, 2012 and 2011:
2012 | 2011 | |||||||||||||
Income Statement Data | Amount | % | Amount | % | ||||||||||
Revenue | $ | 62,849,131 | 100.0 | $ | 72,400,807 | 100.0 | ||||||||
Cost of Revenues | 62,117,039 | 98.8 | 61,633,269 | 85.1 | ||||||||||
Gross Profit | 732,092 | 1.2 | 10,767,538 | 14.9 | ||||||||||
Operating Expense | 1,527,393 | 2.4 | 1,524,149 | 2.1 | ||||||||||
Income (Loss) from Operations | (795,301 | ) | (1.3 | ) | 9,243,389 | 12.8 | ||||||||
Other Income | 32,738 | 0.1 | 63,755 | 0.1 | ||||||||||
Net Income (Loss) | $ | (762,563 | ) | (1.2 | ) | $ | 9,307,144 | 12.9 | ||||||
Revenues
Revenue from ethanol sales decreased by approximately 20% during the six months ended June 30, 2012 compared to the same period of 2011. Revenue from distillers grains increased by approximately 24% during the six months ended June 30, 2012 compared to the same period of 2011. Revenue from corn oil remained steady during the six months ended June 30, 2012 compared to the same period of 2011.
Ethanol
Our ethanol revenue was approximately $12,161,000 less during the six months ended June 30, 2012 compared to the six months ended June 30, 2011, a decrease of approximately 20%. The average price we received for our ethanol decreased by approximately 16% for the six months ended June 30, 2012 compared to the same period of 2011, a decrease of approximately $0.38 per gallon of ethanol sold. Our total gallons of ethanol sold during the six months ended June 30, 2012 were approximately 5% less than during the same period of 2011, a decrease of approximately 1,312,000 gallons. This decrease was due in part to particularly high ethanol sales in 2011 that resulted from ethanol that we carried over from December 2010 into January 2011.
Distillers Grains
Our total distillers grains revenue increased by approximately $2,587,000 for the six months ended June 30, 2012 compared to the same period of 2011. We sold a greater number of tons of distillers grains during six months ended June 30, 2012, and the prices we received for our distillers grains were significantly higher for the six months ended June 30, 2012 compared to the same period of 2011. The average price we received for our dried distillers grains increased by approximately $72 per ton, an increase of approximately 59%, for the six months ended June 30, 2012 compared to the same period of 2011. The average price we
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received for our modified/wet distillers grains increased by approximately $32 per ton, an increase of approximately 20%, for the six months ended June 30, 2012 compared to the same period of 2011. Additionally, from 2011 to 2012, our distillers grain production continued to shift from distillers grains produced in the dried form to distillers grains in the modified/wet form. For the six months ended June 30, 2012, we sold approximately 9% of our distillers grains in the dried form and approximately 91% in the modified/wet form. During the six months ended June 30, 2011, we sold approximately 21% of our distillers grains in the dried form and approximately 79% in the modified/wet form.
Corn Oil
Our total pounds of corn oil sold increased by approximately 9% during the six months ended June 30, 2012 compared to the same period of 2011. Offsetting this increase in production, the average price we received for our corn oil decreased by approximately 7% for the six months ended June 30, 2012 compared to the same period of 2011.
Cost of Revenues
Our cost of revenues related to corn was approximately 5% higher for the six months ended June 30, 2012 compared to the same period of 2011. Our average cost per bushel of corn increased by approximately 8% for the six months ended June 30, 2012 compared to the same period of 2011, an increase of approximately $0.44 per bushel of corn. We used approximately 2% fewer bushels of corn during the six months ended June 30, 2012 compared to the same period of 2011.
Our cost of revenues related to natural gas decreased by approximately $993,000, a decrease of approximately 30%, for the six months ended June 30, 2012 compared to the same period of 2011. Our average cost per MMBtu of natural gas during the six months ended June 30, 2012 was approximately 28% lower compared to the six months ended June 30, 2011, a decrease of approximately $1.32 per MMBtu of natural gas. We used approximately 3% less natural gas during the six months ended June 30, 2012 compared to the same period of 2011. This decrease was due to a warmer winter and decreased production of distillers grains in the dried form.
Operating Expense
Our operating expenses were approximately the same for the six months ended June 30, 2012 compared to the same period of 2011. We had an increase in professional and public relations fess for the period, but our wages and bonuses were lower.
Other Income and Expense
Our interest expense was lower for the six months ended June 30, 2012 compared to the same period of 2011 because we had significantly less debt outstanding. We also had less interest income during the six months ended June 30, 2012 compared to the same period of 2011 due to lower interest rates and having less cash on hand during the 2012 period.
Changes in Financial Condition for the Six Months Ended June 30, 2012.
Current Assets
Our current assets were lower at June 30, 2012 compared to December 31, 2011 primarily due to decreased cash on hand, and receivables. The decrease in our cash on hand is tied partially to recent changes in corn prices impacting our derivative investments and partially to tighter operating margins which has effected our profitability and also to the reduction of the deferred corn payment liability at the end of December. The amount we had due from our commodities broker was higher at June 30, 2012 compared to December 31, 2011 because we were required to hold more cash in our margin account with our commodities broker due to greater unrealized losses on our risk management positions.
Property and Equipment
Our net property and equipment was slightly lower at June 30, 2012 compared to December 31, 2011 as a result of regular depreciation of our equipment. We had approximately $413,000 in construction in progress at June 30, 2012 due to our plant scale upgrade project and our plant control systems upgrade project.
Current Liabilities
We had more checks issued in excess of our bank balances as of June 30, 2012 compared to December 31, 2011 related to our ongoing operations. Our accounts payable was lower at June 30, 2012 compared to December 31, 2011 because our corn
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suppliers typically seek to defer payments for corn that is delivered at the end of the year for tax purposes which increases our accounts payable. These deferred payments were made early in our first quarter of 2012. We had $1.4 million outstanding on our short-term revolving line of credit as of June 30, 2012 compared to $0 outstanding as of December 31, 2011. The current portion of our notes payable was lower at June 30, 2012 compared to December 31, 2011 because we repaid our land purchase promissory note early which was included in the current portion of our notes payable, along with our continuing payments on our subordinated debt.
Long-Term Liabilities
Our long-term liabilities were lower at June 30, 2012 compared to December 31, 2011 because of our continuing payments on our various long-term promissory notes.
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. Management does not anticipate that we will need to raise additional debt or equity financing in the next twelve months and management believes that our current sources of liquidity will be sufficient to continue our operations during that time period. We do not anticipate making any significant capital expenditures in the next 12 months other than ordinary repair and replacement of equipment in our ethanol plant in addition to our capital commitments which have previously been disclosed.
Currently, we have two revolving loans which allow us to borrow funds for working capital. These two revolving loans are described in greater detail below in the section entitled "Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Indebtedness." As of June 30, 2012, we had $1,430,000 outstanding and $13,570,000 available to be drawn on these revolving loans. Management anticipates that this is sufficient to maintain our liquidity and continue our operations.
The following table shows cash flows for the six months ended June 30, 2012 and 2011:
Six Months Ended June 30, | ||||||||
2012 | 2011 | |||||||
Net cash provided by (used in) operating activities | $ | (10,450,614 | ) | $ | 4,209,820 | |||
Net cash (used in) provided by investing activities | (488,510 | ) | 9,300 | |||||
Net cash provided by (used for) financing activities | 589,503 | (4,502,494 | ) | |||||
Cash Flow From Operations. Our operating activities used more cash during the six months ended June 30, 2012 compared to the same period of 2011, primarily due to decreased net income during the 2012 period. We also used more cash to pay down accounts payable during the six months ended June 30, 2012.
Cash Flow From Investing Activities. Our investing activities used more cash during the six months ended June 30, 2012 compared to the same period of 2011, due to our plant control and scale upgrade projects. We also purchased equipment for our lab during our 2012 fiscal year which was included in our purchases of property and equipment.
Cash Flow From Financing Activities. Our financing activities provided more cash during the six months ended June 30, 2012 compared to the same period of 2011 due to funds drawn on our revolving loan along with an increase in our checks issued in excess of our bank balances.
Indebtedness
First National Bank of Omaha ("FNBO") is our primary lender. We have two loans outstanding with FNBO, a short-term revolving loan and a long-term revolving loan. We also have two loans that we used to offset the cost of our corn oil extraction equipment which totaled $1,200,000. We had a long-term loan related to a piece of property that we purchased adjacent to our ethanol plant which was repaid in February 2012. The specifics of each credit facility are discussed below.
Short-Term Debt Sources
We have a short-term revolving promissory note with FNBO that expires on May 1, 2013. The principal amount of this short-term revolving promissory note is $10 million. However, the maximum amount we can draw on this short-term loan is limited by a borrowing base calculation, described in the May 2012 amendment, based on a percentage of our inventory and
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accounts receivable less certain accounts payable and letters of credit that we may have outstanding from time to time. We agreed to pay a variable interest rate on the revolving promissory note at an annual rate 350 basis points above the one month London Interbank Offered Rate ("LIBOR"), adjusted monthly. The note is not subject to a floor. The interest rate for this loan at June 30, 2012 was 3.39%. We are required to pay a fee of 0.25% on the unused portion of the revolving promissory note. The revolving promissory note is collateralized by the ethanol plant, its accounts receivable and inventories. As of June 30, 2012, we had $1,430,000 outstanding on our revolving promissory note and $8,570,000 available to be drawn.
Long-Term Debt Sources
We restructured our long-term revolving loan that we refer to as Term Note 5 in May 2012. Term Note 5 was restructured into a $5,000,000 loan with an interest rate that accrues at 350 basis points above the one month LIBOR, adjusted monthly. Term Note 5 is not subject to a floor. The credit limit on Term Note 5 reduces each year by $500,000 until the maturity date on May 1, 2017. Therefore, the funds available for us to draw on Term Note 5 will decrease each year. If in any year we have a principal balance outstanding on Term Note 5 in excess of the new credit limit, we must make a payment to FNBO such that the amount outstanding on Term Note 5 does not exceed the new credit limit. We are required to pay a fee of 0.25% on the unused portion of Term Note 5. On June 30, 2012, we had $0 outstanding and $5,000,000 available to be drawn on this loan. As of June 30, 2012, interest accrued on Term Note 5 at the rate of 3.39% per year.
We also had a long-term debt obligation related to our purchase of an additional 135 acres of land pursuant to a land purchase contract. The total cost of this additional land was $550,000. This note was paid in full on February 8, 2012.
We have a long-term debt obligation on a portion of a tax increment revenue bond series issued by Lake County, South Dakota of which we were the recipient of the proceeds. The portion for which we are obligated is currently estimated at $172,000. Taxes levied on our property are used for paying the debt service on the bonds. We are obligated to pay any shortfall in debt service on the bonds should the property taxes collected not be sufficient to pay the entire debt service. The interest rate on the bonds is 7.75% annually. The bonds require semi-annual payments of interest on December 1 and June 1, in addition to a payment of principal on December 1 of each year. While our obligation under the guarantee is expected to continue until maturity in 2018, such obligation may cease at some point in time if the property on which the plant is located appreciates in value to the extent that Lake County is able to collect a sufficient amount in taxes to cover the principal and interest payments on the taxable bonds. The principal balance outstanding was approximately $1,217,000 as of June 30, 2012.
Subordinated Debt
We raised a total of $1,200,000 in subordinated loans to help offset the cost of our corn oil extraction equipment from two different parties. We secured $1,000,000 in financing for the corn oil extraction equipment from the Rural Electric Economic Development, Inc. (REED) and $200,000 from the First District Development Company (FDDC). We closed on these loans on May 22, 2009. We agreed to pay 4.70% interest on the $1,000,000 loan from REED and 5.5% interest on the $200,000 FDDC loan. Both loans are amortized over a period of five years and both loans require monthly payments. The principal balance of the REED loan was approximately $412,000 as of June 30, 2012. The principal balance of the FDDC loan was approximately $83,000 as of June 30, 2012.
Covenants
Our credit facilities with FNBO are subject to various loan covenants. If we fail to comply with these loan covenants, FNBO can declare us to be in default of our loans. The material loan covenants applicable to our credit facilities are our fixed charge coverage ratio, our minimum net worth and minimum working capital requirements. We are required to maintain a fixed charge coverage ratio of no less than 1.10 to 1.0. This fixed charge coverage ratio compares our EBITDA adjusted earnings, as defined in our credit agreements, with our scheduled principal and interest payments on our outstanding debt obligations, including our subordinated debt. We are also required to maintain at least $4.8 million in working capital and maintain a minimum net worth of $20 million.
As of June 30, 2012, we were in compliance with all of our loan covenants. Management's current financial projections indicate that we will be in compliance with our financial covenants for the next 12 months and we expect to remain in compliance thereafter. Management does not believe that it is reasonably likely that we will fall out of compliance with our material loan covenants in the next 12 months. If we fail to comply with the terms of our credit agreements with FNBO, and FNBO refuses to waive the non-compliance, FNBO may require us to immediately repay all amounts outstanding on our loans.
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Application of Critical Accounting Policies
Management uses estimates and assumptions in preparing our consolidated financial statements in accordance with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Of the significant accounting policies described in the notes to our consolidated financial statements, we believe that the following are the most critical:
Derivative Instruments
We enter into short-term forward grain, 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 our risk and we are exposed to risk of loss in the market value of inventories. To reduce that risk, we generally take positions using cash and futures contracts and options.
Unrealized gains and losses related to derivative contracts for 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. The fair values of derivative contracts are presented on the accompanying balance sheet as derivative financial instruments.
Lower of cost or market accounting for inventory and forward purchase contracts
With the significant change in the prices of our main inputs and outputs, the lower of cost or market analysis of inventories and purchase commitments can have a significant impact on our financial performance.
The impact of market activity related to pricing of corn and ethanol will require us to continuously evaluate the pricing of our inventory and purchase commitments under a lower of cost or market analysis.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to the impact of market fluctuations associated with commodity prices as discussed below. We have no exposure to foreign currency risk as all of our business is conducted in U.S. Dollars. We have loans that are subject to variable interest rates, however, they are currently accruing interest at minimum interest rates which based on current market conditions is expected to continue for the foreseeable future. We use derivative financial instruments as part of an overall strategy to manage market risk. We use cash, futures and option contracts to hedge changes to the commodity prices of corn and natural gas. We do not enter into these derivative financial instruments for trading or speculative purposes, nor do we designate these contracts as hedges for accounting purposes.
Commodity Price Risk
We are exposed to market risk from changes in commodity prices. Exposure to commodity price risk results from our dependence on corn and natural gas in the ethanol production process. We seek to minimize the risks from fluctuations in the prices of corn and natural gas through the use of hedging instruments. In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate. Although we believe our hedge positions accomplish an economic hedge against our future purchases, they are not designated as such for hedge accounting purposes, which would match the gain or loss on our hedge positions to the specific commodity purchase being hedged. We are marking to market our hedge positions, which means as the current market price of our hedge positions changes, the gains and losses are immediately recognized in our cost of revenues.
The immediate recognition of hedging gains and losses can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged. We recorded a increase to our cost of revenues of approximately $1.2 million related to derivative instruments for the quarter ended
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June 30, 2012. We recorded an decrease to our cost of revenues of approximately $800,000 related to derivative instruments for the quarter ended June 30, 2011. There are several variables that could affect the extent to which our derivative instruments are impacted by price fluctuations in the cost of corn or natural gas. However, it is likely that commodity cash prices will have the greatest impact on the derivatives instruments with delivery dates nearest the current cash price.
As of June 30, 2012, we were committed to purchasing approximately 3.7 million bushels of corn valued at approximately $22.6 million using forward contracts. These corn purchases represent approximately 21% of our expected corn usage for the next 12 months As corn prices move in reaction to market trends and information, our income statement will be affected depending on the impact such market movements have on the value of our derivative instruments. Depending on market movements, crop prospects and weather, these price protection positions may cause immediate adverse effects to our financial results, but are designed to produce long-term positive growth for us.
As of June 30, 2012, we were committed to purchasing approximately 240,000 MMBtus of natural gas during our 2012 fiscal year, valued at approximately $667,000. The natural gas purchases represent approximately 16% of the annual plant requirements.
A sensitivity analysis has been prepared to estimate our exposure to corn and natural gas price risk. Market risk related to these factors is estimated as the potential change in income resulting from a hypothetical 10% adverse change in the average cost of our corn and natural gas prices and average ethanol price as of June 30, 2012, net of the forward and future contracts used to hedge our market risk for corn and natural gas usage requirements. The volumes are based on our expected use and sale of these commodities for a one year period from June 30, 2012. The results of this analysis, which may differ from actual results, are as follows:
Estimated Volume Requirements for the next 12 months (net of forward and futures contracts) | Unit of Measure | Hypothetical Adverse Change in Price | Approximate Adverse Change to Income | ||||||||
Ethanol | 49,000,000 | Gallons | 10 | % | $ | 9,800,000 | |||||
Corn | 15,784,058 | Bushels | 10 | % | $ | 9,770,332 | |||||
Natural Gas | 1,160,000 | MMBTU | 10 | % | $ | 291,160 | |||||
For comparison purposes, our sensitivity analysis for our 2011 fiscal year is set forth below.
Estimated Volume Requirements for the next 12 months (net of forward and futures contracts) | Unit of Measure | Hypothetical Adverse Change in Price | Approximate Adverse Change to Income | ||||||||
Ethanol | 49,000,000 | Gallons | 10 | % | $ | 10,192,000 | |||||
Corn | 15,065,059 | Bushels | 10 | % | $ | 9,340,337 | |||||
Natural Gas | 1,220,000 | MMBTU | 10 | % | $ | 435,540 | |||||
ITEM 4. CONTROLS AND PROCEDURES.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosures.
Our management, including our Chief Executive Officer (the principal executive officer), Scott Mundt, along with our Chief Financial Officer (the principal financial officer), Rob Buchholtz, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2012. Based on this review and evaluation, these officers believe that our disclosure controls and procedures are effective in ensuring that material information related to us is recorded, processed, summarized and reported within the time periods required by the forms and rules of the Securities and Exchange Commission.
For the fiscal quarter ended June 30, 2012, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time in the ordinary course of business, Dakota Ethanol or Lake Area Corn Processors may be named as a defendant in legal proceedings related to various issues, including, worker's compensation claims, tort claims, or contractual disputes. We are not currently involved in any material legal proceedings, directly or indirectly, and we are not aware of any claims pending or threatened against us or any of the managers that could result in the commencement of material legal proceedings.
ITEM 1A. RISK FACTORS.
The following risk factor is provided due to material changes from the risk factors previously disclosed in our annual report on Form 10-K. The risk factor set forth below should be read in conjunction with the risk factors section and the Management's Discussion and Analysis section for the fiscal year ended December 31, 2011, included in our annual report on Form 10-K.
Recent increases in corn prices have led to tight operating margins which may make ethanol production unprofitable. Due to unfavorable weather conditions, corn prices have recently increased significantly. Many believe that current unfavorable weather conditions will result in a smaller corn harvest in the fall of 2012. This, along with smaller corn carryover in the last two crop years and higher export demand for corn has led to higher corn prices. The price of ethanol has not kept pace with rising corn prices which has resulted in tighter operating margins in the ethanol industry. These tighter operating margins have caused some ethanol producers to reduce production or cease operating altogether. We are also facing tighter operating margins which have reduced our net income. While management believes that it is still favorable for us to operate the ethanol plant, if conditions in the ethanol industry deteriorate, we may be forced to reduce production or cease operating altogether. This could negatively impact the value of our units.
We may be forced to reduce production or cease production altogether if we are unable to secure the corn we require to operate the ethanol plant. Due to tighter corn supplies, many ethanol producers are experiencing difficulty securing the corn they require to operate. This may result in some ethanol producers reducing or terminating production, even if operating margins are favorable due to the lack of corn availability. This has increased the price we have to pay for corn and may reduce the number of bushels that we can purchase. If we are unable to secure the corn we require to continue to operate the ethanol plant, we may have to reduce production or cease operating altogether which may negatively impact the value of our units.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION.
None.
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ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
The following exhibits are filed as part of this report.
Exhibit No. | Exhibit | |
31.1 | Certificate Pursuant to 17 CFR 240.13a-14(a)* | |
31.2 | Certificate Pursuant to 17 CFR 240.13a-14(a)* | |
32.1 | Certificate Pursuant to 18 U.S.C. Section 1350* | |
32.2 | Certificate Pursuant to 18 U.S.C. Section 1350* | |
101 | The following financial information from Lake Area Corn Processors, LLC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011, (ii) Consolidated Statements of Income for the three and six months ended June 30, 2012 and 2011, (iii) Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011, and (iv) the Notes to Unaudited Consolidated Financial Statements.** | |
* Filed herewith.
** Furnished herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LAKE AREA CORN PROCESSORS, LLC | |||
Date: | August 14, 2012 | /s/ Scott Mundt | |
Scott Mundt | |||
President and Chief Executive Officer (Principal Executive Officer) | |||
Date: | August 14, 2012 | /s/ Robbi Buchholtz | |
Robbi Buchholtz | |||
Chief Financial Officer (Principal Financial and Accounting Officer) | |||
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