LAKE AREA CORN PROCESSORS LLC - Quarter Report: 2013 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, 2013 | |
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 13, 2013, 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, 2013 | December 31, 2012* | ||||||
ASSETS | |||||||
CURRENT ASSETS | |||||||
Cash and cash equivalents | $ | 5,504,547 | $ | 7,662,901 | |||
Accounts receivable | 5,619,867 | 4,251,590 | |||||
Other receivables | 22,987 | 91,139 | |||||
Inventory | 9,196,680 | 11,552,830 | |||||
Derivative financial instruments | 1,198,158 | 3,322,650 | |||||
Prepaid expenses | 134,400 | 137,990 | |||||
Total current assets | 21,676,639 | 27,019,100 | |||||
PROPERTY AND EQUIPMENT | |||||||
Land | 676,097 | 676,097 | |||||
Land improvements | 2,665,358 | 2,665,358 | |||||
Buildings | 8,277,636 | 8,277,636 | |||||
Equipment | 39,828,295 | 39,828,295 | |||||
51,447,386 | 51,447,386 | ||||||
Less accumulated depreciation | (27,677,163 | ) | (26,361,261 | ) | |||
Net property and equipment | 23,770,223 | 25,086,125 | |||||
OTHER ASSETS | |||||||
Goodwill | 10,395,766 | 10,395,766 | |||||
Investments | 3,605,594 | 3,385,479 | |||||
Other | 434,752 | 86,609 | |||||
Total other assets | 14,436,112 | 13,867,854 | |||||
TOTAL ASSETS | $ | 59,882,974 | $ | 65,973,079 | |||
* Derived from audited financial statements.
See Notes to Unaudited Consolidated Financial Statements.
3
LAKE AREA CORN PROCESSORS, LLC
Consolidated Balance Sheets (Unaudited)
June 30, 2013 | December 31, 2012* | ||||||
LIABILITIES AND MEMBERS’ EQUITY | |||||||
CURRENT LIABILITIES | |||||||
Accounts payable | 5,454,151 | 13,518,218 | |||||
Accrued liabilities | 427,113 | 355,278 | |||||
Derivative financial instruments | 882,166 | 535,816 | |||||
Current portion of notes payable | 30,978 | 288,631 | |||||
Other | 67,732 | 34,540 | |||||
Total current liabilities | 6,862,140 | 14,732,483 | |||||
LONG-TERM LIABILITIES | |||||||
Notes payable, net of current maturities | 29,786 | 157,535 | |||||
Other | 474,626 | 8,726 | |||||
Total long-term liabilities | 504,412 | 166,261 | |||||
COMMITMENTS AND CONTINGENCIES | |||||||
MEMBERS' EQUITY (29,620,000 units issued and outstanding) | 52,516,422 | 51,074,335 | |||||
TOTAL LIABILITIES AND MEMBERS' EQUITY | $ | 59,882,974 | $ | 65,973,079 | |||
* Derived from audited financial statements.
See Notes to Unaudited Consolidated Financial Statements.
4
LAKE AREA CORN PROCESSORS, LLC
Consolidated Statements of Operations (Unaudited)
Three Months Ended June 30, 2013 | Three Months Ended June 30, 2012 | Six Months Ended June 30, 2013 | Six Months Ended June 30, 2012 | ||||||||||||
REVENUES | $ | 38,288,817 | $ | 30,843,839 | $ | 76,581,285 | $ | 62,849,131 | |||||||
COSTS OF REVENUES | 35,860,462 | 31,433,015 | 70,556,122 | 62,117,039 | |||||||||||
GROSS PROFIT (LOSS) | 2,428,355 | (589,176 | ) | 6,025,163 | 732,092 | ||||||||||
OPERATING EXPENSES | 1,070,134 | 759,221 | 1,826,305 | 1,527,393 | |||||||||||
INCOME (LOSS) FROM OPERATIONS | 1,358,221 | (1,348,397 | ) | 4,198,858 | (795,301 | ) | |||||||||
OTHER INCOME (EXPENSE) | |||||||||||||||
Interest income | 20,655 | 15,144 | 29,306 | 22,616 | |||||||||||
Equity in net income of investments | 88,813 | 11,754 | 219,115 | 31,295 | |||||||||||
Interest expense | (9,646 | ) | (9,714 | ) | (43,192 | ) | (21,173 | ) | |||||||
Total other income | 99,822 | 17,184 | 205,229 | 32,738 | |||||||||||
NET INCOME (LOSS) | $ | 1,458,043 | $ | (1,331,213 | ) | $ | 4,404,087 | $ | (762,563 | ) | |||||
BASIC AND DILUTED EARNINGS (LOSS) PER UNIT | $ | 0.05 | $ | (0.04 | ) | $ | 0.15 | $ | (0.03 | ) | |||||
WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING FOR THE CALCULATION OF BASIC & DILUTED EARNINGS (LOSS) PER UNIT | 29,620,000 | 29,620,000 | 29,620,000 | 29,620,000 | |||||||||||
DISTRIBUTIONS DECLARED PER UNIT | $ | 0.10 | $ | 0.05 | $ | 0.10 | $ | 0.05 | |||||||
See Notes to Unaudited Consolidated Financial Statements.
5
LAKE AREA CORN PROCESSORS, LLC
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 2013 | Six Months Ended June 30, 2012 | ||||||
OPERATING ACTIVITIES | |||||||
Net income (loss) | $ | 4,404,087 | $ | (762,563 | ) | ||
Changes to net income (loss) affecting cash and cash equivalents | |||||||
Depreciation and amortization | 1,403,411 | 1,329,915 | |||||
Equity in net (income) of investments | (219,115 | ) | (31,295 | ) | |||
(Increase) decrease in | |||||||
Receivables | (1,300,125 | ) | 354,227 | ||||
Inventory | 2,356,150 | (1,999,245 | ) | ||||
Prepaid expenses | 3,590 | (1,594 | ) | ||||
Derivative financial instruments and due from broker | 2,470,842 | (1,436,184 | ) | ||||
Increase (decrease) in | |||||||
Accounts payable | (7,918,769 | ) | (7,624,865 | ) | |||
Accrued and other liabilities | 222,835 | (279,010 | ) | ||||
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | 1,422,906 | (10,450,614 | ) | ||||
INVESTING ACTIVITIES | |||||||
Purchase of property and equipment | (145,298 | ) | (488,510 | ) | |||
Changes in other assets | (33,990 | ) | — | ||||
NET CASH (USED IN) INVESTING ACTIVITIES | (179,288 | ) | (488,510 | ) | |||
FINANCING ACTIVITIES | |||||||
Increase in outstanding checks in excess of bank balance | — | 888,833 | |||||
Net borrowings on line of credit | — | 1,430,000 | |||||
Principal payments on long-term notes payable | (385,402 | ) | (248,330 | ) | |||
Financing costs paid | (54,570 | ) | — | ||||
Distributions paid to LACP members | (2,962,000 | ) | (1,481,000 | ) | |||
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | (3,401,972 | ) | 589,503 | ||||
NET DECREASE IN CASH | (2,158,354 | ) | (10,349,621 | ) | |||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 7,662,901 | 11,225,659 | |||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 5,504,547 | $ | 876,038 | |||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | |||||||
Cash paid during the period for interest | $ | 37,014 | $ | 21,924 | |||
See Notes to Unaudited Consolidated Financial Statements
6
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2013 and 2012
NOTE 1 . NATURE OF OPERATIONS
Principal Business Activity
Lake Area Corn Processors, LLC and subsidiary (the Company) is a South Dakota limited liability company. The Company owns and manages Dakota Ethanol, LLC (Dakota Ethanol), a 40 million-gallon (annual nameplate capacity) ethanol plant, located near Wentworth, South Dakota. 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, 2013 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, 2012, contained in the annual report on Form 10-K for 2012.
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, 2013 and 2012
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.
We do not apply the normal purchase and sales exemption for forward corn purchase contracts. As of June 30, 2013, the Company is committed to purchasing 2,100,000 bushels of corn on a forward contract basis with an average price of $5.93 per bushel. Dakota Ethanol has a net derivative financial instrument liability of approximately $880,000 related to the forward contracted purchases of corn. These corn purchase contracts represent 12% of our expected 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, 2013, we are committed to purchasing 99,000 MMBtu's of natural gas with an average price of $3.64 per MMBtu. We account for these transactions as normal purchases, and accordingly, do not mark these transactions to market. These natural gas purchases represent approximately 7% of our expected annual plant requirements.
The Company enters into firm-price sales commitments with our ethanol marketer under which we agree to sell ethanol at a price set in advance of the actual delivery of that ethanol by us. Under these arrangements, we assume the risk of a price increase in the market price of ethanol between the time the price is fixed and the time the ethanol is delivered. At June 30, 2013, we are committed to selling 855,000 gallons of ethanol with an average price of $1.87 per gallon. The Company accounts for these transactions as normal sales, and accordingly, do not mark these transactions to market. These ethanol sales represent 2% of our expected annual plant production.
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, 2013 and December 31, 2012 were as follows:
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LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2013 and 2012
Balance Sheet Classification | June 30, 2013 | December 31, 2012* | ||||||||
Forward contracts in gain position | Current Assets | $ | 2,262 | $ | 912,248 | |||||
Futures contracts in gain position | Current Assets | $ | 149,763 | $ | 974,132 | |||||
Forward contracts in loss position | (Current Liabilities) | $ | (144,663 | ) | $ | (291,119 | ) | |||
Total forward and futures contracts | $ | 7,362 | $ | 1,595,261 | ||||||
Cash held by broker | 1,190,796 | 1,727,389 | ||||||||
Current Assets | $ | 1,198,158 | $ | 3,322,650 | ||||||
Forward contracts in loss position | (Current Liabilities) | $ | (882,166 | ) | $ | (535,816 | ) | |||
*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.
Statement of Income | Three Months Ended June 30, | |||||||||
Classification | 2013 | 2012 | ||||||||
Net realized and unrealized gains (losses) related to purchase contracts: | ||||||||||
Futures contracts | Cost of Revenues | $ | 524,907 | $ | (1,209,496 | ) | ||||
Forward contracts | Cost of Revenues | $ | (989,146 | ) | $ | 49,232 | ||||
Statement of Income | Six Months Ended June 30, | |||||||||
Classification | 2013 | 2012 | ||||||||
Net realized and unrealized gains (losses) related to purchase contracts: | ||||||||||
Futures contracts | Cost of Revenues | $ | 285,492 | $ | (474,480 | ) | ||||
Forward contracts | Cost of Revenues | $ | (1,052,097 | ) | $ | (758,378 | ) | |||
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. Significant estimates include the fair value of derivative financial instruments, lower of cost or market accounting for inventory and forward purchase contracts and goodwill impairment evaluation.
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 CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2013 and 2012
NOTE 3. INVENTORY
Inventory consisted of the following as of June 30, 2013 and December 31, 2012:
June 30, 2013 | December 31, 2012* | |||||||
Raw materials | $ | 4,820,869 | $ | 8,117,020 | ||||
Finished goods | 2,326,506 | 1,525,812 | ||||||
Work in process | 1,076,526 | 990,002 | ||||||
Parts inventory | 972,779 | 919,996 | ||||||
$ | 9,196,680 | $ | 11,552,830 | |||||
*Derived from audited financial statements.
NOTE 4. SHORT-TERM NOTE PAYABLE
On May 15, 2013, Dakota Ethanol executed a revolving promissory note from Farm Credit Services of America (FCSA) in the amount of $10,000,000 and the amount available is subject to a borrowing base. Interest on the outstanding principal balances will accrue at 310 basis points above the 1 month LIBOR rate and is not subject to a floor. The rate was 3.30% at June 30, 2013. There is a non-use fee of 0.25% on the unused portion of the $10,000,000 availability. The note is collateralized by the ethanol plant, its accounts receivable and inventory. The note expires on May 31, 2015. On June 30, 2013, Dakota Ethanol had $0 outstanding and as a result of the borrowing base calculation, $6,400,000 available to be drawn on the revolving promissory note.
Prior to May 15, Dakota Ethanol had a revolving promissory note from First National Bank of Omaha (FNBO) in the amount of $10,000,000 and the amount available was subject to a borrowing base. On December 31, 2012, Dakota Ethanol had $0 outstanding and $10,000,000 available to be drawn on the revolving promissory note.
NOTE 5. LONG-TERM NOTES PAYABLE
On May 15, 2013, Dakota Ethanol executed a revolving promissory note from Farm Credit Services of America (FCSA) in the amount of $5,000,000.
As part of the note payable agreement, Dakota Ethanol is subject to certain restrictive covenants establishing financial reporting requirements, distribution and capital expenditure limits and minimum working capital 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, 2013.
The note is a revolving note with an availability of $5,000,000. Interest on the outstanding principal balance will accrue at 335 basis points above the 1 month LIBOR rate and is not subject to a floor. The rate was 3.55% at June 30, 2013. Dakota Ethanol may elect to borrow any principal amount repaid on the note 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 a non-use fee of 0.35% on the unused portion of the note. The note matures on May 31, 2018. On June 30, 2013, Dakota Ethanol had $0 outstanding and $5,000,000 available to be drawn on the note.
Prior to May 15, Dakota Ethanol had a revolving promissory note from First National Bank of Omaha (FNBO) in the amount of $5,000,000. On December 31, 2012, Dakota Ethanol had $0 outstanding and $5,000,000 available to be drawn on the revolving promissory note.
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, had a fixed interest rate of 4.7%. The note was secured by the oil extraction equipment.
10
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2013 and 2012
The note to FDDC, originally for $200,000, had a fixed interest rate of 5.5%. The note was secured by the oil extraction equipment.
In April of 2013, Dakota Ethanol paid off the remaining balances on the REED and FDDC notes.
The balances of the notes payable are as follows:
June 30, 2013 | December 31, 2012* | |||||||
Note payable - Long-term bank note | $ | — | $ | — | ||||
Note payable - REED | — | 308,142 | ||||||
Note payable - FDDC | — | 62,341 | ||||||
Note payable - Other | 60,764 | 75,683 | ||||||
60,764 | 446,166 | |||||||
Less current portion | (30,978 | ) | (288,631 | ) | ||||
$ | 29,786 | $ | 157,535 | |||||
*Derived from audited financial statements
Minimum scheduled principal payments for the next two years are estimated as follows:
Years Ending June 30, | Amount | |||
2014 | $ | 30,978 | ||
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, 2013 and 2012
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 CME markets.
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2013 and December 31, 2012 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, 2013 | ||||||||||||||||
Assets: | ||||||||||||||||
Derivative financial instruments, futures contracts | $ | 149,763 | $ | 149,763 | $ | — | $ | — | ||||||||
forward contracts | $ | 2,262 | $ | — | $ | 2,262 | $ | — | ||||||||
Liabilities: | ||||||||||||||||
Derivative financial instruments, futures contracts | $ | (144,663 | ) | $ | (144,663 | ) | $ | — | $ | — | ||||||
forward contracts | $ | (882,166 | ) | $ | — | $ | (882,166 | ) | $ | — | ||||||
December 31, 2012* | ||||||||||||||||
Assets: | ||||||||||||||||
Derivative financial instruments, futures contracts | $ | 974,132 | $ | 974,132 | $ | — | $ | — | ||||||||
forward contracts | $ | 912,248 | $ | — | $ | 912,248 | $ | — | ||||||||
Liabilities: | ||||||||||||||||
Derivative financial instruments, futures contracts | $ | (291,119 | ) | $ | (291,119 | ) | $ | — | $ | — | ||||||
forward contracts | $ | (535,816 | ) | $ | — | $ | (535,816 | ) | $ | — | ||||||
*Derived from audited financial statements.
During the three and six months ended June 30, 2013, the Company did not make any changes between Level 1 and Level 2 assets and liabilities. As of June 30, 2013 and December 31, 2012, the Company did not have any Level 3 assets or liabilities.
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, 2013.
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.
12
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2013 and 2012
The Company believes the carrying amount of cash and cash equivalents (level 1), accounts receivable (level 2), other receivables (level 2), accounts payable (level 2) and short-term debt (level 3) approximates fair value due to the short maturity of these instruments.
The carrying amount of long-term obligations (level 3) at June 30, 2013 of $60,764 had an estimated fair value of approximately $60,764 based on estimated interest rates for comparable debt. The carrying amount of long-term obligations at December 31, 2012 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 with RPMG 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.
Sales and marketing fees related to the agreements are as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Sales ethanol | $ | 29,363,677 | $ | 23,541,622 | $ | 57,038,053 | $ | 47,753,984 | ||||||||
Sales distiller's grains and corn oil | 1,841,800 | 1,740,007 | 3,626,371 | 3,085,020 | ||||||||||||
Marketing fees ethanol | 64,152 | 45,911 | 128,304 | 92,624 | ||||||||||||
Marketing fees distillers grains and corn oil | 9,288 | 10,140 | 18,761 | 19,167 | ||||||||||||
June 30, 2013 | December 31, 2012* | |||||||||||||||
Amounts due included in accounts receivable | $ | 4,386,603 | $ | 3,142,616 | ||||||||||||
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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, 2013, 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, 2012, included in the Company's Annual Report on Form 10-K for 2012.
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, 2012.
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 Renewable Products Marketing Group, Inc. ("RPMG") 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.
On April 29, 2013, we executed amended loan agreements with our primary lender, First National Bank of Omaha, for the purpose of extending our short-term revolving loan's maturity date from May 1, 2013 to July 1, 2013. All of the other terms of our short-term revolving loan remained the same.
On May 20, 2013, we entered into a new comprehensive credit facility with Farm Credit Services of America ("FCSA"). The FCSA credit facility replaces our prior loans with First National Bank of Omaha. The FCSA loan is comprised of a $10 million revolving operating line of credit and a $5 million revolving term loan. The details of our new comprehensive credit facility with FCSA are described below in the section entitled "Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Indebtedness."
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Results of Operations
Comparison of the Fiscal Quarters Ended June 30, 2013 and 2012
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, 2013 and 2012:
2013 | 2012 | |||||||||||||
Income Statement Data | Amount | % | Amount | % | ||||||||||
Revenue | $ | 38,288,817 | 100.0 | $ | 30,843,839 | 100.0 | ||||||||
Cost of Revenues | 35,860,462 | 93.7 | 31,433,015 | 101.9 | ||||||||||
Gross Profit (Loss) | 2,428,355 | 6.3 | (589,176 | ) | (1.9 | ) | ||||||||
Operating Expense | 1,070,134 | 2.8 | 759,221 | 2.5 | ||||||||||
Income (Loss) from Operations | 1,358,221 | 3.5 | (1,348,397 | ) | (4.4 | ) | ||||||||
Other Income | 99,822 | 0.3 | 17,184 | 0.1 | ||||||||||
Net Income (Loss) | $ | 1,458,043 | 3.8 | $ | (1,331,213 | ) | (4.3 | ) | ||||||
Revenues
Revenue from ethanol sales increased by approximately 25% during our second quarter of 2013 compared to the same period of 2012. Revenue from distillers grains increased by approximately 27% during our second quarter of 2013 compared to the same period of 2012. Revenue from corn oil decreased by approximately 11% during our second quarter of 2013 compared to the same period of 2012.
Ethanol
Our ethanol revenue was approximately $5.8 million greater during our second quarter of 2013 compared to our second quarter of 2012, an increase of approximately 25%. This increase in ethanol revenue was due to an increase in the average price we received for our ethanol of approximately $0.43 per gallon, an increase of approximately 22%, during our second quarter of 2013 compared to our second quarter of 2012. Management attributes this increase in ethanol prices with higher corn prices during our second quarter of 2013 compared to the same period of 2012, which typically results in higher ethanol prices. Further, ethanol imports from Brazil were lower than expected during the 2013 period which along with greater gasoline demand increased the market price of ethanol during our second quarter of 2013 compared to the same period of 2012.
In addition to this increase in ethanol prices, ethanol sales were higher during our second quarter of 2013 compared to the same period of 2012. Our total ethanol sales during our second quarter of 2013 were approximately 2% greater than during the same period of 2012, an increase of approximately 261,000 gallons. Management attributes this increase in ethanol sales with improved plant efficiencies and throughput capacity. Management anticipates that ethanol sales will be comparable to prior years going forward.
Distillers Grains
Our total distillers grains revenue increased by approximately 27% during our second quarter of 2013 compared to the same period of 2012. We sold more distillers grains in the dried form during our second quarter of 2013 compared to the same period of 2012 due to better market conditions for the dried product. For our second quarter of 2013, we sold approximately 13% of our total distillers grains in the dried form and approximately 87% of our total distillers grains in the modified/wet form. 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.
The average price we received for our dried distillers grains was approximately 20% greater during our second quarter of 2013 compared to the same period of 2012, an increase of approximately $39 per ton. The average price we received for our modified/wet distillers grains was approximately 25% greater for our second quarter of 2013 compared to the same period of
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2012, an increase of approximately $50 per ton. Management attributes this increase in the selling price of our distillers grains with increased corn prices and lower corn availability which both resulted in correspondingly increased distillers grains demand. Since distillers grains are typically used as a feed substitute for corn, as the price of corn increases and corn availability decreases, the price of and demand for distillers grains typically also increase.
Management anticipates that distillers grains prices will continue to follow the corn market. If the price of corn decreases significantly leading up to the fall harvest or after harvest, management expects that this will result in lower distillers grain prices. If the corn harvest in the fall of 2013 is smaller than expected, management anticipates that corn prices will increase which will likely benefit distillers grains prices.
Corn Oil
Our total pounds of corn oil sold increased by approximately 3% during our second quarter of 2013 compared to the same period of 2012, an increase of approximately 69,000 pounds, primarily due to improved efficiencies operating our corn oil extraction equipment. Management anticipates that corn oil production will continue to be variable based on the total production of ethanol at our plant and by operating efficiencies we achieve. Offsetting the increase in the total pounds of corn oil we sold was a decrease in the average price we received for our corn oil of approximately 14% for our second quarter of 2013 compared to the same period of 2012, a decrease of approximately $0.06 per pound. This decrease in market corn oil prices was primarily due to higher market corn oil supply which has negatively impacted corn oil prices. Management anticipates relatively stable corn oil prices as demand from biodiesel production continues to increase which may offset increases in corn oil supply.
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 13% higher for our second quarter of 2013 compared to the same period of 2012. Our average cost per bushel of corn increased by approximately 9% for our second quarter of 2013 compared to our second quarter of 2012. Management attributes the increase in corn prices with higher market corn prices due to decreased corn production resulting from last summer's drought, as well as a smaller corn carryover from the prior year. While we believe that we will be able to secure the corn we need to operate the ethanol plant during the remaining quarters of our 2013 fiscal year, we have been seeing increased competition for corn in our local market. We have seen other corn users expanding the area in which they purchase corn due to lower corn production to our south which can increase the price we pay for corn.
We used approximately 4% more bushels of corn during our second quarter of 2013 compared to the same period of 2012, due primarily to increased production at the ethanol plant. Management anticipates that our corn consumption will remain at current levels into the foreseeable future as management expects relatively consistent production levels.
Our cost of revenues related to natural gas increased by approximately $629,000, an increase of approximately 63%, for our second quarter of 2013 compared to our second quarter of 2012. This increase was due to an increase in market natural gas prices during our second quarter of 2013 compared to the same period of 2012 due to a longer and colder winter, with cold temperatures stretching into April. Our average cost per MMBtu of natural gas during our second quarter of 2013 was approximately 54% more per MMBtu compared to the price for our second quarter of 2012. Management anticipates 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 approximately 6% more MMBtus of natural gas during our second quarter of 2013 compared to the same period of 2012 due to an extended and colder winter during the 2013 period. 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 2013 compared to the same period of 2012 due primarily to a one-time pledge of $250,000 to support a technical development center for the development of innovations in bio-energy technology, partially offset by lower environmental compliance costs.
Other Income and Expense
Our income related to our investments was higher for our second quarter of 2013 compared to the same period of 2012 due to improved performance by the ethanol industry, particularly our investment in RPMG, our marketer. We had more interest
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income during our second quarter of 2013 compared to the same period of 2012 due to having more cash on hand during the 2013 period.
Comparison of the Six Months Ended June 30, 2013 and 2012
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, 2013 and 2012:
2013 | 2012 | |||||||||||||
Income Statement Data | Amount | % | Amount | % | ||||||||||
Revenue | $ | 76,581,285 | 100.0 | $ | 62,849,131 | 100.0 | ||||||||
Cost of Revenues | 70,556,122 | 92.1 | 62,117,039 | 98.8 | ||||||||||
Gross Profit | 6,025,163 | 7.9 | 732,092 | 1.2 | ||||||||||
Operating Expense | 1,826,305 | 2.4 | 1,527,393 | 2.4 | ||||||||||
Income (Loss) from Operations | 4,198,858 | 5.5 | (795,301 | ) | (1.3 | ) | ||||||||
Other Income | 205,229 | 0.3 | 32,738 | 0.1 | ||||||||||
Net Income (Loss) | $ | 4,404,087 | 5.8 | $ | (762,563 | ) | (1.2 | ) | ||||||
Revenues
Revenue from ethanol sales increased by approximately 19% during the six months ended June 30, 2013 compared to the same period of 2012. Revenue from distillers grains increased by approximately 35% during the six months ended June 30, 2013 compared to the same period of 2012. Revenue from corn oil decreased by approximately 5% during the six months ended June 30, 2013 compared to the same period of 2012.
Ethanol
Our ethanol revenue was approximately $9,248,000 more during the six months ended June 30, 2013 compared to the six months ended June 30, 2012, an increase of approximately 19%. The average price we received for our ethanol increased by approximately 18% for the six months ended June 30, 2013 compared to the same period of 2012, an increase of approximately $0.36 per gallon of ethanol sold. Our total gallons of ethanol sold during the six months ended June 30, 2013 was approximately 1% more than during the same period of 2012, an increase of approximately 228,000 gallons. This increase was due to improved plant efficiencies.
Distillers Grains
Our total distillers grains revenue increased by approximately $4,607,000 for the six months ended June 30, 2013 compared to the same period of 2012. We sold approximately 1% more tons of distillers grains during the six months ended June 30, 2013 compared to the same period of 2012. The average price we received for our dried distillers grains increased by approximately $54 per ton, an increase of approximately 28%, for the six months ended June 30, 2013 compared to the same period of 2012. The average price we received for our modified/wet distillers grains increased by approximately $68 per ton, an increase of approximately 35%, for the six months ended June 30, 2013 compared to the same period of 2012. For the six months ended June 30, 2013, we sold approximately 11% of our distillers grains in the dried form and approximately 89% in the modified/wet form. During 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.
Corn Oil
Our total pounds of corn oil sold increased by approximately 4% during the six months ended June 30, 2013 compared to the same period of 2012 due to improved efficiency in operating our corn oil extraction equipment. Offsetting this increase in production, the average price we received for our corn oil decreased by approximately 10% for the six months ended June 30, 2013 compared to the same period of 2012.
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Cost of Revenues
Our cost of revenues related to corn was approximately 15% higher for the six months ended June 30, 2013 compared to the same period of 2012. Our average cost per bushel of corn increased by approximately 14% for the six months ended June 30, 2013 compared to the same period of 2012, an increase of approximately $0.84 per bushel of corn. We used approximately 1% more bushels of corn during the six months ended June 30, 2013 compared to the same period of 2012.
Our cost of revenues related to natural gas increased by approximately $778,000, an increase of approximately 33%, for the six months ended June 30, 2013 compared to the same period of 2012. Our average cost per MMBtu of natural gas during the six months ended June 30, 2013 was approximately 28% higher compared to the six months ended June 30, 2012, an increase of approximately $0.98 per MMBtu of natural gas. We used approximately 4% more natural gas during the six months ended June 30, 2013 compared to the same period of 2012. This increase was due to increased production of dried distillers grains and a colder and longer winter.
Operating Expense
Our operating expenses increased by approximately 20%, or approximately $299,000, for the six months ended June 30, 2013 compared to the same period of 2012. This increase was due primarily to a one-time pledge to support a technical development center partially offset by lower environmental compliance costs.
Other Income and Expense
Our interest expense was higher for the six months ended June 30, 2013 compared to the same period of 2012 because we had more borrowing on our revolving loan. We had more income from our investments during the six months ended June 30, 2013 compared to the same period of 2012 due primarily to our investment in our marketer, RPMG.
Changes in Financial Condition for the Six Months Ended June 30, 2013
Current Assets
Our current assets were lower at June 30, 2013 compared to December 31, 2012 primarily due to decreased cash on hand and decreased inventory. The decrease in our cash on hand is tied partially to a reduction in our accounts payable from deferred corn payments which occurred following the end of our 2012 fiscal year. Further, we paid a distribution of approximately $3 million which used cash during the first six months of our 2013 fiscal year. The value of our inventory was lower at June 30, 2013 compared to December 31, 2012 due to less corn inventory offset by increased ethanol inventory. The value of our derivative instruments was lower at June 30, 2013 compared to December 31, 2012 due to fewer forward and futures contracts in gain positions.
Property and Equipment
Our net property and equipment was slightly lower at June 30, 2013 compared to December 31, 2012 as a result of regular depreciation of our equipment.
Current Liabilities
Our accounts payable were lower at June 30, 2013 compared to December 31, 2012 because our corn 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 2013. The liability associated with our derivative financial instruments was higher at June 30, 2013 compared to December 31, 2012 due to more forward contracts in loss positions with the declining corn market.
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.
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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, 2013, we had $0 outstanding and $11,400,000 available to be drawn on these revolving loans, after taking into account the borrowing base calculation. 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, 2013 and 2012:
Six Months Ended June 30, | ||||||||
2013 | 2012 | |||||||
Net cash provided by (used in) operating activities | $ | 1,422,906 | $ | (10,450,614 | ) | |||
Net cash (used in) investing activities | (179,288 | ) | (488,510 | ) | ||||
Net cash (used for) provided by financing activities | (3,401,972 | ) | 589,503 | |||||
Cash Flow From Operations. Our operating activities provided more cash during the six months ended June 30, 2013 compared to the same period of 2012, primarily due to increased net income during the 2013 period. We also used less cash for margin calls related to our derivative instruments and inventory during the six months ended June 30, 2013 compared to the same period of 2012.
Cash Flow From Investing Activities. Our investing activities used less cash during the six months ended June 30, 2013 compared to the same period of 2012, due to having fewer capital expenditures during the 2013 period.
Cash Flow From Financing Activities. Our financing activities used more cash during the six months ended June 30, 2013 compared to the same period of 2012 as a result of having a larger distribution and the fact that our financing activities did not provide any cash for our operations during the 2013 period, unlike the 2012 period.
Indebtedness
On May 20, 2013, we entered into a new comprehensive credit facility with Farm Credit Services of America ("FCSA"). The FCSA credit facility replaces our prior loans with First National Bank of Omaha. The FCSA loan is comprised of a $10 million revolving operating line of credit (the "Operating Line") and a $5 million revolving term commitment (the "Term Revolver").
Pursuant to our FCSA loans, we are required to maintain working capital of $5 million. All of our assets, including the ethanol plant, its accounts receivable and inventories, serves as collateral for our loans with FCSA.
Operating Line
The Operating Line has a two year term which matures on May 31, 2015. The total amount that we can draw on the Operating Line is restricted by a formula based on the amount of inventory, receivables and equity we have in certain CBOT futures positions. Interest on the Operating Line accrues at the one month London Interbank Offered Rate ("LIBOR") plus 310 basis points. There is a fee of 0.25% on the portion of the Operating Line that we are not using, which is billed quarterly. The interest rate for this loan at June 30, 2013 was 3.30%. As of June 30, 2013, we had $0 outstanding on the Operating Line and $6,400,000 available to be drawn, taking into account the borrowing base calculation.
Long-Term Debt Sources
The Term Revolver has a five year term which matures on May 31, 2018. We can use the Term Revolver for draws required to maintain compliance with our working capital requirements, funding approved capital expenditures and funding approved investments in other ethanol production facilities. Interest on the Term Revolver accrues at the one month LIBOR plus 335 basis points. There is a fee of 0.35% on the portion of the Term Revolver that we are not using, which is billed quarterly. As of June 30, 2013, the interest rate was 3.55%. On June 30, 2013, we had $0 outstanding and $5,000,000 available to be drawn on this loan.
Subordinated Debt
In 2009, 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
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Economic Development, Inc. (REED) and $200,000 from the First District Development Company (FDDC). 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. In April 2013, we repaid the balances of the REED and FDDC loans in full.
Covenants
As of June 30, 2013, 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 FCSA, and FCSA refuses to waive the non-compliance, FCSA may require us to immediately repay all amounts outstanding on our loans.
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
With the significant change in the prices of our main inputs and outputs, the lower of cost or market analysis of inventories 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 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, we have no amounts outstanding on these loans at this time. 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.
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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 an increase to our cost of revenues of approximately $500,000 related to derivative instruments for the quarter ended June 30, 2013. We recorded an increase to our cost of revenues of approximately $1.2 million related to derivative instruments for the quarter ended June 30, 2012. 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, 2013, we were committed to purchasing approximately 2.1 million bushels of corn with an average price of $5.93 per bushel. These corn purchases represent approximately 12% 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, 2013, we were committed to purchasing approximately 99,000 MMBtus of natural gas with an average price of approximately $3.64 per MMBtu. The natural gas purchases represent approximately 7% of our expected annual plant requirements.
As of June 30, 2013, we were committed to selling approximately 855,000 gallons of ethanol with an average price of approximately $1.87 per gallon. The ethanol sales represent approximately 2% of our expected annual plant production.
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, 2013, 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, 2013. 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 | 48,145,000 | Gallons | 10 | % | $ | 11,410,365 | |||||
Corn | 15,840,930 | Bushels | 10 | % | $ | 10,328,286 | |||||
Natural Gas | 1,300,639 | MMBTU | 10 | % | $ | 487,740 | |||||
For comparison purposes, our sensitivity analysis for our 2012 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 | % | $ | 9,849,000 | |||||
Corn | 15,208,204 | Bushels | 10 | % | $ | 10,539,285 | |||||
Natural Gas | 1,330,000 | MMBTU | 10 | % | $ | 456,190 | |||||
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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, 2013. 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, 2013, 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.
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.
There have not been any material changes to the risk factors that were previously disclosed on our annual report on Form 10-K for the fiscal year ended December 31, 2012.
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 | |
10.1 | Credit Agreement between Farm Credit Services of America and Dakota Ethanol, L.L.C. dated May 15, 2013. | |
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, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012, (ii) Consolidated Statements of Income for the three and six months ended June 30, 2013 and 2012, (iii) Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012, 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 13, 2013 | /s/ Scott Mundt | |
Scott Mundt | |||
President and Chief Executive Officer (Principal Executive Officer) | |||
Date: | August 13, 2013 | /s/ Rob Buchholtz | |
Rob Buchholtz | |||
Chief Financial Officer (Principal Financial and Accounting Officer) | |||
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