Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
o
Quarterly report under Section 13 or 15(d) of
the Securities Exchange Act of 1934.
For the
fiscal quarter ended July 31, 2010
o
Transition report under Section 13 or 15(d) of
the Exchange Act of 1934.
Commission file number 00051277
GRANITE FALLS ENERGY, LLC
(Name of small business
issuer in its charter)
Minnesota
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41-1997390
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(State or other
jurisdiction of
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(I.R.S. Employer
Identification No.)
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incorporation or
organization)
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15045
Highway 23 SE
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Granite
Falls, MN
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56241-0216
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(Address of principal
executive offices)
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(Zip Code)
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320-564-3100
(Issuers telephone number)
Indicate by check mark whether the registrant (1) filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
x
Yes
o
No
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).
o
Yes
o
No
Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of large accelerated filer, accelerated
filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
o
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Accelerated filer
o
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Non-accelerated
filer
S
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Smaller reporting
company
o
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(Do
not check if a smaller reporting company)
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Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
o
Yes
x
No
Indicate the number of shares outstanding of each of
the issuers classes of common stock, as of the latest practicable date: As of September 1,
2010 there were 30,656 membership units outstanding.
Table of Contents
PART I - FINANCIAL
INFORMATION
Item 1. Financial Statements.
GRANITE FALLS ENERGY, LLC
Condensed Balance Sheets
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July 31
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October 31,
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2010
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2009
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(unaudited)
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ASSETS
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Current Assets
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Cash
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$
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11,231,147
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$
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5,716,506
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Restricted
cash
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736,488
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1,110,673
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Accounts
receivable
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2,435,276
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3,340,018
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Inventory
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3,101,258
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2,851,640
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Derivative
instruments
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112,675
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816,812
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Prepaid
expenses and other current assets
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165,164
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179,622
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Total
current assets
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17,782,008
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14,015,271
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Property, Plant and Equipment
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Land
and improvements
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3,490,107
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3,490,107
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Railroad
improvements
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4,127,738
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4,127,738
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Process
equipment and tanks
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59,892,317
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59,585,019
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Administration
building
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279,734
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279,734
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Office
equipment
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135,912
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135,912
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Rolling
stock
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558,633
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558,633
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Construction
in progress
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73,280
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237,828
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68,557,721
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68,414,971
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Less
accumulated depreciation
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31,161,151
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25,989,953
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Net
property, plant and equipment
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37,396,570
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42,425,018
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Other Assets
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Deferred
financing costs, net of amortization
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20,520
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32,894
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Total Assets
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$
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55,199,098
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$
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56,473,183
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LIABILITIES AND MEMBERS EQUITY
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Current Liabilities
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Current
portion of long-term debt
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$
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66,832
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$
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74,961
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Accounts
payable
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1,405,822
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1,529,688
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Corn
payable to FCE - related party
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1,196,637
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1,565,042
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Derivative
instruments
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30,975
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455,376
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Accrued
liabilities
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577,996
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379,010
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Total
current liabilities
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3,278,262
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4,004,077
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Long-Term Debt,
less current portion
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255,824
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370,136
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Commitments and Contingencies
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Members Equity, 30,656 units issued and outstanding
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51,665,012
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52,098,970
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Total Liabilities and Members Equity
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$
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55,199,098
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$
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56,473,183
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Notes
to the Unaudited Condensed Financial Statements are an integral part of this
Statement.
3
Table of Contents
GRANITE FALLS ENERGY, LLC
Condensed Statements of Operations
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Three Months
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Three Months
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Ended
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Ended
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July 31,
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July 31,
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2010
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2009
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(Unaudited)
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(Unaudited)
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Revenues
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$
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23,632,382
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$
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25,829,076
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Cost of Goods Sold - primarily related party
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22,245,564
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23,899,283
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Gross Profit
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1,386,818
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1,929,793
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Operating Expenses
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467,389
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533,995
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Operating Income
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919,429
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1,395,798
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Other Income (Expense)
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Other
income
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2,699
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|
13,205
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|
Interest
income
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|
18,152
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|
2,330
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|
Interest
expense
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(1,261
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)
|
(16,210
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)
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Total
other income (expense), net
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19,590
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(675
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)
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Net Income
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$
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939,019
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$
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1,395,123
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Weighted Average Units Outstanding - Basic and Diluted
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30,656
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30,656
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Net Income Per Unit - Basic and Diluted
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$
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30.63
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$
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45.51
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Distributions Per Unit
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$
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|
$
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|
Notes
to the Unaudited Condensed Financial Statements are an integral part of this
Statement.
4
Table of
Contents
GRANITE FALLS ENERGY, LLC
Condensed Statements of Operations
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Nine Months
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Nine Months
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Ended
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Ended
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July 31,
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July 31,
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2010
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2009
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(Unaudited)
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(Unaudited)
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|
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|
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|
Revenues
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$
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69,294,943
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$
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68,141,681
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Cost of Goods Sold - primarily related party
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63,831,087
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67,060,694
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|
|
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Gross Profit
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5,463,856
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1,080,987
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Operating Expenses
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1,439,101
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1,573,479
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Operating Income (Loss)
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4,024,755
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(492,492
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)
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Other Income (Expense):
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Other
income (expense), net
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89,107
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|
(618,298
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)
|
Interest
income
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|
60,423
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|
8,036
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|
Interest
expense
|
|
(9,843
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)
|
(79,852
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)
|
Total
other income (expense), net
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139,687
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(690,114
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)
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Net Income (Loss)
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|
$
|
4,164,442
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|
$
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(1,182,606
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)
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Weighted Average Units Outstanding - Basic and Diluted
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30,656
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30,823
|
|
|
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Net Income (Loss) Per Unit - Basic and Diluted
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$
|
135.84
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$
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(38.37
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)
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|
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Distributions Per Unit
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$
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150.00
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$
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|
Notes
to Unaudited Condensed Financial Statements are an integral part of this
Statement.
5
Table of Contents
GRANITE FALLS ENERGY, LLC
Condensed Statements of Cash Flows
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Nine Months
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Nine Months
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Ended
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Ended
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July 31,
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July 31,
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2010
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2009
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(unaudited)
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(unaudited)
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Cash Flows from Operating Activities:
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Net
income (loss)
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$
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4,164,442
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$
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(1,182,606
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)
|
Adjustments
to reconcile net income (loss) to net cash provided by operations:
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|
|
|
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|
Depreciation
and amortization
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5,183,572
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4,764,009
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|
Change
in fair value of derivative instruments
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402,602
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|
895,481
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|
Changes
in assets and liabilities:
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|
|
|
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|
Restricted
cash
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|
374,185
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|
174,451
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|
Derivative
instruments
|
|
(122,866
|
)
|
(412,534
|
)
|
Accounts
receivable
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|
904,742
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|
549,363
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|
Inventory
|
|
(249,618
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)
|
659,240
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|
Prepaid
expenses and other current assets
|
|
14,458
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|
(103,820
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)
|
Accounts
payable
|
|
(492,271
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)
|
998,593
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|
Due
to broker
|
|
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(238,581
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)
|
Accrued
liabilities
|
|
198,986
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|
(1,462,379
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)
|
Net
Cash Provided by Operating Activities
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|
10,378,232
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|
4,641,217
|
|
|
|
|
|
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|
Cash Flows from Investing Activities:
|
|
|
|
|
|
Capital
expenditures
|
|
(92,038
|
)
|
(81,071
|
)
|
Construction
in process
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|
(50,712
|
)
|
(169,679
|
)
|
Net
Cash Used in Investing Activities
|
|
(142,750
|
)
|
(250,750
|
)
|
|
|
|
|
|
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Cash Flows from Financing Activities:
|
|
|
|
|
|
Payments
on revolving line of credit, net
|
|
|
|
(2,560,500
|
)
|
Payments
on long-term debt
|
|
(122,441
|
)
|
(58,734
|
)
|
Member
distributions paid
|
|
(4,598,400
|
)
|
|
|
Net
Cash Used in Financing Activities
|
|
(4,720,841
|
)
|
(2,619,234
|
)
|
|
|
|
|
|
|
Net Increase in Cash
|
|
5,514,641
|
|
1,771,233
|
|
|
|
|
|
|
|
Cash Beginning of Period
|
|
5,716,506
|
|
37,773
|
|
|
|
|
|
|
|
Cash End of Period
|
|
$
|
11,231,147
|
|
$
|
1,809,006
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
Interest
expense
|
|
$
|
10,412
|
|
$
|
72,185
|
|
|
|
|
|
|
|
Supplemental Disclosure of Noncash Investing, Operating and
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable offset by repurchase of membership units
|
|
$
|
|
|
$
|
500,000
|
|
Transfer
of construction in process to fixed assets
|
|
$
|
215,260
|
|
$
|
|
|
Notes
to the Unaudited Condensed Financial Statements are an integral part of this
Statement.
6
Table of Contents
GRANITE
FALLS ENERGY, LLC
Notes
to Unaudited Condensed Financial Statements
July 31,
2010
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed
balance sheet as of October 31, 2009 is derived from audited financial
statements. The unaudited interim condensed financial statements of Granite
Falls Energy, LLC (the Company) reflect all adjustments consisting only of
normal recurring adjustments that are, in the opinion of management, necessary
for a fair presentation of financial position and results of operations and
cash flows. The results for the three and nine month periods ended July 31,
2010 are not necessarily indicative of the results that may be expected for a
full fiscal year. Certain information and note disclosures normally included in
annual financial statements prepared in accordance with accounting principles
generally accepted in the United States of America (GAAP) are condensed or
omitted pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC), although the Company believes that the disclosures
made are adequate to make the information not misleading. These condensed
financial statements should be read in conjunction with the Companys audited
financial statements and notes thereto included in its annual report for the
year ended October 31, 2009 filed on Form 10-K with the SEC.
Nature of Business
Granite Falls Energy, LLC (GFE
or the Company) is a Minnesota limited liability company currently producing
fuel-grade ethanol, distillers grains, and crude corn oil near Granite Falls,
Minnesota and sells these products throughout the continental United States.
GFEs plant has an approximate annual production capacity of 50 million
gallons.
Accounting Estimates
Management
uses estimates and assumptions in preparing these condensed financial
statements in accordance with generally accepted accounting principles in the
United States of America. Those estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities, and the reported revenues and expenses. The Company uses estimates
and assumptions in accounting for the following significant matters, among
others: economic lives of property, plant, and equipment, realizability of
accounts receivable, valuation of derivatives and inventory, and analysis of
long-lived assets impairment. Actual results may differ from previously
estimated amounts, and such differences may be material to our condensed
financial statements. The Company periodically reviews estimates and
assumptions, and the effects of revisions are reflected in the period in which
the revision is made.
Revenue Recognition
The Company generally sells
ethanol and related products pursuant to marketing agreements. Revenues
from the production of ethanol and the related products are recorded when the customer
has taken title and assumed the risks and rewards of ownership, prices are
fixed or determinable, and collectability is reasonably assured. Title is generally assumed by the buyer at
the Companys shipping point.
In accordance with the
Companys agreements for the marketing and sale of ethanol and related
products, marketing fees and commissions due to the marketers are deducted from
the gross sales as earned. These fees and commissions are recorded net of
revenues as they do not provide an identifiable benefit that is sufficiently
separable from the sale of ethanol and related products. Ethanol marketing fees
and commissions totaled approximately $202,000 and $213,000 for the three month
periods ended July 31, 2010 and 2009, respectively. Ethanol marketing fees
and commissions totaled approximately $598,000, and $540,000 for the nine month
periods ended July 31, 2010 and 2009, respectively. Distillers grain marketing fees and
commissions totaled approximately $44,000 and $48,000 for the three month
periods ended July 31, 2010 and 2009, respectively. Distillers grain
marketing fees and commissions totaled approximately $122,000 and $118,000 for
the nine month periods ended July 31, 2010 and 2009, respectively.
7
Table of Contents
GRANITE
FALLS ENERGY, LLC
Notes
to Unaudited Condensed Financial Statements
July 31,
2010
Derivative Instruments
From time to time the
Company enters into derivative transactions to hedge its exposures to commodity
price fluctuations. The Company is required to record these derivatives in the
balance sheet at fair value.
In order for a derivative to
qualify as a hedge, specific criteria must be met and appropriate documentation
maintained. Gains and losses from derivatives that do not qualify as hedges, or
are undesignated, must be recognized immediately in earnings. If the derivative does qualify as a hedge,
depending on the nature of the hedge, changes in the fair value of the
derivative will be either offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in
other comprehensive income until the hedged item is recognized in earnings.
Changes in the fair value of undesignated derivatives are recorded in the
statement of operations.
Additionally, the Company is
required to evaluate its contracts to determine whether the contracts are
derivatives. Certain contracts that
literally meet the definition of a derivative may be exempted as normal
purchases or normal sales. Normal purchases and normal sales are contracts
that provide for the purchase or sale of something other than a financial
instrument or derivative instrument that will be delivered in quantities
expected to be used or sold over a reasonable period in the normal course of
business. Contracts that meet the requirements of normal purchases or sales are
documented as normal and exempted from accounting and reporting requirements,
and therefore, are not marked to market in our financial statements.
2. RISKS AND UNCERTAINTIES
The Company has certain
risks and uncertainties that it experiences during volatile market conditions.
These volatilities can have a severe impact on operations. The Companys
revenues are derived from the sale and distribution of ethanol, distillers
grains, and corn oil to customers primarily located in the U.S. Corn for
the production process is supplied to our plant primarily from local agricultural
producers and from purchases on the open market. Ethanol sales typically
average approximately 85% of total revenues and corn costs typically average
approximately 70% of cost of goods sold.
The Companys operating and
financial performance is largely driven by the prices at which they sell
ethanol and the net expense of corn. The price of ethanol is influenced by
factors such as supply and demand, the weather, government policies and
programs, and unleaded gasoline prices and the petroleum markets as a whole.
Excess ethanol supply in the market, in particular, puts downward pressure on
the price of ethanol. Our largest cost of production is corn. The cost of
corn is generally impacted by factors such as supply and demand, the weather,
government policies and programs, and our risk management program used to
protect against the price volatility of these commodities.
3. INVENTORY
Inventories consist of the
following:
|
|
July 31,
2010
|
|
October 31,
2009
|
|
Raw
materials
|
|
$
|
1,308,180
|
|
$
|
1,123,979
|
|
Spare
parts
|
|
510,628
|
|
495,104
|
|
Work
in process
|
|
543,904
|
|
542,312
|
|
Finished
goods
|
|
738,546
|
|
690,245
|
|
Totals
|
|
$
|
3,101,258
|
|
$
|
2,851,640
|
|
The Company performs a lower
of cost or market analysis on inventory to determine if the market values of
certain inventories are less than their carrying value, which is attributable
primarily to decreases in market prices of corn and ethanol.
8
Table of Contents
GRANITE
FALLS ENERGY, LLC
Notes
to Unaudited Condensed Financial Statements
July 31,
2010
4. DERIVATIVE INSTRUMENTS
In
order to reduce the risk caused by market fluctuations, the Company
occasionally hedges its anticipated corn, natural gas, and denaturant purchases
and ethanol sales by entering into options and futures contracts. These
contracts are used with the intention to fix the purchase price of anticipated
requirements of corn, natural gas, and denaturant in the Companys ethanol
production activities and the related sales price of ethanol. The fair value of
these contracts is based on quoted prices in active exchange-traded or
over-the-counter markets. Although the Company believes its commodity
derivative positions are economic hedges, none have been formally designated as
a hedge for accounting purposes and derivative positions are recorded on the
balance sheet at their fair market value, with changes in fair value recognized
in current period earnings or losses. Gains and losses from ethanol related
derivative instruments, including unrealized changes in the fair value of these
positions, are included in the results of operations and are classified as a
component of revenue. Gains and losses from corn, natural gas, and denaturant
derivative instruments, including unrealized changes in the fair value of these
positions, are included in the results of operations and are classified as a
component of costs of goods sold.
As
of July 31, 2010, the total notional amount of the Companys outstanding
corn derivative instruments was approximately 660,000 bushels that were entered
into to hedge forecasted corn purchases through September 2010. As of July 31,
2010, the total notional amount of the Companys outstanding denaturant
derivative instruments was approximately 294,000 gallons that were entered into
to hedge forecasted denaturant purchases through October 2010. There may
be offsetting positions that are shown on a net basis that could lower the
notional amount of positions outstanding as disclosed above.
The
following tables provide details regarding the Companys derivative instruments
at July 31, 2010, none of which are designated as hedging instruments
|
|
Balance Sheet
location
|
|
Assets
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Corn contracts
|
|
Derivative
instruments
|
|
$
|
112,675
|
|
$
|
|
|
Denaturant contracts
|
|
Derivative
instruments
|
|
|
|
30,975
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
|
$
|
112,675
|
|
$
|
30,975
|
|
In
addition, as of July 31, 2010 the Company maintained approximately
$136,488 of restricted cash related to margin requirements for the Companys
derivative instrument positions.
The
following tables provide details regarding the Companys derivative instruments
at October 31, 2009, none of which are designated as hedging instruments
|
|
Balance Sheet
location
|
|
Assets
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Ethanol contracts
|
|
Derivative
instruments
|
|
$
|
|
|
$
|
386,160
|
|
Corn contracts
|
|
Derivative
instruments
|
|
743,250
|
|
|
|
Natural gas contracts
|
|
Derivative
instruments
|
|
|
|
69,270
|
|
Denaturant contracts
|
|
Derivative
instruments
|
|
73,562
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
|
$
|
816,812
|
|
$
|
455,376
|
|
In
addition, as of October 31, 2009 the Company maintained approximately
$510,673 of restricted cash related to margin requirements for the Companys
derivative instrument positions.
The
following tables provide details regarding the gains and (losses) from Companys
derivative instruments in
9
Table of
Contents
GRANITE
FALLS ENERGY, LLC
Notes
to Unaudited Condensed Financial Statements
July 31, 2010
statements
of operations, none of which are designated as hedging instruments:
|
|
Statement of
|
|
Three-Months Ended July 31,
|
|
|
|
Operations location
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Corn contracts
|
|
Cost
of Goods Sold
|
|
$
|
(12,257
|
)
|
$
|
(903,248
|
)
|
Natural gas contracts
|
|
Cost
of Goods Sold
|
|
|
|
(22,186
|
)
|
Denaturant contracts
|
|
Cost
of Goods Sold
|
|
(58,757
|
)
|
158,404
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
$
|
(71,014
|
)
|
$
|
(767,030
|
)
|
|
|
Statement of
|
|
Nine-Months Ended July 31,
|
|
|
|
Operations location
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Ethanol contracts
|
|
Revenue
|
|
$
|
(103,132
|
)
|
$
|
119,249
|
|
Corn contracts
|
|
Cost
of Goods Sold
|
|
(191,511
|
)
|
(1,011,711
|
)
|
Natural gas contracts
|
|
Cost
of Goods Sold
|
|
(113,710
|
)
|
(182,269
|
)
|
Denaturant contracts
|
|
Cost
of Goods Sold
|
|
5,751
|
|
179,250
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
$
|
(402,602
|
)
|
$
|
(895,481
|
)
|
5. REVOLVING LINE OF CREDIT
The
Company has a Loan Agreement with a bank. Under the Loan Agreement, the Company
has a revolving line of credit with a maximum of $6,000,000 available and is
secured by substantially all of the Companys assets. The interest rate on the
revolving line of credit is at 0.25 percentage points above the prime rate as
reported by the Wall Street Journal, with a minimum rate of 5.0%. The interest
rate on the revolving line of credit at July 31, 2010 was 5.0%, the
minimum rate under the terms of the agreement. At July 31, 2010 and October 31,
2009, the Company had no outstanding balance on this line of credit. The
Company is required to maintain a savings account balance with the Bank
totaling 10% of the maximum amount available on the line of credit to serve as
collateral on this line of credit. At
both July 31, 2010 and October 31, 2009, this amount totaled $600,000
and is included in restricted cash.
The Company also has letters
of credit totaling $484,928 with the bank as part of a credit requirement of
Northern Natural Gas. These letters of
credit reduce the amount available under the revolving line of credit to
approximately $5,515,000.
6. LONG-TERM DEBT
Long-term debt consists of
the following:
|
|
July 31,
2010
|
|
October 31,
2009
|
|
Economic
Development Authority (EDA) Loans:
|
|
|
|
|
|
City
of Granite Fall / MIF
|
|
$
|
247,618
|
|
$
|
292,956
|
|
Western
Minnesota RLF
|
|
|
|
71,423
|
|
Chippewa
County
|
|
75,038
|
|
80,718
|
|
Total
EDA Loan
|
|
322,657
|
|
445,097
|
|
|
|
|
|
|
|
Less:
Current Maturities
|
|
(66,832
|
)
|
(74,961
|
)
|
Total
Long-Term Debt
|
|
$
|
255,824
|
|
$
|
370,136
|
|
The estimated maturities of
long term debt at July 31, 2010 are as follows:
10
Table of
Contents
GRANITE
FALLS ENERGY, LLC
Notes
to Unaudited Condensed Financial Statements
July 31, 2010
2011
|
|
$
|
66,832
|
|
2012
|
|
67,622
|
|
2013
|
|
68,422
|
|
2014
|
|
69,234
|
|
2015
|
|
6,592
|
|
Thereafter
|
|
43,955
|
|
Total
|
|
$
|
322,657
|
|
EDA Loans:
On February 1, 2006,
the Company signed a Loan Agreement with the City of Granite Falls, MN (EDA
Loan Agreement) for amounts to be borrowed from several state and regional
economic development authorities. The original amounts are as follows:
City of Granite Falls /
Minnesota Investment Fund (MIF):
|
|
|
Original
Amount:
|
|
$500,000
|
Interest
Rate:
|
|
1.00%
|
Principal
and Interest Payments:
|
|
Quarterly
|
Maturity
Date:
|
|
June 15, 2014
|
|
|
|
Western Minnesota
Revolving Loan Fund (RLF):
|
|
|
Original
Amount:
|
|
$100,000
|
Interest
Rate:
|
|
5.00%
|
Principal
and Interest Payments:
|
|
Semi-Annual
|
Original
Maturity Date:
|
|
June 15, 2016
|
|
|
|
Chippewa County:
|
|
|
Original
Amount:
|
|
$100,000
|
Interest
Rate:
|
|
3.00%
|
Principal
and Interest Payments:
|
|
Semi-Annual
|
Maturity
Date:
|
|
June 15, 2021
|
Amounts borrowed under the
EDA Loan Agreements are secured by a second mortgage on all of the assets of
the Company. On March 24, 2010, the
RLF loan was paid in full and there were no prepayment penalties assessed.
8. MEMBERS EQUITY
The
Company has one class of membership units. The units have no par value and have
identical rights, obligations and privileges.
Income and losses are allocated to all members based upon their
respective percentage of units held. As of July 31, 2010 and October 31,
2009, the Company had 30,656 membership units issued and outstanding.
In
November 2009, the Company declared a cash distribution of $150 per unit
or $4,598,400 for unit holders of record as of November 19, 2009. The
distribution was paid on December 16, 2009.
9. FAIR VALUE
Various inputs are
considered when determining the value of financial instruments. The
inputs or methodologies used for valuing securities are not necessarily an
indication of the risk associated with investing in these
securities. These inputs are summarized in the three broad levels
listed below.
·
Level 1 inputs
are quoted prices in active markets for identical assets or liabilities as of
the reporting date. Active markets are those in which transactions for
the asset or liability occur with sufficient frequency and
11
Table of Contents
GRANITE
FALLS ENERGY, LLC
Notes
to Unaudited Condensed Financial Statements
July 31,
2010
volume to provide pricing
information on an ongoing basis.
·
Level 2 inputs
include the following:
·
Quoted prices in active markets for similar
assets or liabilities.
·
Quoted prices in markets that are not active
for identical or similar assets or liabilities.
·
Inputs other than quoted prices that are
observable for the asset or liability.
·
Inputs that are derived primarily from or
corroborated by observable market data by correlation or other means.
·
Level 3 inputs
are unobservable inputs for the asset or liability.
The following table provides
information on those assets and liabilities measured at fair value on a
recurring basis.
|
|
|
|
|
|
Fair
Value Measurement Using
|
|
|
|
Carrying
Amount
in Balance Sheet
July 31, 2010
|
|
Fair
Value
July 31, 2010
|
|
Quoted
Prices in
Active
Markets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
unobservable
inputs
(Level 3)
|
|
Financial
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
Instruments
|
|
$
|
112,675
|
|
$
|
112,675
|
|
$
|
112,675
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
Instruments
|
|
$
|
(30,975
|
)
|
$
|
(30,975
|
)
|
$
|
(30,975
|
)
|
$
|
|
|
$
|
|
|
The fair value of the
derivative instruments are based on quoted market prices in an active market.
|
|
|
|
|
|
Fair
Value Measurement Using
|
|
|
|
Carrying
Amount
in Balance Sheet
October 31, 2009
|
|
Fair
Value
October 31, 2009
|
|
Quoted
Prices in
Active
Markets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
unobservable
inputs
(Level 3)
|
|
Financial
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
Instruments
|
|
$
|
816,812
|
|
$
|
816,812
|
|
$
|
816,812
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
Instruments
|
|
$
|
(455,376
|
)
|
$
|
(455,376
|
)
|
$
|
(455,376
|
)
|
$
|
|
|
$
|
|
|
The fair value of the
derivative instruments are based on quoted market prices in an active market.
10.
COMMITMENTS AND CONTINGENCIES
Construction Management and
Operations Management Agreement
On August 1, 2008, the
Company and Glacial Lakes Energy, LLC (GLE) executed a settlement agreement
and mutual release related to the dispute with GLE over the termination of the
Operating and Management Agreement. The Company has agreed to pay GLE a
contingent amount of 2% of net income of the Company, as defined per the
agreement, for each of the fiscal years ending October 31, 2008 and 2009
and 1.5% of net income of the Company, as defined per the agreement, for the fiscal
year ending October 31, 2010. As of July 31, 2010 and October 31,
2009, the Company accrued approximately $62,000 and $14,000, respectively, for
the contingent amounts due under this agreement.
12
Table of
Contents
GRANITE
FALLS ENERGY, LLC
Notes
to Unaudited Condensed Financial Statements
July 31, 2010
11. LEGAL PROCEEDINGS
From
time to time in the ordinary course of business, the Company may be named as a
defendant in legal proceedings related to various issues, including without
limitation, workers compensation claims, tort claims, or contractual disputes.
We are not currently a party to any material pending legal proceedings
and we are not currently aware of any such proceedings being contemplated.
13
Table of Contents
Item 2. Managements Discussion
and Analysis of Financial Condition and Results of Operations.
We prepared the following discussion and analysis to
help you better understand our financial condition, changes in our financial
condition, and results of operations for the three and nine month period ended July 31,
2010, compared to the same period of the prior fiscal year. This discussion
should be read in conjunction with the condensed financial statements and notes
and the information contained in the Companys Annual Report on Form 10-K
for the fiscal year ended October 31, 2009.
Disclosure Regarding Forward-Looking Statements
This report contains historical information, as well
as forward-looking statements. These forward-looking statements include any
statements that involve known and unknown risks and relate to future events and
our expectations regarding future performance or conditions. Words such as may,
will, should, expect, plan, anticipate, believe, estimate, future,
intend, could, hope, predict, target, potential, or continue or
the negative of these terms or other similar expressions are intended to
identify forward-looking statements, but are not the exclusive means of
identifying such statements. These forward-looking statements, and others we
make from time to time, are subject to a number of risks and uncertainties.
Many factors could cause actual results to differ materially from those
projected in forward-looking statements. While it is impossible to identify all
such factors, factors that could cause actual results to differ materially from
those estimated by us include, but are not limited to:
·
Changes in the availability
and price of corn and natural gas;
·
Changes in our business
strategy, capital improvements or development plans;
·
Our ability to profitably
operate the ethanol plant and maintain a positive spread between the selling
price of our products and our raw materials costs;
·
Results of our hedging
transactions and other risk management strategies;
·
Decreases in the market
prices of ethanol and distillers grains;
·
Ethanol supply exceeding
demand; and corresponding ethanol price reductions;
·
Changes in the environmental
regulations that apply to our plant operations and changes in our ability to
comply with such regulations;
·
Changes in the availability
of credit and our ability to generate sufficient liquidity to fund our operations,
debt service requirements and capital expenditures;
·
Changes in plant production
capacity or technical difficulties in operating the plant;
·
Changes in general economic
conditions or the occurrence of certain events causing an economic impact in
the agriculture, oil or automobile industries;
·
Lack of transport, storage
and blending infrastructure preventing ethanol from reaching high demand
markets;
·
Changes in federal and/or
state laws (including the elimination of any federal and/or state ethanol tax
incentives);
·
Changes and advances in
ethanol production technology;
·
Effects of mergers,
consolidations or contractions in the ethanol industry;
·
Competition from alternative
fuel additives;
·
The development of
infrastructure related to the sale and distribution of ethanol;
·
Our inelastic demand for
corn, as it is the only available feedstock for our plant;
·
Our ability to retain key
employees and maintain labor relations; and
·
Volatile commodity and
financial markets.
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 do not undertake any duty to update forward-looking statements
after the date they are made or to conform forward-looking statements to actual
results or to changes in circumstances or expectations. 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
14
Table of
Contents
statements
by these cautionary statements.
Overview
Granite Falls Energy, LLC (Granite Falls or the Company)
is a Minnesota limited liability company currently producing fuel-grade
ethanol, distillers grains, and crude corn oil for sale. Our plant has an
approximate annual production capacity of 50 million gallons, and our
environmental permits allow us to produce ethanol at a rate of 49.9 million
gallons of undenatured ethanol on a twelve month rolling sum basis.
Our operating results are largely driven by the
prices at which we sell our ethanol, distillers grains, and crude corn oil as
well as the other costs related to production. The price of ethanol has
historically fluctuated with the price of petroleum-based products such as
unleaded gasoline, heating oil and crude oil. The price of distillers grains
has historically been influenced by the price of corn as a substitute livestock
feed. We expect these price relationships to continue for the foreseeable
future, although recent volatility in the commodities markets makes historical
price relationships less reliable. Our largest costs of production are corn,
natural gas, depreciation and manufacturing chemicals. The cost of corn is
largely impacted by geopolitical supply and demand factors and the outcome of
our risk management strategies. Prices for natural gas, manufacturing chemicals
and denaturant are tied directly to the overall energy sector, crude oil and
unleaded gasoline.
As of the date of this report, we have 37 full time
employees. Ten of these employees are involved primarily in management and
administration. The remaining employees are involved primarily in plant
operations. We do not currently anticipate any significant change in the number
of employees at our plant.
There
have been a number of recent developments in legislation that impacts the
ethanol industry. One such development
concerns the federal Renewable Fuels Standard (RFS). The ethanol industry is benefited by the RFS
which requires that a certain amount of renewable fuels must be used in the
United States each year. In February 2010,
the EPA issued new regulations governing the RFS. These new regulations have been called
RFS2. RFS2, as adopted by the EPA,
provides that corn based ethanol from modern ethanol production processes does
meet the definition of a renewable fuel under the RFS program.
In
2009, California passed a Low Carbon Fuels Standard (LCFS). The California LCFS requires that renewable
fuels used in California must accomplish certain reductions in greenhouse gases
which is measured using a lifecycle analysis, similar to RFS2. Management believes that this lifecycle
analysis is based on unsound scientific principles that unfairly disadvantages corn
based ethanol. If our industry is unable
to supply ethanol to California, it could significantly reduce demand for the
ethanol we produce. Several lawsuits
have been filed by industry groups challenging the California LCFS.
Ethanol
production in the United States is benefited by various tax incentives. The most significant of these tax incentives
is the federal Volumetric Ethanol Excise Tax Credit (VEETC). VEETC provides a volumetric ethanol excise
tax credit of 45 cents per gallon of ethanol blended with gasoline. VEETC is scheduled to expire on December 31,
2010. If this tax credit is not renewed,
it likely would have a negative impact on the price of ethanol and demand for
ethanol in the marketplace. The current
debate in the U.S. Congress, about deficit spending and energy policy indicates
that it is possible that VEETC may not be renewed. If the VEETC that benefits the ethanol
industry is allowed to expire, it could negatively impact demand for ethanol
and may harm our financial condition.
The Small Ethanol Producer
Tax Credit (SEPTC) is another tax incentive allowing small ethanol producers
a 10 cent per gallon federal income tax credit on up to 15 million gallons of
production, annually. The credit, which is capped at $1.5 million per year per
producer, is only available to ethanol producers with an annual production
capacity of no more than 60 million gallons per year. The SEPTC expires December 31,
2010, along with the VEETC.
Another
federal policy in jeopardy is the secondary tariff on imported ethanol. This is a 54 cent per gallon tariff on
ethanol imports from certain countries.
This tariff was designed to offset the blenders credit that is applied
to ethanol regardless of its country of origin.
The secondary tariff on imported ethanol is scheduled to expire in January 2011. However, the proposed Renewable Fuels
Reinvestment Act of 2010 contains provisions
extending
15
Table of Contents
the 54 cent per gallon
tariff
for five years. If this
tariff is allowed to expire, imported ethanol could have a significant negative
impact on ethanol prices and our profitability.
Results of Operations for the Three Months Ended July 31,
2010 and 2009
The following table shows the results of our
operations and the approximate percentage of revenues, costs of goods sold,
operating expenses and other items to total revenues in our unaudited
statements of operations for the three months ended July 31, 2010 and
2009:
|
|
Three
Months
Ended July 31, 2010
(Unaudited)
|
|
Three
Months
Ended July 31, 2009
(Unaudited)
|
|
Statement of Operations Data
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Revenues
|
|
$
|
23,632,382
|
|
100.0
|
%
|
$
|
25,829,076
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
Cost of Goods Sold
|
|
22,245,564
|
|
94.13
|
%
|
23,899,283
|
|
92.53
|
%
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
1,386,818
|
|
5.87
|
%
|
1,929,793
|
|
7.47
|
%
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
467,389
|
|
1.98
|
%
|
533,995
|
|
2.07
|
%
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
919,429
|
|
3.89
|
%
|
1,395,798
|
|
5.40
|
%
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense),
net
|
|
19,590
|
|
0.00
|
%
|
(675
|
)
|
(0.00
|
)%
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
939,019
|
|
3.97
|
%
|
$
|
1,395,123
|
|
5.40
|
%
|
Revenues
Our revenues from operations come from three primary
sources: sales of fuel ethanol, sales of distillers grains and sales of corn
oil.
The following table shows the sources of our revenue
for the three months ended July 31, 2010.
Revenue Sources
|
|
Amount
|
|
Percentage
of
Total Revenues
|
|
|
|
|
|
|
|
Ethanol
sales
|
|
$
|
20,093,477
|
|
85.03
|
%
|
Distillers
grains sales
|
|
3,035,665
|
|
12.85
|
%
|
Corn
oil sales
|
|
503,240
|
|
2.13
|
%
|
Total
Revenues
|
|
$
|
23,632,382
|
|
100.00
|
%
|
The following table shows the sources of our revenue
for the three months ended July 31, 2009:
Revenue
Sources
|
|
Amount
|
|
Percentage
of
Total Revenues
|
|
|
|
|
|
|
|
Ethanol
sales
|
|
$
|
21,092,398
|
|
81.66
|
%
|
Distillers
grains sales
|
|
4,362,830
|
|
16.89
|
%
|
Corn
oil sales
|
|
373,848
|
|
1.45
|
%
|
Total
Revenues
|
|
$
|
25,829,076
|
|
100.00
|
%
|
16
Table of Contents
The following table shows additional data regarding
production and price levels for our primary inputs and products for the three
months ended July 31, 2010
and 2009:
Additional Data
|
|
Three
Months
ended
July 31, 2010
|
|
Three
Months
ended
July 31, 2009
|
|
Ethanol sold (gallons)
|
|
13,542,445
|
|
13,519,117
|
|
Dried distillers grains
sold (tons)
|
|
33,444
|
|
33,747
|
|
Modified distillers grains
sold (tons)
|
|
764
|
|
4,465
|
|
Corn oil sold (pounds)
|
|
2,082,780
|
|
1,752,460
|
|
Ethanol average price per
gallon (net of hedging activity)
|
|
$
|
1.48
|
|
$
|
1.56
|
|
Dried distillers grains
average price per ton
|
|
$
|
88.92
|
|
$
|
121.85
|
|
Modified distillers grains
average price per ton
|
|
$
|
37.29
|
|
$
|
63.73
|
|
Corn oil average price per
pound
|
|
$
|
0.24
|
|
$
|
0.21
|
|
Corn costs per bushel (net
of hedging activity)
|
|
$
|
3.33
|
|
$
|
3.78
|
|
Revenues.
In the three month period ended July 31, 2010, ethanol sales
comprised approximately 85.03% of our revenues and distillers grains sales
comprised approximately 12.85% percent of our revenues, while corn oil sales
comprised approximately 2.1% of our revenues. For the three month period ended July 31, 2009, ethanol sales
comprised approximately 81.7% of our revenue, and distillers grains sales
comprised approximately 16.9% of our revenue, without including ethanol
derivatives, while corn oil sales comprised approximately 1.6% of our revenues.
Management believes that distillers grains represent
a smaller proportion of our revenues during the three months ended July 31, 2010 compared to the
same period of 2009 as a result of lower distillers grains prices we received
during our third fiscal quarter of 2010 compared to the same period of
2009. Management believes these lower
distillers grains prices are a result of an abundant supply of feed products
available to livestock producers and continued economic distress in the
livestock and dairy industries have reduced animal numbers.
The average ethanol sales price we received for the
three month period ended July 31, 2010 was approximately 5.1% lower than
our average ethanol sales price for the comparable 2009 period. Management
anticipates that the price of ethanol may be stronger during the fourth fiscal
quarter of our 2010 fiscal year as a result of slowly improving worldwide
economics and continued strength in the sugar market resulting in less ethanol
production in Brazil. Since the end of
our third fiscal quarter on July 31, 2010, ethanol prices have increased
along with the price of corn.
Management also anticipates that our results of
operations for our 2010 fiscal year will continue to be affected by volatility
in the commodity markets. If plant operating margins remain low for an extended
period of time, management anticipates that this could impact our liquidity,
especially if our raw material costs increase. Management believes the industry
will need to continue to grow demand and further develop an ethanol
distribution system to facilitate additional blending of ethanol and gasoline
to offset the increased supply brought to the marketplace by additional production.
Going forward, we are optimistic that ethanol demand will continue to grow and
ethanol distribution will continue to expand as a result of the positive blend
economics that are currently available to the gasoline refiners and blenders.
The price we received for our dried distillers
grains decreased during the three month period ended July 31, 2010
compared to the same period of 2009. We
anticipate that the market price of our dried distillers grains will continue
to be volatile as a result of changes in the price of corn and competing animal
feed substitutes such as soybean meal.
Volatility in distillers grains supplies related to changes in ethanol
production is another factor that may impact the sales price of our distillers
grains.
Corn oil sales accounted for
approximately 2.1% of our revenues during our quarter ended July 31,
2010. The price we received for our corn
oil increased by approximately 14.3% during the three month ended July 31,
2010 compared to the same period of 2009.
We anticipate that the market price of our corn oil to remain steady or
17
Table of Contents
decrease as a result of
curtailed bio-diesel production as a result of the expiration of the bio-diesel
tax credit.
We occasionally engage in hedging activities with
respect to our ethanol sales. We recognize the gains or losses that result from
the changes in the value of these derivative instruments in revenues as the
changes occur. As ethanol prices fluctuate, the value of our derivative
instruments are impacted, which affects our financial performance. We
anticipate continued volatility in our revenues due to the timing of the
changes in value of the derivative instruments relative to the price and volume
of the ethanol being hedged.
Cost of Sales
Our costs of goods sold as a percentage of revenues
were 94.1% for the three month period ended July 31, 2010 compared to
92.5% for the same period of 2009. Our
two largest costs of production are corn (69.2% of cost of goods sold for our
three months ended July 31, 2010) and natural gas (8.0% of cost of goods
sold for our three months ended July 31, 2010). Our cost of goods sold decreased to
$22,245,564 for the three months ended July 31, 2010 from $23,899,283 in
the three months ended July 31, 2009.
Our per bushel corn costs decreased by approximately 11.8% for the three
months ended July 31, 2010 as compared to the same period for our 2009
fiscal year. Our decreased cost of corn
was the primary factor driving down our costs of goods sold. Since the end of our third fiscal quarter on July 31,
2010, the price of corn futures contracts has increased. We expect continued volatility in the corn
market through the end of our fiscal year.
For the three month period ended July 31, 2010,
we experienced a decrease of approximately 13.3% per MMBtu in natural gas costs
compared to the same period of 2009. We attribute
this significant decrease in natural gas costs to improved efficiencies and
lower natural gas costs due to the excess supply in the natural gas
market. We expect the market price for
natural gas to remain low in the near term as we continue to endure the
worldwide economic slowdown and the resulting decreased energy demand along
with the continued commissioning of new, highly productive, non-conventional
natural gas wells.
We occasionally engage in hedging activities with
respect to corn, natural gas or denaturant. We recognize the gains or losses
that result from the changes in the value of our derivative instruments in cost
of goods sold as the changes occur. As corn, natural gas and denaturant prices
fluctuate, the value of our derivative instruments are impacted, which affects
our financial performance. We anticipate continued volatility in our cost of
goods sold due to the timing of the changes in value of the derivative
instruments relative to the cost and use of the commodity being hedged.
Operating Expense
Our operating expenses as a percentage of revenues
were lower for the three month period ended July 31, 2010 than they were
for the same period ended July 31, 2009. These percentages were
approximately 2.0% and 2.1% for the three months ended July 31, 2010 and
2009, respectively. This decrease in operating expenses is primarily due to
increased operating efficiencies and a concerted effort by management and staff
to lower our operating expenses. We
expect that going forward our operating expenses will remain relatively steady.
18
Table of
Contents
Operating
Income (Loss)
Our income from operations for the three months
ended July 31, 2010 was 3.9% of our revenues compared to income of
approximately 5.4% of our revenues for the three months ended July 31, 2009.
For the three months ended July 31, 2010, we reported operating income of
approximately $920,000 and for the three months ended July 31, 2009, we had
operating income of approximately $1,396,000. This decrease in our operating
income is primarily due decreased ethanol
and distillers grains revenues. This
reduction in our operating income coincided with a soft demand cycle in the
ethanol market that limited the volume of ethanol that could be sold at favorable
price levels.
Other Income (Expense)
We
had total other income (net) for the
three months ended July 31,
2010 of $19,590 compared to other
expense (net) of $675 for the three months ended July 31, 2009. Our
other expense (net) for our 2009 fiscal quarter ended July 31, 2009 was higher
as a result our interest expense for that period.
Interest Expense and Interest Income
Interest expense for the three months ended July 31,
2010, was less that one tenth of one percent of our revenue and totaled approximately
$1,260, compared to approximately $16,200 interest expense for the three months
ended July 31, 2009. The interest
expense incurred during the three months ended July 31, 2010 is attributable to
our low interest loans obtained through state and regional economic development
authorities.
Results of Operations for the Nine Months Ended July
31, 2010 and 2009
The following table shows
the results of our operations and the approximate percentage of revenues, costs
of sales, operating expenses and other items to total revenues in our unaudited
statements of operations for the nine months ended July 31, 2010 and 2009:
|
|
Nine Months
Ended July 31, 2010
(Unaudited)
|
|
Nine Months
Ended July 31, 2009
(Unaudited)
|
|
Statement of Operations Data
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Revenues
|
|
$
|
69,294,943
|
|
100.0
|
%
|
$
|
68,141,681
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
Cost of Goods Sold
|
|
63,831,087
|
|
92.12
|
%
|
67,060,694
|
|
98.41
|
%
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
5,463,856
|
|
7.88
|
%
|
1,080,987
|
|
1.59
|
%
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
1,439,101
|
|
2.08
|
%
|
1,573,479
|
|
2.31
|
%
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
4,024,755
|
|
5.81
|
%
|
(492,492
|
)
|
(0.72
|
)%
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense), net
|
|
139,687
|
|
0.20
|
%
|
(690,114
|
)
|
(1.01
|
)%
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
4,164,442
|
|
6.01
|
%
|
$
|
(1,182,606
|
)
|
(1.74
|
)%
|
Revenues
Our revenues from operations come from two primary
sources: sales of fuel ethanol and sales of distillers grains. We also had
revenue from the sale of corn oil.
19
Table of Contents
The following table shows the sources of our revenue
for the nine months ended July 31, 2010.
Revenue
Sources
|
|
Amount
|
|
Percentage
of
Total Revenues
|
|
|
|
|
|
|
|
Ethanol
Sales
|
|
$
|
59,271,278
|
|
85.53
|
%
|
Distillers
Grains Sales
|
|
8,894,621
|
|
12.84
|
%
|
Corn
Oil Sales
|
|
1,232,176
|
|
1.78
|
%
|
Ethanol
Derivative Activity Gains/ (Losses)
|
|
(103,132
|
)
|
(0.15
|
)%
|
Total
Revenues
|
|
$
|
69,294,943
|
|
100.0
|
%
|
The following table shows
the sources of our revenue for the nine months ended July 31, 2009:
Revenue
Sources
|
|
Amount
|
|
Percentage
of
Total Revenues
|
|
|
|
|
|
|
|
Ethanol
Sales
|
|
$
|
55,331,232
|
|
81.19
|
%
|
Distillers
Grains Sales
|
|
11,855,675
|
|
17.40
|
%
|
Corn
Oil Sales
|
|
835,525
|
|
1.23
|
%
|
Ethanol
Derivative Activity Gains/ (Losses)
|
|
119,249
|
|
0.18
|
%
|
Total
Revenues
|
|
$
|
68,141,681
|
|
100.0
|
%
|
The following table shows
additional data regarding production and price levels for our primary inputs
and products for the nine months ended July 31, 2010 and 2009:
Additional Data
|
|
Nine
Months
ended
July 31, 2010
|
|
Nine
Months
ended
July 31, 2009
|
|
Ethanol
sold (gallons)
|
|
37,533,702
|
|
37,399,698
|
|
Dried
distillers grains sold (tons)
|
|
94,951
|
|
95,246
|
|
Modified
distillers grains sold (tons)
|
|
2,962
|
|
13,211
|
|
Corn
oil sold (pounds)
|
|
5,141,820
|
|
4,634,820
|
|
Ethanol
average price per gallon (net of hedging activity)
|
|
$
|
1.58
|
|
$
|
1.49
|
|
Dried
distillers grains average price per ton
|
|
$
|
91.79
|
|
$
|
115.57
|
|
Modified
distillers grains average price per ton
|
|
$
|
45.89
|
|
$
|
64.14
|
|
Corn
oil average price per pound
|
|
$
|
0.24
|
|
$
|
0.18
|
|
Corn
costs per bushel (net of hedging activity)
|
|
$
|
3.41
|
|
$
|
3.52
|
|
Revenues
In the nine month period ended July 31, 2010,
ethanol sales comprised approximately 85.4% of our revenues and distillers
grains sales comprised approximately 12.9% percent of our revenues, while corn
oil sales comprised approximately 1.8% of our revenues. For the nine month
period ended July 31, 2009, ethanol sales comprised approximately 81.2% of our
revenue, without accounting for ethanol hedging, and distillers grains sales
comprised approximately 17.4% of our revenue, while corn oil sales comprised
approximately 1.2% of our revenues.
Our revenues were higher for our first three
quarters of fiscal year 2010 compared to the same period of 2009
20
Table of Contents
primarily
as a result of higher ethanol prices.
These higher ethanol prices, combined with lower distillers grains prices,
caused ethanol sales to be larger percentage of our revenues.
The average ethanol sales price we received for the
nine month period ended July 31, 2010 was approximately 6.0% higher than our
average ethanol sales price for the comparable 2009 period. Management
attributes this increase in ethanol prices to strong ethanol price levels
during our first and second fiscal quarters.
Management anticipates that the price of ethanol may be stronger during
the fourth fiscal quarter of our 2010 fiscal year as a result of slowly
improving worldwide economics and continued strength in the sugar market
resulting in less ethanol production in Brazil.
Since the end of our third fiscal quarter on July 31, 2010, ethanol
prices have increased along with the price of corn.
The price we received for our dried distillers
grains decreased by approximately 15.4% during the nine month period ended July
31, 2010 compared to the same period of 2009. Management attributes this
decrease in the price of our dried distillers grains to an excess supply of
competitively priced livestock feeds, including distillers grains and soybean
meal. We anticipate that the market
price of distillers grains will continue to be volatile as a result of changes
in the price of corn and competing animal feed substitutes such as soybean meal
as well as volatility in distillers grains supplies related to changes in
ethanol production.
Cost of Sales
Our costs of goods sold as a percentage of revenues
were approximately 92.1% for the nine month period ended July 31, 2010 compared
to 98.4% for the same period of 2009. Our two largest costs of production are
corn (69.5% of cost of goods sold for our nine months ended July 31, 2010) and
natural gas (9.3% of cost of goods sold for our nine months ended July 31,
2010). The per bushel price we paid for corn was 3.1% less for the nine month
period ended July 31, 2010 compared to the same period of 2009. Our cost of goods sold decreased by
approximately $3,230,000 in the nine months ended July 31, 2010, compared to
the nine months ended July 31, 2009, while our revenue for the same period
increased by approximately $1,046,000. This decrease in the cost of goods sold
is primarily a result of lower corn prices combined with a decrease in our
natural gas costs.
Operating Expense
Our operating expenses as a percentage of revenues
were slightly lower for the nine month period ended July 31, 2010 than they
were for the same period ended July 31, 2009. These percentages were 2.0% and
2.3% for the nine months ended July 31, 2010 and 2009, respectively. This
decrease in operating expenses is primarily due to increased operating
efficiencies and a concerted effort by our management and staff to lower our
operating expenses. We expect that going forward our operating expenses will
remain relatively steady.
Operating Income (Loss)
Our income from operations for the nine months ended
July 31, 2010 was approximately 5.8% of our revenues compared to a loss of 0.7%
of our revenues for the nine months ended July 31, 2009. This increase in our
profitability is primarily due to an increase in the price of ethanol and the
corresponding decline in our cost of goods sold.
Other Income and Other Expense
Other income for the nine months ended July 31,
2010, was approximately 0.2% of our revenue and totaled approximately $140,000.
Other expense for the nine months ended July 31, 2009 was approximately 1.0% of
our revenue and totaled approximately $690,000.
Our other expense for nine months ended July 31, 2009 is high as a
result of us paying $780,000 to Aventine Renewable Energy, Inc. as a
termination fee we incurred in connection with our ethanol marketing agreement
during our quarter ended January 31, 2009.
Interest Expense
Interest expense for the nine months ended July 31,
2010, was approximately $9,800. Interest expense for the nine months ended July
31, 2009 was approximately $79,900. This reduction in interest expense is due
primarily to a
21
Table of Contents
reduction
in our outstanding debt.
Changes in Financial Condition for the Nine Months
Ended
July 31, 2010
The following table highlights the changes in our
financial condition for the three months ended July 31, 2010 from our previous
fiscal year ended October 31, 2009:
|
|
July 31, 2010
|
|
October
31, 2009
|
|
Current Assets
|
|
$
|
17,782,008
|
|
$
|
14,015,271
|
|
Current Liabilities
|
|
$
|
3,278,262
|
|
$
|
4,004,077
|
|
Long-Term Debt
|
|
$
|
255,824
|
|
$
|
370,136
|
|
Members Equity
|
|
$
|
51,665,012
|
|
$
|
52,098,970
|
|
Total assets were approximately $55,199,000 at July
31, 2010 compared to approximately $56,473,000 at October 31, 2009. This
decrease in total assets is primarily a result of a cash distribution in the
amount of approximately $4,600,000 paid out to members in December 2009 which
has been largely offset by approximately $4,000,000 in earnings from operations
for the first nine months of our 2010 fiscal year.
Current assets totaled approximately $17,782,000 at
July 31, 2010, an increase from approximately $14,015,000 at October 31, 2009.
The change resulted primarily due to an increase in cash from the Companys
operating activities.
Total current liabilities decreased and totaled
approximately $3,278,000 at July 31, 2010 and $4,004,000 at October 31, 2009.
Long-term debt decreased from approximately $370,000 at October 31, 2009 to
approximately $256,000 at July 31, 2010 as we continue to pay down our EDA
loans.
Plant Operations
Management anticipates our
plant will continue to operate at our currently permitted capacity of 49.9
million gallons per year. In June 2009, we submitted an application package to
the Minnesota Pollution Control Agency (MPCA) to allow the facility to
operate at a production rate of 70 million gallons per year of undenatured
ethanol. Our application to increase the
plants permitted production capacity is currently pending with the MPCA. We
expect to have sufficient cash generated by continuing operations, current
lines of credit and cash reserves to cover our usual operating costs, which
consist primarily of our corn supply, our natural gas supply, staffing expense,
office expense, audit and legal compliance, working capital costs and debt
service obligations.
Trends and Uncertainties Impacting the Ethanol and
Distillers Grains Industries and Our Future Revenues
Our revenues primarily consist of sales of the
ethanol and distillers grains we produce; however, we also realize revenue from
the sale of corn oil we separate from our distillers syrup. Management
anticipates steady to stronger ethanol demand and higher ethanol prices as a
result of slowly improving worldwide economic conditions. The ethanol industry needs to continue to
expand the market for distillers grains in order to maintain current distillers
grains prices. In addition, previous economic distress in the livestock
industry has resulted in decreased livestock numbers and reduced demand for
animal feed, including all types of distillers grains, which may contribute to
a weaker distillers grain market during the last quarter of the 2010 fiscal
year. The following chart shows the
general price information released by the USDA in their National Weekly Energy
Round-Up Report for ethanol through August 2010.
22
Table of Contents
The following chart shows the general price
information released by the Jacobsen Publishing Company for distillers grains
through July 2010.
According to the Renewable Fuels Association (RFA),
as of August 16, 2010, there were 201 ethanol plants nationwide with the
capacity to produce approximately 13.6 billion gallons of ethanol annually. The
RFA estimates that plants with an annual production capacity of approximately
12.9 billion gallons are currently operating and that approximately 4.5% of the
nameplate production capacity is not currently operational. Management believes
the production capacity of the ethanol industry is greater than ethanol demand
which may continue to depress ethanol prices. This overcapacity issue may be
exacerbated by increased production from plants that had previously slowed
their rate of production or idled altogether due to poor operating margins.
23
Table of Contents
Currently, ethanol is primarily blended with
conventional gasoline for use in standard (non-flex fuel) vehicles to create a
blend which is 10% ethanol and 90% conventional gasoline. Estimates indicate
that approximately 135 billion gallons of gasoline are sold in the United
States each year. However, gasoline demand may be shrinking in the United
States as a result of the global economic slowdown. Assuming that all gasoline
in the United States is blended at a rate of 10% ethanol and 90% gasoline, the
maximum demand for ethanol is 13.5 billion gallons. This is commonly referred
to as the blending wall, which represents a limit where more ethanol cannot
be blended into the national gasoline pool. This is a theoretical limit since
it is believed it would not be possible to blend ethanol into every gallon of
gasoline that is used in the United States and it discounts higher percentage
blends of ethanol such as E85 used in flex fuel vehicles.
In order to meet the RFS and expand demand for
ethanol, higher blends of ethanol must be utilized in conventional automobiles.
Such higher blends of ethanol have recently become a contentious issue.
Automobile manufacturers and environmental groups have fought against higher
ethanol blends. Currently, state and federal regulations prohibit the use of
higher ethanol blends in conventional automobiles and vehicle manufacturers
have indicated that using higher blends of ethanol in conventional automobiles
would void the manufacturers warranty. Without increases in the allowable
percentage blends of ethanol, demand for ethanol may not continue to increase.
An ethanol industry interest group has requested that the Administrator of the
United Stated Environmental Protection Agency approve a waiver of the 10% limit
on ethanol blending and increase the limit on the amount of ethanol in our
nations gasoline supply to 15%. The EPA
must grant or deny this waiver at some point in 2010. If the waiver is granted and current blend
economics persist, we expect ethanol demand to increase. The ethanol industry
must continue to expand demand for ethanol in order to support the market price
of ethanol.
Trends and Uncertainties Impacting the Corn and
Natural Gas Markets and Our Future Cost of Goods Sold
Our costs of our goods sold consist primarily of
costs relating to the corn and natural gas supplies necessary to produce
ethanol and distillers grains for sale. We grind approximately 1,450,000
bushels of corn each month. For the quarter ended July 31, 2010, our average
cost of corn, net of hedging activity, was approximately $3.33 per bushel,
which is approximately $0.45 lower than our cost of corn for the same period
ended July 31, 2009.
Corn
prices could increase during our 2010 fiscal year should we experience lower
than expected corn yields during the fall of 2010 or if the global demand for
corn or corn futures contracts increases from currently predicted levels. As of September 10, 2010, United States
Department of Agriculture (USDA) estimated that 2010 corn acres harvested
will increase approximately 1.8% from 2009.
The USDA also reports that the average yield per acre will be higher in
2010 than in 2009. As of the September
10, 2010 report, the UDSA reported total anticipated corn production of
approximately 13.159 billion bushels, up slightly from 13.111 billion bushels
in 2009. If demand for corn increases
significantly as a result of improved global economic conditions or from
increased ethanol production in the United States due to the implementation of
a 15% ethanol blend, we could experience increased corn prices.
Natural gas is also an important input commodity to
our manufacturing process. Our natural gas usage is approximately 115,000
million British thermal units (mmBTU) per month. We continue to work to find
ways to limit our natural gas price risk through efficient usage practices,
research of new technologies, and pricing and hedging strategies. We use a
marketing firm and an energy consultant for our natural gas procurement and
will work with them on an ongoing basis to mitigate our exposure to volatile
gas prices.
Management anticipates that
natural gas prices will be relatively stable in the next several months as a
result of ample amount of gas in storage and reduced overall demand. However,
should we experience a colder winter and a more robust economic recovery, it
could increase demand for energy which could lead to increases in natural gas
prices. Further, should we experience
any natural gas supply disruptions, including disruptions from hurricane
activity, we may experience significant increases in natural gas prices.
Compliance with Environmental Laws
We are subject to extensive
air, water and other environmental regulations and we have been required to
obtain a number of environmental permits to construct and operate the
plant. As such, any changes that are
made to the plant or its operations must be reviewed to determine if amended
permits need to be obtained in order to implement
24
Table of Contents
these changes. We received amended permits in September 2008
to allow production to increase from 45 million gallons per year of undenatured
ethanol to 49.9 million gallons.
The National Pollutant
Discharge Elimination System/State Disposal System (NPDES/SDS) permit, which
regulates the water treatment, water disposal and stormwater systems at the
facility, requires renewal every five years.
We submitted a renewal application to the MPCA in October 2008. We are
allowed to continue operations under our current permit requirements until the
MPCA renews the water discharge permit.
In June 2009, we submitted
an application package to the MPCA to allow the facility to operate at a
production rate of 70 million gallons per year of undenatured ethanol. This application included the possibilities of
exploring/expanding our alternatives with respect to the increase of production
or optimization of operations. The
renewal application for the NPDES/SDS permit was incorporated into this package
for MPCA consideration.
The application submittal
required numerous documents covering all aspects of the facility including:
Environmental Assessment Worksheet (EAW), air modeling, Air Permit, NPDES/SDS
permit, Aboveground Storage Tank (AST) permit, Construction Stormwater
permit, and various other support documentation. Currently, we are working with the MPCA to
answer questions and provide further information to the MPCA regarding this
application. Our application to increase
the plants permitted production capacity is currently pending with the MPCA.
The majority of the work
being performed on the application involves the air modeling and water
discharge from the facility. Air
modeling is a process of determining the impact the facility has on the
surrounding area, community and in the region itself. The area of concern is the particles smaller
than 2.5 microns (clay dust), called fugitive emissions. We are evaluating operational considerations
for decreasing the effect of fugitive emissions.
The other area of discussion
is the NPDES/SDS permit. The MPCA and
EPA have regulations regarding the quantity and quality of the water being
discharged from the site into area water sources. These regulations are designed to protect and
improve the waters of the state. We
continue to evaluate options to modify operations to meet these
regulations. The water discharge issue
is a challenging task that will require a long term plan to meet these current
regulations.
Contracting Activity
Farmers Cooperative Elevator Company supplies our
corn. Eco-Energy, LLC markets our ethanol, CHS, Inc. markets our distillers
grains and RPMG markets our corn oil. Each of these contracts is critical to
our success and we are very dependent on each of these companies. Accordingly,
the financial stability of these partners is critical to the successful
operation of our business.
In June 2010 we signed an amendment to our
Distillers Grain Marketing Agreement with CHS.
Prior to signing the amendment, we independently marketed a portion of
our distillers grains to local markets.
On June 1, 2010 CHS began marketing all our distillers grains except for
certain distillers grains that are sold through Montevideo Intermodal. We expect that under the new agreement CHS
will be marketing substantially all of our distillers grains on a regular
basis, and the balance may be sold though Montevideo Intermodal.
We independently market a small portion of our
ethanol production as E-85 to local retailers.
Commodity Price Risk Protection
We seek to minimize the risks from fluctuations in
the prices of corn, ethanol, denaturant and natural gas through the use of
derivative instruments. In practice, as markets move, we actively manage our
risk and adjust hedging strategies as appropriate. We do not use hedge
accounting which would match the gain or loss on our hedge positions to the
specific commodity contracts being hedged. Instead, we are using fair value
accounting for our hedge positions, which means that as the current market
price of our hedge positions changes, the gains and losses are immediately
recognized in our cost of goods sold. The immediate recognition of hedging
gains and losses under fair value accounting can cause
25
Table of Contents
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.
As of July 31, 2010, the fair values of our derivative
instruments are reflected as net assets in the amount of $81,700. As of October
31, 2009, we recorded a net asset for our derivative instruments in the amount
of $361,436. There are several variables that could affect the extent to which
our derivative instruments are impacted by fluctuations in the price of corn,
ethanol, denaturant or natural gas. However, it is likely that commodity cash
prices will have the greatest impact on the derivative instruments with
delivery dates nearest the current cash price. As we move forward, additional
protection may be necessary. As the prices of these hedged commodities move in
reaction to market trends and information, our statement of operations 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,
but are expected to produce long-term positive growth for Granite Falls.
As of July 31, 2010, we had entered into derivative
instruments to hedge 660,000 bushels of our future corn purchases through
September 2010 for the purpose of minimizing risk from future market price
fluctuations. We have used various option contracts as vehicles for these
hedges.
As of July 31, 2010, we had price protection in
place for approximately 69% of our natural gas needs through October 2010. As
we move forward, we may determine that additional price protection for natural
gas purchases is necessary to reduce our susceptibility to price increases.
However, we may not be able to secure natural gas for prices less than current
market price and we may not recover high costs of production resulting from
high natural gas prices, which may raise our costs of production and reduce our
net income.
The derivative accounts are reported at fair value
as designated by our broker. We have categorized the cash flows related to the
hedging activities in the same category as the item being hedged. We expect
substantially all of our hedge positions outstanding as of July 31, 2010 to be
realized and recognized by December 2010.
Critical Accounting Estimates
Management uses estimates and assumptions in
preparing our 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.
Liquidity and Capital Resources
The
following table shows cash flows for the nine months ended July 31, 2010 and
2009:
|
|
2010
|
|
2009
|
|
Net cash provided by
operating activities
|
|
$
|
10,378,232
|
|
$
|
4,641,217
|
|
Net cash used in investing
activities
|
|
$
|
(142,750
|
)
|
$
|
(250,750
|
)
|
Net cash used in financing
activities
|
|
$
|
(4,720,841
|
)
|
$
|
(2,619,234
|
)
|
Net
increase in cash
|
|
$
|
5,514,641
|
|
$
|
1,771,233
|
|
Operating Cash Flows.
Cash provided by operating activities was approximately $10,378,000 for
the nine months ended July 31, 2010, which was an increase from approximately
$4,641,000 provided by operating activities for the nine months ended July 31,
2009. Contributing to this increase in cash provided by our operating
activities is our increased profitability during our nine months ended July 31,
2010. Currently, our capital needs are being adequately met through cash flows
from our operating activities and our currently available credit facilities.
Investing Cash Flows.
Cash used in investing activities was approximately $142,750 for the
nine months ended July 31, 2010, compared to $250,750 for the nine months ended
July 31, 2009.
Financing Cash Flows.
Cash used in financing activities was approximately $4,721,000 for the
nine months ended July 31, 2010, compared to $2,619,000 for nine months ended
July 31, 2009. In the nine month period
ended July 31, 2010, cash was used to pay a distribution to our members
totaling approximately $4,600,000 and to decrease the
26
Table of
Contents
principal
balance on the Companys EDA loans.
Indebtedness
Short-Term Debt Sources
The Company has a Loan Agreement with Minnwest Bank
M.V. of Marshall, MN (the Bank). Under the Loan Agreement, the Company has a
revolving line of credit with a maximum of $6,000,000 available which is
secured by substantially all of our assets. The Company has outstanding letters
of credit in the amount of approximately $485,000. These letters of credit reduce the amount
available under the revolving line of credit to approximately $5,515,000. The interest rate on the revolving line of
credit is at 0.25 percentage points above the prime rate as reported by the
Wall Street Journal, with a minimum rate of 5.0%. At July 31, 2010, the
Company had no outstanding balance on this line of credit
Long-Term Debt Sources
We have paid off our term loans with FNBO and
received a release of FNBOs security interest in all of our tangible and
intangible property, real and personal, which had served as collateral for our
term loans.
Below is a summary of our remaining long term loans
payable:
Note payable to City of Granite Falls/Minnesota
Investment Fund, bearing interest of 1.0% due in quarterly installments of
$15,807, payable in full on June 15, 2014, secured by a second mortgage on
all assets. The outstanding balance at July 31, 2010 was $247,618.
Note payable to City of Granite Falls/Chippewa
County, bearing interest of 3.0% due in semi-annual installments of $4,030,
payable in full on June 15, 2021, secured by a second mortgage on all
assets. The outstanding balance at July 31, 2010 was $75,038.
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 interest rates and 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 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, ethanol 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 pursuant to the requirements of Generally Accepted
Accounting Principles (GAAP).
Interest Rate Risk
We are generally exposed to market risk from changes
in interest rates. Exposure to interest rate risk results primarily from our
revolving line of credit and letters of credit with Minnwest Bank. As of July 31, 2010, we did not have an
outstanding balance on this revolving line of credit. The specifics of these
credit facilities are discussed in greater detail in Item 2 Managements
Discussion and Analysis of Financial Condition and Results of Operations
Short-Term Debt Sources.
Commodity Price Risk
We seek to minimize the risks from fluctuations in
the prices of raw material inputs, such as corn and natural gas, and finished
products, such as ethanol and distillers grains, 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
27
Table of Contents
hedge
positions accomplish an economic hedge against our future purchases and sales,
management has chosen not to use hedge accounting, which would match the gain
or loss on our hedge positions to the specific commodity purchase being hedged.
We are using fair value accounting for our hedge positions, which means as the
current market price of our hedge positions changes, the realized or unrealized
gains and losses are immediately recognized in our cost of goods sold or as an
offset to revenues. The immediate recognition of hedging gains and losses under
fair value accounting 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.
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, but are expected to produce long-term
positive growth for us.
A sensitivity analysis has been prepared to estimate
our exposure to ethanol, 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 fair value of our corn and natural gas
prices and average ethanol price as of July 31, 2010, 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 July 31, 2010. 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 as of
July 31, 2010
|
|
Approximate
Adverse Change to
Income
|
|
Natural Gas
|
|
1,130,000
|
|
MMBTU
|
|
10
|
%
|
$
|
540,000
|
|
Ethanol
|
|
47,709,000
|
|
Gallons
|
|
10
|
%
|
$
|
7,634,000
|
|
Corn
|
|
16,740,000
|
|
Bushels
|
|
10
|
%
|
$
|
6,563,000
|
|
We participate in a captive reinsurance company (Captive).
The Captive reinsures losses related to workmans compensation, commercial
property and general liability. Premiums are accrued by a charge to income for
the period to which the premium relates and is remitted by our insurer to the
captive reinsurer. The Captive reinsures losses in excess of a predetermined
amount. The Captive insurer has estimated and collected a premium amount in
excess of expected losses but less than the aggregate loss limits reinsured by
the Captive. We have contributed limited capital surplus to the Captive that is
available to fund losses should the actual losses sustained exceed premium
funding. So long as the Captive is fully-funded through premiums and capital
contributions to the aggregate loss limits reinsured, and the fronting insurers
are financially strong, we can not be assessed over the amount of our current
contributions.
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
pursuant to 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 Commissions 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 and General Manager (the principal executive officer), Tracey Olson,
along with our Chief Financial Officer (the principal financial officer),
Stacie Schuler, have reviewed and evaluated the effectiveness of our disclosure
controls and procedures as of July 31, 2010. Based upon this review and
evaluation, these officers have concluded that our disclosure controls and
procedures are effective to ensure that information required to be disclosed in
the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods required by the
forms and rules of the Securities and Exchange Commission; and to ensure
that the information required to be disclosed by an issuer in the reports that
it files or submits under the Exchange Act is accumulated and communicated to
our management including our
28
Table of Contents
principal
executive and principal financial officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
Changes in Internal Control over Financial Reporting
Our management, including our principal executive
officer and principal financial officer, have reviewed and evaluated any
changes in our internal control over financial reporting that occurred during
the quarter ended July 31, 2010 and there has been no change 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.
None.
Item 1A. Risk
Factors
.
The following risk factors are provided due to
material changes from the risk factors previously disclosed in our annual
report on Form 10-K. The risk factors set forth below should be read in
conjunction with the risk factors section and the Managements Discussion and
Analysis section for the fiscal year ended October 31, 2009, included in
our annual report on Form 10-K.
The California Low Carbon Fuel Standard may
decrease demand for corn based ethanol which could negatively impact our
profitability.
Recently,
California passed a Low Carbon Fuels Standard (LCFS). The California LCFS requires that renewable
fuels used in California must accomplish certain reductions in greenhouse gases
which are measured using a lifecycle analysis.
Management believes that these new regulations could preclude corn based
ethanol produced in the Midwest from being used in California. California represents a significant ethanol
demand market. If we are unable to
supply ethanol to California, it could significantly reduce demand for the
ethanol we produce. Any decrease in
ethanol demand could negatively impact ethanol prices which could reduce our
revenues and negatively impact our ability to profitably operate the ethanol
plant.
If the Federal Volumetric Ethanol Excise Tax Credit
(VEETC) expires on December 31, 2010, it could negatively impact our
profitability
. The ethanol
industry is benefited by VEETC which is a federal excise tax credit of 4.5
cents per gallon of ethanol blended with gasoline at a rate of at least
10%. This excise tax credit is set to
expire on December 31, 2010. We
believe that VEETC positively impacts the price of ethanol. On December 31, 2009, the portion of
VEETC that benefits the biodiesel industry was allowed to expire. This resulted in the biodiesel industry
ceasing to produce biodiesel because the price of biodiesel without the tax
credit was uncompetitive with the cost of petroleum based diesel. If the portion of VEETC that benefits ethanol
is allowed to expire, it could negatively impact the price we receive for our
ethanol and could negatively impact our profitability.
If the Small Ethanol
Producer Tax Credit (SEPTC) expires on December 31, 2010, it could
negatively impact our profitability.
The Small Ethanol Producer
Tax Credit (SEPTC) is a tax incentive allowing small ethanol producers a 10
cent per gallon federal income tax credit on up to 15 million gallons of
production. Our investor directly benefit from the SEPTC. If the SEPTC is allowed to expire on December 31,
2010, along with the VEETC, it would negatively impact our investors.
If the secondary tariff on imported ethanol is
allowed to expire in January 2011, we could see an increase in ethanol
produced in foreign countries being marked in the Untied States which could
negatively impact our profitability.
The secondary
tariff on imported ethanol is a 54 cent per gallon tariff on ethanol imports
from certain foreign countries. The
secondary tariff on imported ethanol is scheduled to expire in January 2011.
If
this tariff is allowed to expire, an influx of imported ethanol on the domestic
ethanol market could have a significant negative impact on ethanol prices and
our profitability.
29
Table of
Contents
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. [Removed and Reserved]
Item 5. Other Information.
None.
Item 6. Exhibits.
The following exhibits are
included herein:
Exhibit No.
|
|
Description
|
31.1
|
|
Certificate
Pursuant to 17 CFR 240.15d-14(a).
|
|
|
|
31.2
|
|
Certificate
Pursuant to 17 CFR 240.15d-14(a).
|
|
|
|
32.1
|
|
Certificate
Pursuant to 18 U.S.C. § 1350.
|
|
|
|
32.2
|
|
Certificate Pursuant to 18
U.S.C. § 1350.
|
SIGNATURES
In accordance with the
requirements of the Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
GRANITE FALLS ENERGY, LLC
|
|
|
|
September 13, 2010
|
|
/s/ Tracey L. Olson
|
|
|
Tracey L. Olson
|
|
|
Chief Executive Officer
|
|
|
|
September 13, 2010
|
|
/s/ Stacie Schuler
|
|
|
Stacie Schuler
|
|
|
Chief
Financial Officer
|
30
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