ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This report contains forward-looking statements that involve future events, our future performance and our expected future operations and actions. In some cases you can identify forward-looking statements by the use of words such as “may,” “will,” “should,” “anticipate,” “believe,” “expect,” “plan,” “future,” “intend,” “could,” “estimate,” “predict,” “hope,” “potential,” “continue,” or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions and involve numerous assumptions, risks and uncertainties. Our actual results or actions may differ materially from these forward-looking statements for many reasons, including the reasons described in this report. We are not under any duty to update the forward-looking statements contained in this report. We cannot guarantee future results, levels of activity, performance or achievements. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits, completely and with the understanding that our actual future results may be materially different from what we currently expect. We qualify all of our forward-looking statements by these cautionary statements.
Overview
Granite Falls Energy, LLC (“Granite Falls Energy” or the “Company”) is a Minnesota Limited Liability Company formed on December 29, 2000.
We are currently producing fuel-grade ethanol, distillers grains and crude corn oil for sale. Our plant has an approximate annual production capacity of 60 million gallons of denatured ethanol, but is currently permitted to produce up to 70 million gallons of undenatured ethanol on a twelve month rolling sum basis. We intend to continue working toward increasing production to take advantage of the additional production allowed pursuant to our permit as long as we believe it is profitable to do so.
Our operating results are largely driven by the prices at which we sell our ethanol, distillers grains, and corn oil as well as the costs related to their 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. Our 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.
Results of Operations for the Fiscal Years Ended
October 31, 2012
and
2011
The following table shows the results of our operations and the percentage of revenues, costs of goods sold, operating expenses and other items to total revenues in our audited statements of operations for the fiscal years ended
October 31, 2012
and
2011
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
Income Statement Data
|
Amount
|
|
%
|
|
Amount
|
|
%
|
Revenue
|
$
|
175,162,043
|
|
|
100.0
|
%
|
|
$
|
156,521,489
|
|
|
100.0
|
%
|
Cost of Goods Sold
|
172,708,074
|
|
|
98.6
|
%
|
|
142,353,416
|
|
|
90.9
|
%
|
Gross Profit
|
2,453,969
|
|
|
1.4
|
%
|
|
14,168,073
|
|
|
9.1
|
%
|
Operating Expenses
|
2,449,596
|
|
|
1.4
|
%
|
|
2,002,706
|
|
|
1.3
|
%
|
Operating Income
|
4,373
|
|
|
—
|
%
|
|
12,165,367
|
|
|
7.8
|
%
|
Other Income, net
|
156,234
|
|
|
0.1
|
%
|
|
126,489
|
|
|
0.1
|
%
|
Net Income
|
$
|
160,607
|
|
|
0.1
|
%
|
|
$
|
12,291,856
|
|
|
7.9
|
%
|
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 fiscal year ended
October 31, 2012
:
|
|
|
|
|
|
|
|
|
Revenue Sources
|
Amount
|
|
Percentage of
Total Revenues
|
|
|
|
|
Ethanol sales
|
$
|
138,628,048
|
|
|
79.1
|
|
%
|
Distillers grains sales
|
32,214,496
|
|
|
18.4
|
|
%
|
Corn oil sales
|
4,319,499
|
|
|
2.5
|
|
%
|
Ethanol derivative activity losses
|
—
|
|
|
—
|
|
%
|
Total Revenues
|
$
|
175,162,043
|
|
|
100.0
|
|
%
|
The following table shows the sources of our revenue for the fiscal year ended
October 31, 2011
:
|
|
|
|
|
|
|
|
|
Revenue Sources
|
Amount
|
|
Percentage of
Total Revenues
|
|
|
|
|
Ethanol sales
|
$
|
129,936,623
|
|
|
83.0
|
|
%
|
Distillers grains sales
|
22,745,766
|
|
|
14.5
|
|
%
|
Corn oil sales
|
3,843,726
|
|
|
2.5
|
|
%
|
Ethanol derivative activity losses
|
(4,626
|
)
|
|
—
|
|
%
|
Total Revenues
|
$
|
156,521,489
|
|
|
100.0
|
|
%
|
We experienced an 11.9% increase in our revenues for our 2012 fiscal year compared to our 2011 fiscal year. Management attributes this increase in revenues primarily to an increase in the production of our products. Additionally, the prices we received for our distillers grains increased substantially, although the prices we received for our ethanol and corn oil decreased in our 2012 fiscal year compared to our 2011 fiscal year. Our volume of ethanol sold in 2012 was approximately 15.4% higher than the volume sold in 2011. For our 2012 fiscal year, ethanol sales comprised approximately 79.1% of our revenue, distillers grains comprised approximately 18.4% of our revenue and corn oil sales comprised approximately 2.5% of our revenue. For our 2011 fiscal year, ethanol sales comprised approximately 83.0% of our revenue, distillers grains comprised approximately 14.5% of our revenue and corn oil sales comprised approximately 2.5% of our revenue.
Ethanol
The average price we received for our ethanol decreased by approximately 7.5% during our 2012 fiscal year compared to our 2011 fiscal year. Management attributes the decrease in our average ethanol sales price to sustained market oversupply resulting from anticipation of the expiration of the Federal Volumetric Ethanol Excise Tax Credit (“VEETC”) on December 31, 2011. In an effort to capture as much of the VEETC as possible, blenders maximized the amount of ethanol they could blend at the end of calendar 2011. As a result of that timing, demand slowed during the beginning of calendar 2012, resulting in increased ethanol inventories, which pressured ethanol prices downward.
Downward pressure on ethanol prices, combined with increased corn prices, have recently caused some ethanol plants to suspend production. Although these suspensions will reduce the total quantity of ethanol produced domestically, management does not anticipate that this reduction in supply will materially impact ethanol prices moving forward. Management anticipates that the price of ethanol will continue to be volatile during our 2013 fiscal year. In the event ethanol prices further decrease, the industry may be forced to further reduce ethanol production if operating margins are unfavorable. Further, our operating margins depend on corn prices which can affect the spread between the price we receive for our ethanol and our raw material costs. In times when this spread decreases or becomes negative, we may reduce or terminate ethanol production until these spreads become more favorable.
Distillers Grains
We produce distillers grains for sale in two separate forms, distillers dried grains with solubles (DDGS) and modified/wet distillers grains (MWDG). Market factors dictate whether we sell more DDGS versus MWDG.
Distillers grains represent a larger portion of our revenues during our 2012 fiscal year compared to our 2011 fiscal year as a result of higher prices and greater quantities of distillers grains produced and sold. The price we received for our distillers grains in our 2012 fiscal year was approximately 25.2% higher than the price we received during our 2011 fiscal year. Management believes these higher distillers grains prices are a result of the high price of other feed products available to livestock producers. We anticipate that the market price of our 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. Additionally, our quantity of distillers grains sold increased approximately 13.1% in our 2012 fiscal year compared to our 2011 fiscal year. This increase in quantity sold was largely a result of increased production of our products during our 2012 fiscal year compared to our 2011 fiscal year. The price and quantity increases, combined with the decrease in ethanol prices discussed above, resulted in distillers grains sales comprising a larger percentage of our total revenues during our 2012 fiscal year relative to our 2011 fiscal year.
Corn Oil
Separating the corn oil from our distillers grains decreases the total tons of distillers grains that we
sell; however, our corn oil has a higher per ton value than our distillers grains. The average price we received per pound of corn oil sold during our 2012 fiscal year was approximately 8.9% less than the average price received during our 2011 fiscal year. Management attributes the decrease in corn oil prices to additional corn oil entering the market. However, increased use of corn oil by biodiesel producers and animal feeders have continued to support demand.
Offsetting this price decrease, our volume of corn oil sold increased approximately 23.3% during our 2012 fiscal year relative to our 2011 fiscal year as a result of higher production rates at our facility and increased extraction efficiencies. The net effect of the price decrease and increase in volume sold was an increase in corn oil revenue from $3,843,726 in 2011 to $4,319,499 in 2012.
Hedging and Volatility of Sales
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 did not recognize any gains or losses for our 2012 fiscal year related to our ethanol derivative instruments, as compared to a nominal $4,626 combined realized and unrealized loss for our 2011 fiscal year related to our ethanol derivative instruments, which decreased our revenues.
Our results of operations for our 2013 fiscal year will continue to be affected by volatility in the commodity markets. If plant operating margins are negative for an extended period of time, management anticipates that this could negatively impact our liquidity. 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 oversupply issues within the industry. In April 2012, the U.S. Environmental Protection Agency ("EPA") approved the first applications for registering ethanol for use in making a blend of fifteen percent ethanol, known as E15. Since that time, our application with the EPA to register ethanol for use in making E15 has also been approved. We are optimistic that over time, as E15 is brought to market and gains market acceptance, demand for ethanol will increase. However, we do not anticipate that the EPA's approval of applications for registering ethanol for use in making E15 will impact ethanol demand or pricing in the near term.
Cost of Sales
Our two primary costs of producing ethanol, distillers grains and corn oil are corn costs and natural gas costs. We experienced a significant increase in our cost of goods sold for our 2012 fiscal year compared to our 2011 fiscal year.
Our costs of goods sold as a percentage of revenues were
98.6%
for our fiscal year ended
October 31, 2012
compared to
90.9%
for the same period of 2011. Our two largest costs of production are corn (84.7% of cost of goods sold for our fiscal year ended
October 31, 2012
) and natural gas (3.4% of cost of goods sold for our fiscal year ended
October 31, 2012
). Our cost of goods sold increased to $
172,708,074
for our fiscal year ended
October 31, 2012
from $
142,353,416
in our fiscal year ended
October 31, 2011
. Our per bushel corn costs increased by approximately 8.8% for the year ended
October 31, 2012
as compared to the same period for our 2011 fiscal year. Additionally, our volume of corn used in our 2012 fiscal year was approximately
13.5% greater as compared to our 2011 fiscal year due to increased production. Our increased cost and volume of corn were the primary factors driving up our costs of goods sold.
Corn Costs
We experienced an increase of approximately 23.5% in the total amount we paid for corn for our 2012 fiscal year compared to our 2011 fiscal year, due to our increased per bushel cost and volume of corn used discussed above.
Widespread drought in 2012 in several corn producing states, combined with continued corn demand from other sectors, has resulted in increasing corn prices. Management anticipates that corn prices will remain high for the duration of our 2013 fiscal year. Although the 2012 drought did not impact corn production in Minnesota to the same extent as other corn producing states, as a local consumer of corn we must nevertheless be cost competitive when sourcing corn in order to procure sufficient quantities for ethanol production. Management expects continued upward pressure on corn prices and tightened corn supplies moving forward.
Natural Gas Costs
For our 2012 fiscal year, we experienced a decrease of approximately 15.9% in our overall natural gas costs compared to our 2011 fiscal year. Falling natural gas prices have decreased our natural gas costs, even though our natural gas consumption has risen as a result of our increased ethanol production during our 2012 fiscal year as compared to our 2011 fiscal year. We expect the market price for natural gas to remain steady in the near term as we continue to enjoy an abundant supply of domestic natural gas, due in part to the continued commissioning of new, highly productive natural gas wells.
Hedging and Volatility of Purchases
Realized and unrealized gains and losses related to our corn derivative instruments resulted in an increase of $1,651,799 in our cost of goods sold for our 2012 fiscal year compared to a decrease of $1,275,868 in our cost of goods sold for our 2011 fiscal year. We recognize the gains or losses that result from the changes in the value of our derivative instruments related to corn in cost of goods sold as the changes occur. As corn 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
Operating expenses as a percentage of revenues were relatively steady, increasing from 1.3% of revenues for our fiscal year ended
October 31, 2011
to 1.4% of revenues for our fiscal year ended
October 31, 2012
. We continue to focus on increasing our operating efficiency as we strive to lower our operating expenses. We expect that going forward our operating expenses will remain relatively steady.
Operating Income
Our income from operations for our fiscal year ended
October 31, 2012
was a negligible amount of our revenues compared to income of approximately
7.8%
of our revenues for our fiscal year ended
October 31, 2011
. For our fiscal year ended
October 31, 2012
, we reported operating income of $
4,373
and for our fiscal year ended
October 31, 2011
, we had operating income of $
12,165,367
. This decrease in our operating income is primarily due to the decreases in our crush margins. This decrease in our operating income is primarily due to decreased ethanol sales prices.
Other Income, Net
We had other income for our fiscal year ended
October 31, 2012
of $
156,234
compared to other income of $
126,489
for our fiscal year ended
October 31, 2011
.
Our other income, net increased from $37,281 for our fiscal year ended
October 31, 2011
to $181,186 for our fiscal year ended
October 31, 2012
primarily as a result of income related to land rent and other miscellaneous income.
Our interest income was lower for our fiscal year ended
October 31, 2012
compared to the same period of 2011 as a result of having less cash on hand during the 2012 period. Our interest expense was greater for our fiscal year ended
October 31, 2012
compared to the same period of 2011 due to the note we took to purchase a Shuttlewagon Railcar Mover in December 2011.
Results of Operations
Comparison of Fiscal Years Ended
October 31, 2011
and 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
2010
|
|
|
Income Statement Data
|
Amount
|
|
%
|
|
Amount
|
|
%
|
Revenues
|
$
|
156,521,489
|
|
|
100.0
|
|
$
|
95,289,452
|
|
|
100.0
|
Cost of Goods Sold
|
142,353,416
|
|
|
90.9
|
|
85,146,261
|
|
|
89.4
|
Gross Profit
|
14,168,073
|
|
|
9.1
|
|
10,143,191
|
|
|
10.6
|
Operating Expenses
|
2,002,706
|
|
|
1.3
|
|
1,957,742
|
|
|
2.1
|
Operating Income
|
12,165,367
|
|
|
7.8
|
|
8,185,449
|
|
|
8.6
|
Other Income, net
|
126,489
|
|
|
0.1
|
|
176,863
|
|
|
0.2
|
Net Income
|
$
|
12,291,856
|
|
|
7.9
|
|
$
|
8,362,312
|
|
|
8.8
|
Revenues
The following table shows the sources of our revenue for the year ended
October 31, 2011
.
|
|
|
|
|
|
|
|
|
Revenue Sources
|
Amount
|
|
Percentage of
Total Revenues
|
Ethanol sales
|
$
|
129,936,623
|
|
|
83.0
|
|
%
|
Distillers grains sales
|
|
22,745,766
|
|
|
14.5
|
|
%
|
Corn oil sales
|
|
3,843,726
|
|
|
2.5
|
|
%
|
Ethanol derivative activity losses
|
|
(4,626
|
)
|
|
—
|
|
|
Total Revenues
|
$
|
156,521,489
|
|
|
100.0
|
|
%
|
The following table shows the sources of our revenue for the year ended October 31, 2010:
|
|
|
|
|
|
|
|
Revenue Sources
|
Amount
|
|
Percentage of
Total Revenues
|
Ethanol sales
|
$
|
81,317,691
|
|
|
85.3
|
%
|
Distillers grains sales
|
|
12,250,393
|
|
|
12.9
|
%
|
Corn oil sales
|
|
1,721,368
|
|
|
1.8
|
%
|
Total Revenues
|
$
|
95,289,452
|
|
|
100.0
|
%
|
We experienced a significant increase in our revenues for our 2011 fiscal year compared to our 2010 fiscal year. Management attributes this increase in revenues primarily to the higher average prices we received for our products during fiscal year 2011 compared to fiscal year 2010 and to a lesser extent an increase in the production of our products. Our volume of ethanol sold in 2011 was approximately 7.5% higher than the volume sold in 2010. For our 2011 fiscal year, ethanol sales comprised approximately 83.0% of our revenue, distillers grains comprised approximately 14.5% of our revenue and corn oil sales comprised approximately 2.5% of our revenue. For our 2010 fiscal year, ethanol sales comprised approximately 85.3% of our revenue, distillers grains comprised approximately 12.9% of our revenue and corn oil sales comprised approximately 1.8% of our revenue.
Ethanol
The average price we received for our ethanol increased by approximately 48.0% during our 2011 fiscal year compared to our 2010 fiscal year. Management attributes this increase in the average price we received per gallon of ethanol with higher petroleum prices and increased ethanol exports during our 2011 fiscal year.
Distillers Grains
We experienced an increase in the average prices we received for our distillers grains during our 2011 fiscal year compared to the same period of 2010. We experienced an increase of approximately 76.2% in the average price we received for our dried distillers grains during our 2011 fiscal year compared to our 2010 fiscal year and an increase of approximately 45.3% in the average price we received for our modified/wet distillers grains during the same period. This change in the prices we received for our
distillers grains is coupled with an increase of approximately 5.5% in the overall volume of distillers grains sold in 2011 compared to 2010.
Corn Oil
The average price we received per pound of corn oil sold during our 2011 fiscal year was approximately 75.0% greater that the average price received during our 2010 fiscal year. This increase in corn oil prices coupled with an increase of approximately 27.6% in the volume of corn oil sold caused our annual corn oil revenue to increase from approximately $1,721,000 in 2010 to approximately $3,844,000 in 2011.
Cost of Goods Sold and Gross Profit
Our costs of goods sold as a percentage of revenues were 90.9% for our fiscal year ended October 31, 2011 compared to 89.4% for the same period of 2010. Our cost of goods sold increased to $142,353,416 for our fiscal year ended October 31, 2011 from $85,146,261 in our fiscal year ended October 31, 2010. Our per bushel corn costs increased by approximately 84.6% for the year ended October 31, 2011 as compared to the same period for our 2010 fiscal year. Our increased cost of corn was the primary factor driving up our costs of goods sold.
Corn Costs
We experienced an increase of approximately 96.7% in the total amount we paid for corn for our 2011 fiscal year compared to our 2010 fiscal year. This increase was due primarily to the per bushel price we paid since the volume of corn we used in 2011 was only 6.5% higher than the volume of corn we used in 2010. Market corn prices increased during our 2011 fiscal year starting in January 2011 and continuing through the beginning of September 2011 when the market experienced a decline in corn prices followed by a stronger corn market during December 2011. Management attributes this increase in corn prices with uncertainty regarding weather factors that resulted in decreased yields in some parts of the United States. Parts of the upper Midwest experienced these lower yields which reduced the amount of corn harvested in the fall of 2011.
Natural Gas Costs
We experienced a decrease in the average price we paid per MMBtu of natural gas during our 2011 fiscal year compared to our 2010 fiscal year. The average price we paid per MMBtu of natural gas during our 2011 fiscal year was approximately 5.7% lower than the average price we paid during our 2010 fiscal year. Management attributes this decrease in our natural gas costs with lower market natural gas prices due to increased natural gas supplies and relatively stable natural gas demand.
Hedging
Realized and unrealized gains and losses related to our corn, natural gas, and denaturant derivative instruments resulted in a decrease of approximately $1,276,000 in our cost of goods sold for our 2011 fiscal year compared to a decrease of approximately $2,223,000 in our cost of goods sold for our 2010 fiscal year. We recognize the gains or losses that result from the changes in the value of our derivative instruments related to corn, natural gas, and denaturant 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 Expenses
Operating expenses were relatively steady for the fiscal year ended October 31, 2011 compared to the same period in 2010. Our operating expenses as a percentage of revenues were lower for the fiscal year ended October 31, 2011 when compared to the same period ended October 31, 2010. However, this decrease is primarily due to the extreme increase in our revenues and not an actual reduction in operating expenses.
Other Income, Net
We had other income, net for our fiscal year ended October 31, 2011 of $126,489 compared to other income of $176,863 for our fiscal year ended October 31, 2010.
Included in other income, net is our interest income and expense. Interest expense for the fiscal year ended October 31, 2011, was less that one tenth of one percent of our revenue and totaled $4,358, compared to $10,704 of interest expense for the
year ended October 31, 2010. The interest expense incurred during our fiscal year ended October 31, 2011 is attributable to our low interest loan obtained through a local economic development authority and the upfront one percent fee on our letters of credit. On August 26, 2011, the board of governors decided to repay this loan in the amount of approximately $187,000.
Our interest income was steady for our fiscal year ended October 31, 2011 when compared to the same period ended October 31, 2010.
Changes in Financial Condition for the Fiscal Year Ended
October 31, 2012
and 2011
The following table highlights the changes in our financial condition for the
fiscal year ended
ended
October 31, 2012
from our previous fiscal year ended
October 31, 2011
:
|
|
|
|
|
|
|
|
|
|
October 31, 2012
|
|
October 31, 2011
|
Current Assets
|
$
|
20,715,050
|
|
|
$
|
27,542,361
|
|
Current Liabilities
|
$
|
6,002,937
|
|
|
$
|
13,680,184
|
|
Long-Term Debt
|
$
|
5,274,870
|
|
|
$
|
—
|
|
Members' Equity
|
$
|
49,855,325
|
|
|
$
|
49,761,138
|
|
Total assets were approximately $61,133,000 at
October 31, 2012
compared to approximately $63,441,000 at
October 31, 2011
. This decrease in total assets is primarily a result of the approximately $9,200,000 cash distribution paid to membership during our 2012 fiscal year. Also included in our total assets this period is an increase of approximately $8,018,000 in land, process equipment, and construction in progress. During our 2012 fiscal year, we purchased approximately $3,500,000 of land that will be used as part of a rail infrastructure improvement project. The construction of our rail loop enables us to load unit trains. Our construction in progress is primarily related to rail infrastructure improvement and the de-bottlenecking process we are implementing at our plant as we move toward an increased annual run rate. The additions in property, plant and equipment were offset with additional depreciation of approximately $4,161,000.
Current assets totaled approximately $20,715,000 at
October 31, 2012
, which is less than our current assets as of
October 31, 2011
which totaled approximately $27,542,000. The decrease is primarily due to the land acquisitions, property, plant, and equipment purchases, and payments of distributions discussed in the previous paragraph.
Total current liabilities decreased and totaled approximately $6,003,000 at
October 31, 2012
and approximately $13,680,000 at
October 31, 2011
. This decrease was mainly due to the payment of the accrued distribution during the first quarter of our 2012 fiscal year. Long term debt increased from zero at
October 31, 2011
to approximately $5,275,000 at
October 31, 2012
as we drew on our line of credit in order to finance our rail infrastructure improvement project and financed the purchase of a Shuttlewagon Railcar Mover.
Plant Operations
We are currently producing fuel-grade ethanol, distillers grains and crude corn oil for sale. Our plant has an approximate annual production capacity of 60 million gallons of denatured ethanol. We have obtained an amendment to our environmental permits allowing us to produce up to 70 million gallons of undenatured ethanol on a twelve month rolling sum basis. We intend to continue working to increase production to take advantage of the underutilized capacity of our plant. Any plant bottlenecks are assessed and a cost benefit analysis is performed prior to further capital investment.
We have completed several de-bottlenecking projects and we are in the process of completing our remaining projects. Each of these projects help our facility to be more efficient, productive and improve the environmental aspects of our process. For the fiscal year ended
October 31, 2012
, we have incurred approximately $1,135,000 in costs associated with our equipment construction projects. Since starting our de-bottlenecking projects we have incurred approximately $5,135,000 associated with the cost of these equipment improvements.
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 and natural gas supply, de-bottlenecking projects, staffing and 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. The ethanol industry needs to continue to expand the market for ethanol and distillers grains in order to maintain current price levels.
The following chart shows the average cash price per gallon of ethanol in Minnesota from December 1, 2010 through January 1, 2013, as compiled by the USDA Agricultural Marketing Service.
According to the Renewable Fuels Association (“RFA”), as of December 10, 2012, there were 211 ethanol plants nationwide with the capacity to produce approximately 14.7 billion gallons of ethanol annually. The RFA estimates that plants with an annual production capacity of approximately 13.3 billion gallons are currently operating and that approximately 9.6% 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.
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 and improved fuel efficiency. 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 “blend 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 E15 and E85 used in flex fuel vehicles. As discussed under "Results of Operations for the Fiscal Years Ended October 31, 2012 and 2011 - Revenues," in April 2012, the U.S. Environmental Protection Agency ("EPA") approved the first applications for registering ethanol for use in making E15. As E15 is brought to market and gains market acceptance, management believes that demand for ethanol will increase. However, we do not expect the EPA's acceptance of applications for registering ethanol for use in making E15 to impact ethanol demand or pricing in the near term.
The United States ethanol industry has exported an increasing amount of ethanol. Granite Falls Energy, through the use of its ethanol marketer, recently began to export a portion of its ethanol production to the European market. The exportation of domestic ethanol has helped to mitigate the effects of the blend wall and has thereby helped to maintain ethanol price levels. We are excited to be participating in the export market, but would prefer that all of our domestically produced fuel could be utilized by the domestic market. Whether the export market continues to make economic sense for Granite Falls Energy will depend on domestic blend rates as well as global supply and demand for our product.
The federal Renewable Fuels Standard, known as RFS2, requires the use of a specified amount of renewable fuels in the United States. In 2012, RFS2 required approximately 15.2 billion gallons, of which corn based ethanol could be used to satisfy approximately 13.2 billion gallons. In 2013, the RFS2 will require approximately 16.55 billion gallons, of which corn based ethanol can be used to satisfy approximately 13.8 billion gallons. In August 2012, the governors of several states requested that the EPA
waive the national volume requirements under RFS2. Although the EPA denied these waiver requests, parties opposed to RFS2 may again seek waivers in the future.
The removal of a dam on the Minnesota River located downstream from our water intake structure has resulted in the water level lowering below our current intake structure. We have opted to upgrade our intake structure, finding that option preferable to acquiring ownership of the dam prior to its removal. We are working on plans for this upgrade and expect to complete the necessary modifications during the second quarter of our 2013 fiscal year. We currently estimate that this project will cost a total of $1,000,000 and anticipate using cash flows from fiscal 2013 operations to fund the entire upgrade. However, the actual cost may be different than our current estimate.
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 1,800,000 bushels of corn each month. For the fiscal year ended
October 31, 2012
, our average cost of corn per bushel, net of hedging activity, was approximately $0.56 higher than our per bushel cost of corn for the same period ended
October 31, 2011
.
Corn prices remain above historical averages. During spring 2012, projected increases in domestic corn production led many to anticipate the possibility of lower corn prices following the 2012 harvest. However, a widespread drought in several corn producing states, combined with continued corn demand from other sectors, resulted in increasing corn prices. The drought contributed to lower domestic production during the 2012 growing season. We anticipate that corn prices will remain high through at least the 2013 harvest, as that is the earliest possible time that corn producers may be able to generate significant additional domestic production. If a period of high corn prices were to be sustained for some time, such pricing may reduce our ability to generate income because of the higher cost of operating our plant.
Natural gas is also an important input commodity to our manufacturing process. Our natural gas usage is approximately 120,000 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 the supply chain. However, 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 these changes.
Contracting Activity
Farmers Cooperative Elevator Company supplies our corn. Eco-Energy, LLC markets our ethanol and RPMG markets our distillers grains and 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.
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 revenue or cost of goods sold depending on the commodity that is hedged. 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 of
October 31, 2012
, we recorded a net liability for our derivative instruments in the amount of $45,563. As of
October 31, 2011
, we recorded a net asset for our derivative instruments in the amount of $404,050. 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 Energy.
As of
October 31, 2012
, we had approximately 1,000,000 bushels of fixed basis contracts for forward corn purchase commitments for delivery through December 2012. Through these contracts we hope to minimize risk from future market price fluctuations and basis fluctuations.
As of
October 31, 2012
, we had price protection in place for approximately 30% of our natural gas needs through March 2013. 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. We have categorized the cash flows related to the hedging activities with cash provided by operations, in the same category as the item being hedged.
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. Of the significant accounting policies described in the notes to our financial statements, we believe that the following are the most critical:
Inventory
We value our inventory at the lower of cost or market. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management’s assumptions which do not reflect unanticipated events and circumstances that may occur. In our analysis, we consider future corn costs and ethanol prices, break-even points for our plant and our risk management strategies in place through our use of derivative instruments. Given the significant assumptions required and the possibility that actual conditions will differ, we consider the valuation of the lower of cost or market on inventory to be a critical accounting estimate.
Property, Plant and Equipment
Management’s estimate of the depreciable lives of property, plant, and equipment is based on the estimated useful lives. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Impairment testing for assets requires various estimates and assumptions, including an allocation of cash flows to those assets and, if required, an estimate of the fair value of those assets. Given the significant assumptions required and the possibility that actual conditions will differ, we consider the assessment of the useful lives of property and equipment to be a critical accounting estimate.
Liquidity and Capital Resources
The following table shows our cash flows for the fiscal years ended
October 31, 2012
and
2011
:
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
Net cash provided by (used in) operating activities
|
$
|
(953,958
|
)
|
|
$
|
11,879,586
|
|
Net cash used in investing activities
|
(7,551,142
|
)
|
|
(50,020
|
)
|
Net cash used in financing activities
|
(3,873,632
|
)
|
|
(9,429,231
|
)
|
Operating Cash Flows.
Cash used in operating activities was approximately $954,000 for the
fiscal year ended
October 31, 2012
, compared to cash provided by operating activities of approximately $11,880,000 for the
fiscal year ended
October 31, 2011
. The difference is primarily attributable to our decrease in net income for the
fiscal year ended
October 31, 2012
compared to the
fiscal year ended
October 31, 2011
. We also purchased approximately $6,500,000 of corn during the fourth quarter of 2012 that we anticipate using during fiscal 2013. 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 $7,551,000 for the
fiscal year ended
October 31, 2012
, compared to cash used in investing activities of approximately $50,000 for the
fiscal year ended
October 31, 2011
. During the
fiscal year ended
October 31, 2012
, we made payments totaling approximately $7,551,000 for capital expenditures, construction in process and land acquisitions, compared to payments of approximately $3,550,000 during the same period in 2011. Additionally, during the
fiscal year ended
October 31, 2011
we had positive investing cash flow from the maturity of certain short term investments (certificates of deposit) in the amount of $3,500,000.
Financing Cash Flows.
Cash used in financing activities was approximately $3,874,000 for the
fiscal year ended
October 31, 2012
, compared to approximately $9,429,000 for the
fiscal year ended
October 31, 2011
. The difference is primarily attributable to approximately $5,491,000 in long-term debt proceeds from our revolving term loan with United FCS during the
fiscal year ended
October 31, 2012
.
The following table shows our cash flows for the fiscal years ended October 31, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
Net cash provided by operating activities
|
$
|
11,879,586
|
|
|
$
|
14,079,296
|
|
Net cash used in investing activities
|
(50,020
|
)
|
|
(4,320,511
|
)
|
Net cash used in financing activities
|
(9,429,231
|
)
|
|
(4,811,066
|
)
|
Operating Cash Flows.
Cash provided by operating activities was approximately $11,880,000 for the fiscal year ended October 31, 2011, which was less than the approximately $14,080,000 provided by operating activities for the fiscal year ended October 31, 2010. The difference is primarily attributable to the significant depreciation taken during the period ended October 31, 2010.
Investing Cash Flows.
Cash used in investing activities was approximately $50,000 for the fiscal year ended October 31, 2011, compared to cash used in investing activities of approximately $4,321,000 for the fiscal year ended October 31, 2010. During the fiscal year ended October 31, 2011 we had positive investing cash flow from the maturity of certain short term investments (certificates of deposit) in the amount of $3,500,000. These proceeds were offset by payments for capital expenditures and construction in process in the amount of approximately $3,550,000.
Financing Cash Flows.
Cash used in financing activities was approximately $9,429,000 for the fiscal year ended October 31, 2011, compared to approximately $4,811,000 for the fiscal year ended ended October 31, 2010. In the fiscal year ended October 31, 2011, cash was used to pay a distribution to our members totaling approximately $9,200,000 and to repay the principal balance on our long-term debt.
Indebtedness
Short-Term Debt Sources
The Company formerly had a Loan Agreement with Minnwest Bank M.V. of Marshall, MN (the “Bank”). Under the Loan Agreement, the Company had a revolving line of credit with a maximum of $6,000,000 available which was secured by a first mortgage on substantially all of our assets. The interest rate on the revolving line of credit was at 0.25 percentage points above the prime rate as reported by the Wall Street Journal, with a minimum rate of 4.0%. In August 2012, the Company terminated this revolving line of credit and entered into two new credit facilities, one short-term and one long-term, with United FCS. CoBank serves as administrative agent for these new credit facilities.
The Company's short-term credit facility with United FCS is a revolving line of credit. This facility allows us to borrow, repay, and reborrow up to $6,000,000 subject to a borrowing base calculation. Final payment of amounts borrowed under this credit facility is due August 1, 2013. Amounts borrowed under the revolving line of credit bear interest at one of three interest rate options selected by us, (i) at a variable weekly rate equal to 2.65% above the rate quoted by the British Bankers Association for the offering of one-month U.S. Dollar deposits, (ii) at a fixed rate to be quoted by CoBank, or (iii) at a fixed rate for up to 12
months equal to LIBOR plus 2.65%. Interest on amounts borrowed is payable monthly in arrears. We expect to utilize this credit facility to finance inventory and receivables as needed. We have not yet made any advances on this line of credit.
The Company also has letters of credit totaling $386,928 as part of a credit requirement of Northern Natural Gas. In August 2012, these letters of credit were transferred to United FCS as part of the new credit facilities. These letters of credit reduce the amount available under our line of credit to approximately $5,613,000.
Long-Term Debt Sources
The Company's long-term credit facility with United FCS is a revolving term loan. Under this facility we may borrow, repay, and reborrow up to $8,000,000. However, the amount available for borrowing under this facility reduces by $1,000,000 every six months, beginning September 1, 2013, with final payment due March 1, 2017. Amounts borrowed under the revolving term loan bear interest at one of three interest rate options selected by us, (i) at a variable weekly rate equal to 2.90% above the rate quoted by the British Bankers Association for the offering of one-month U.S. Dollar deposits, (ii) at a fixed rate to be quoted by CoBank, or (iii) at a fixed rate for up to 12 months equal to LIBOR plus 2.90%. Interest on amounts borrowed is payable monthly in arrears. We have used this credit facility to fund our rail infrastructure improvement project. As of October 31, 2012, the outstanding balance on our revolving term loan was $4,891,952 and the interest rate as of that date was 3.12%.
The Company's credit facilities with United FCS require the Company to comply with certain financial covenants, including (i) maintaining working capital of at least $10,000,000, (ii) maintaining local net worth, defined as total assets, minus total liabilities, minus investments by the Company in other entities, of at least $45,000,000, and (iii) achieving a debt service coverage ratio of at least 2.0 to 1.0. Our debt service coverage ratio is calculated as follows: (1) net income, plus depreciation and amortization, minus extraordinary gains (plus extraordinary losses), minus gain on asset sales (plus loss on asset sales); (2) divided by $2,000,000. As of October 31, 2012, we were in compliance with our financial covenants.
Our credit facilities with United FCS are secured by substantially all our assets. There are no savings account balance collateral requirements as part of this new credit facility.
In December 2011, the Company purchased a Shuttlewagon Railcar Mover for use at its facility. The Company financed the entire purchase price through Capital One Equipment Leasing and Finance. As of October 31, 2012, the loan balance was approximately $498,000, of which approximately $383,000 is classified as long-term debt. The note is on a five-year term at a fixed annual interest rate of 3.875%.
Contractual Obligations
The following table provides information regarding the contractual obligations of the Company as of October 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Less than One Year
|
|
One to Three Years
|
|
Three to Five Years
|
|
Greater Than Five Years
|
Long-Term Debt Obligations (1)
|
|
$
|
6,022,593
|
|
|
$
|
131,938
|
|
|
$
|
2,522,722
|
|
|
$
|
3,367,933
|
|
|
$
|
—
|
|
Operating Lease Obligations (2)
|
|
$
|
4,456,982
|
|
|
$
|
1,582,612
|
|
|
$
|
2,342,058
|
|
|
$
|
471,494
|
|
|
$
|
60,816
|
|
Purchase Obligations (3)
|
|
$
|
719,000
|
|
|
$
|
719,000
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
Total Contractual Obligations
|
|
$
|
11,198,575
|
|
|
$
|
2,433,550
|
|
|
$
|
4,864,780
|
|
|
$
|
3,839,427
|
|
|
$
|
60,816
|
|
(1) Long-term debt obligations include both principal and interest payments.
(2) Operating lease obligations include the Company's rail car lease (Note 7).
(3) Purchase commitments include fixed price utility forward contracts.
Off-Balance Sheet Arrangements.
We currently have no off-balance sheet arrangements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Governors
Granite Falls Energy, LLC
Granite Falls, Minnesota
We have audited the accompanying balance sheets of Granite Falls Energy, LLC as of October 31, 2012 and 2011, and the related statements of operations, changes in members’ equity, and cash flows for each of the years in the three-year period ended October 31, 2012. Granite Falls Energy, LLC's management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Granite Falls Energy, LLC as of October 31, 2012 and 2011, and the results of its operations and its cash flows for each of the years in the three-year period ended October 31, 2012, in conformity with accounting principles generally accepted in the United States of America.
|
|
|
|
/s/ Boulay, Heutmaker, Zibell, and Co. P.L.L.P.
|
|
Certified Public Accountants
|
|
|
Minneapolis, Minnesota
|
|
January 29, 2013
|
|
GRANITE FALLS ENERGY, LLC
Balance Sheets
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
October 31, 2012
|
|
October 31, 2011
|
|
|
|
|
|
Current Assets
|
|
|
|
|
Cash
|
|
$
|
685,828
|
|
|
$
|
13,064,560
|
|
Restricted cash
|
|
494,000
|
|
|
1,503,000
|
|
Accounts receivable
|
|
7,356,534
|
|
|
3,777,547
|
|
Inventory
|
|
12,013,169
|
|
|
8,615,411
|
|
Commodity derivative instruments
|
|
—
|
|
|
404,050
|
|
Prepaid expenses and other current assets
|
|
165,519
|
|
|
177,793
|
|
Total current assets
|
|
20,715,050
|
|
|
27,542,361
|
|
|
|
|
|
|
Property, Plant and Equipment
|
|
|
|
|
Land and improvements
|
|
7,095,172
|
|
|
3,627,973
|
|
Railroad improvements
|
|
4,121,148
|
|
|
4,121,148
|
|
Process equipment and tanks
|
|
64,678,860
|
|
|
63,592,688
|
|
Administration building
|
|
279,734
|
|
|
279,734
|
|
Office equipment
|
|
154,072
|
|
|
154,072
|
|
Rolling stock
|
|
1,305,395
|
|
|
642,908
|
|
Construction in progress
|
|
3,831,263
|
|
|
366,979
|
|
|
|
81,465,644
|
|
|
72,785,502
|
|
Less accumulated depreciation
|
|
41,047,562
|
|
|
36,886,541
|
|
Net property, plant and equipment
|
|
40,418,082
|
|
|
35,898,961
|
|
|
|
|
|
|
Total Assets
|
|
$
|
61,133,132
|
|
|
$
|
63,441,322
|
|
Notes to Financial Statements are an integral part of this Statement.
GRANITE FALLS ENERGY, LLC
Balance Sheets
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS' EQUITY
|
|
October 31, 2012
|
|
October 31, 2011
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
114,718
|
|
|
$
|
—
|
|
Accounts payable
|
|
3,527,840
|
|
|
1,591,036
|
|
Corn payable to FCE
|
|
1,995,997
|
|
|
2,516,923
|
|
Commodity derivative instruments
|
|
45,563
|
|
|
—
|
|
Accrued liabilities
|
|
318,819
|
|
|
375,425
|
|
Distribution payable
|
|
—
|
|
|
9,196,800
|
|
Total current liabilities
|
|
6,002,937
|
|
|
13,680,184
|
|
|
|
|
|
|
Long-Term Debt, less current portion
|
|
5,274,870
|
|
|
—
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
Members' Equity, 30,606 and 30,656 units authorized, issued and outstanding at October 31, 2012 and 2011, respectively
|
|
49,855,325
|
|
|
49,761,138
|
|
|
|
|
|
|
Total Liabilities and Members’ Equity
|
|
$
|
61,133,132
|
|
|
$
|
63,441,322
|
|
|
|
|
|
|
|
|
|
|
|
Notes to Financial Statements are an integral part of this Statement.
GRANITE FALLS ENERGY, LLC
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
For the fiscal years ended,
|
October 31, 2012
|
October 31, 2011
|
October 31, 2010
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
175,162,043
|
|
$
|
156,521,489
|
|
$
|
95,289,452
|
|
|
|
|
|
Cost of Goods Sold
|
172,708,074
|
|
142,353,416
|
|
85,146,261
|
|
|
|
|
|
Gross Profit
|
2,453,969
|
|
14,168,073
|
|
10,143,191
|
|
|
|
|
|
Operating Expenses
|
2,449,596
|
|
2,002,706
|
|
1,957,742
|
|
|
|
|
|
Operating Income
|
4,373
|
|
12,165,367
|
|
8,185,449
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
Other income
|
182,186
|
|
37,281
|
|
89,890
|
|
Interest income
|
18,050
|
|
93,566
|
|
97,677
|
|
Interest expense
|
(44,002
|
)
|
(4,358
|
)
|
(10,704
|
)
|
Total other income, net
|
156,234
|
|
126,489
|
|
176,863
|
|
|
|
|
|
Net Income
|
$
|
160,607
|
|
$
|
12,291,856
|
|
$
|
8,362,312
|
|
|
|
|
|
Weighted Average Units Outstanding - Basic and Diluted
|
30,614
|
|
30,656
|
|
30,656
|
|
|
|
|
|
Net Income Per Unit - Basic and Diluted
|
$
|
5.25
|
|
$
|
400.96
|
|
$
|
272.78
|
|
|
|
|
|
Distributions Per Unit
|
$
|
—
|
|
$
|
600.00
|
|
$
|
150.00
|
|
|
|
|
|
Notes to Financial Statements are an integral part of this Statement.
GRANITE FALLS ENERGY, LLC
Statement of Changes in Members' Equity
|
|
|
|
|
|
Balance - October 31, 2009
|
|
$
|
52,098,970
|
|
|
|
|
Member distributions
|
|
(4,598,400
|
)
|
|
|
|
Net income for the year ended October 31, 2010
|
|
8,362,312
|
|
|
|
|
Balance - October 31, 2010
|
|
55,862,882
|
|
|
|
|
Member distributions
|
|
(18,393,600
|
)
|
|
|
|
Net income for the year ended October 31, 2011
|
|
12,291,856
|
|
|
|
|
Balance - October 31, 2011
|
|
49,761,138
|
|
|
|
|
Repurchase of 50 membership units in December 2011
|
|
(66,420
|
)
|
|
|
|
Net income for the year ended October 31, 2012
|
|
160,607
|
|
|
|
|
Balance - October 31, 2012
|
|
$
|
49,855,325
|
|
Notes to Financial Statements are an integral part of this Statement.
`GRANITE FALLS ENERGY, LLC
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal years ended,
|
October 31, 2012
|
|
October 31, 2011
|
|
October 31, 2010
|
|
|
|
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
Net income
|
$
|
160,607
|
|
|
$
|
12,291,856
|
|
|
$
|
8,362,312
|
|
Adjustments to reconcile net income to net cash provided by operations:
|
|
|
|
|
|
Depreciation and amortization
|
4,161,021
|
|
|
3,988,606
|
|
|
6,940,876
|
|
Change in fair value of derivative instruments
|
1,651,799
|
|
|
(1,271,242
|
)
|
|
(1,889,836
|
)
|
Change in operating assets and liabilities:
|
|
|
|
|
|
Restricted cash
|
1,009,000
|
|
|
(601,500
|
)
|
|
209,173
|
|
Commodity derivative instruments
|
(1,202,186
|
)
|
|
1,619,692
|
|
|
1,498,772
|
|
Accounts receivable
|
(3,578,987
|
)
|
|
(613,338
|
)
|
|
175,809
|
|
Inventory
|
(3,397,758
|
)
|
|
(4,284,741
|
)
|
|
(1,479,030
|
)
|
Prepaid expenses and other current assets
|
12,274
|
|
|
(60,904
|
)
|
|
62,733
|
|
Accounts payable
|
286,878
|
|
|
871,671
|
|
|
141,558
|
|
Accrued liabilities
|
(56,606
|
)
|
|
(60,514
|
)
|
|
56,929
|
|
Net Cash (Used in) Provided by Operating Activities
|
(953,958
|
)
|
|
11,879,586
|
|
|
14,079,296
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
Proceeds from (payments for) maturity of short-term investments
|
—
|
|
|
3,500,000
|
|
|
(3,500,000
|
)
|
Payments for capital expenditures
|
(1,381,680
|
)
|
|
(3,183,041
|
)
|
|
(80,415
|
)
|
Payments for construction in process
|
(2,702,263
|
)
|
|
(366,979
|
)
|
|
(740,096
|
)
|
Payments for land acquisitions
|
(3,467,199
|
)
|
|
—
|
|
|
—
|
|
Net Cash Used in Investing Activities
|
(7,551,142
|
)
|
|
(50,020
|
)
|
|
(4,320,511
|
)
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
Proceeds from long-term debt
|
5,490,926
|
|
|
—
|
|
|
—
|
|
Payments on long-term debt
|
(101,338
|
)
|
|
(232,431
|
)
|
|
(212,666
|
)
|
Payments for membership unit redemption
|
(66,420
|
)
|
|
—
|
|
|
—
|
|
Member distributions paid
|
(9,196,800
|
)
|
|
(9,196,800
|
)
|
|
(4,598,400
|
)
|
Net Cash Used in Financing Activities
|
(3,873,632
|
)
|
|
(9,429,231
|
)
|
|
(4,811,066
|
)
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash
|
(12,378,732
|
)
|
|
2,400,335
|
|
|
4,947,719
|
|
|
|
|
|
|
|
Cash - Beginning of Period
|
13,064,560
|
|
|
10,664,225
|
|
|
5,716,506
|
|
|
|
|
|
|
|
Cash - End of Period
|
$
|
685,828
|
|
|
$
|
13,064,560
|
|
|
$
|
10,664,225
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
Interest
|
$
|
44,002
|
|
|
$
|
6,857
|
|
|
$
|
11,611
|
|
|
|
|
|
|
|
Supplemental Disclosure of Noncash Investing and Financing Activities
|
|
|
|
|
|
Member distributions included in distribution payable
|
$
|
—
|
|
|
$
|
9,196,800
|
|
|
$
|
—
|
|
Transfer of construction in process to fixed assets
|
$
|
366,979
|
|
|
$
|
746,008
|
|
|
$
|
231,916
|
|
Capital expenditures and construction in process included in accounts payable
|
$
|
1,129,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Notes to Financial Statements are an integral part of this Statement.
GRANITE FALLS ENERGY, LLC
Notes to Financial Statements
October 31, 2012 and 2011
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying audited financial statements of Granite Falls Energy, LLC have been Impairment prepared pursuant to the rules and regulations of the Securities and Exchange Commission. As used in this report in Form 10-K, the “Company” represents Granite Falls Energy, LLC (“GFE”).
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, pursuant to marketing agreements, throughout the continental United States and on the international market. GFE's plant has an approximate annual production capacity of
60 million
gallons, but is currently permitted to produce up to
70 million
gallons of undenatured ethanol on a
twelve
month rolling sum basis.
Fiscal Reporting Period
The Company has adopted a fiscal year ending October 31 for financial reporting purposes.
Accounting Estimates
Management uses estimates and assumptions in preparing these 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, valuation of commodity derivatives and inventory, and the assumptions used in the impairment analysis of long-lived assets. Actual results may differ from previously estimated amounts, and such differences may be material to our 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.
Cash
The Company maintains it accounts primarily at two financial institutions, of which one is a member of the Company. At times throughout the year, the Company's cash balances may exceed amounts insured by the Federal Deposit Insurance Corporation. At October 31, 2012 and 2011 such uninsured funds approximated
$230,000
and
$13,028,000
, respectively. The Company does not believe it is exposed to any significant credit risk on its cash balances.
Restricted Cash
The Company has restricted cash balances relating to its margin requirements with the Company's commodity derivative broker based on open commodity contracts discussed in Note 5.
Accounts Receivable
Credit terms are extended to customers in the normal course of business. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral.
Accounts receivable are recorded at their estimated net realizable value. Accounts are considered past due if payment is not made on a timely basis in accordance with the Company's credit terms. Accounts considered uncollectible are written off. The Company follows a policy of providing an allowance for doubtful accounts; however, based on historical experience, and its evaluation of the current status of receivables, the Company is of the belief that such accounts will be collectible in all material respects and thus an allowance was not necessary at October 31, 2012 or 2011. It is at least possible this estimate will change in the future.
GRANITE FALLS ENERGY, LLC
Notes to Financial Statements
October 31, 2012 and 2011
Inventory
Inventory is stated at the lower of cost or market. Cost for all inventories is determined using the first in first out method (FIFO). Market is based on current replacement values except that it does not exceed net realizable values and it is not less than net realizable values reduced by allowances from normal profit margin. Inventory consists of raw materials, work in process, finished goods, and spare parts. Corn is the primary raw material along with other raw materials. Finished goods consist of ethanol, distillers grains, and corn oil.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Depreciation is provided over the following estimated useful lives by use of the straight-line method.
|
|
|
Asset Description
|
Years
|
Land improvements
|
5-20 years
|
Buildings
|
10-30 years
|
Grain handling equipment
|
5-15 years
|
Mechanical equipment
|
5-15 years
|
Equipment
|
5-10 years
|
Maintenance and repairs are expensed as incurred; major improvements and betterments are capitalized. Construction in progress expenditures will be depreciated using the straight-line method over their estimated useful lives once the assets are placed into service. Depreciation expense totaled
$4,161,021
,
$2,978,556
, and
$6,918,032
for the fiscal years ended October 31, 2012, 2011, and 2010, respectively.
Long-Lived Assets
Long-lived assets, such as property, plant, and equipment, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including, but not limited to, discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. No indicators of impairment existed during fiscal 2012 or 2011 that would have triggered impairment testing, and therefore, no impairment expense was recorded during 2012 or 2011.
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. Ethanol and related products are generally shipped free on board (FOB) shipping point. The Company believes there are no ethanol sales, during any given month, which should be considered contingent and recorded as deferred revenue.
In accordance with the Company's 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 price 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. Shipping costs paid by the Company to the marketer in the sale of ethanol are not specifically identifiable and, as a result, are recorded based on the net selling price reported to the Company from the marketer. Shipping costs incurred by the Company in the sale of distillers grains and corn oil are included in cost of goods sold.
GRANITE FALLS ENERGY, LLC
Notes to Financial Statements
October 31, 2012 and 2011
Fair Value of Financial Instruments
The Company's accounting for fair value measurements of assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring or nonrecurring basis adhere to the Financial Accounting Standards Board (FASB) fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The Company has adopted guidance for fair value measurement related to nonfinancial items that are recognized and disclosed at fair value in the financial statements on a nonrecurring basis. The guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements).
The three levels of the fair value hierarchy are as follows:
|
|
•
|
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
|
|
|
•
|
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
|
|
|
•
|
Level 3 inputs are unobservable inputs for the asset or liability.
|
The level in the fair value hierarchy within which a fair measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
Except for those assets and liabilities which are required by authoritative accounting guidance to be recorded at fair value in our balance sheets, the Company has elected not to record any other assets or liabilities at fair value. No events occurred during the fiscal years ended October 31, 2012 or 2011 that required adjustment to the recognized balances of assets or liabilities, which are recorded at fair value on a nonrecurring basis.
The carrying value of cash, restricted cash, accounts receivable, accounts payable and accrued liabilities approximates fair value due to the short maturity of these instruments. The Company obtains fair value measurements from an independent pricing service for corn derivative contracts. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the Chicago Board of Trade and New York Mercantile Exchange markets. The fair value of the long-term debt is estimated based on anticipated interest rates which management believes would currently be available to the Company for similar issues of debt, taking into account the current credit risk of the Company and other market factors. The Company believes the carrying value of the debt instruments approximate fair value.
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 sheets 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 earnings.
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.
GRANITE FALLS ENERGY, LLC
Notes to Financial Statements
October 31, 2012 and 2011
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.
In order to reduce the risks 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 for corn in the Company's 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 market conditions. 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. The Company does not enter into financial instruments for trading or speculative purposes.
The Company has adopted authoritative guidance related to “Derivatives and Hedging,” and has included the required enhanced quantitative and qualitative disclosure about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses from derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. See further discussion in Note 5.
Income Taxes
The Company is treated as a partnership for federal and state income tax purposes, and generally does not incur income taxes. Instead its earnings and losses are included in the income tax returns of its members. Therefore, no provision or liability for federal or state income taxes has been included in these financial statements. The Company had no significant uncertain tax positions as of October 31, 2012 or 2011. For years before fiscal 2010, the Company is no longer subject to U.S. Federal or state income tax examinations.
Environmental Liabilities
The Company's operations are subject to environmental laws and regulations adopted by various governmental entities in the jurisdiction in which it operates. These laws require the Company to investigate and remediate the effects of the release or disposal of materials at its location. Accordingly, the Company has adopted policies, practices, and procedures in the areas of pollution control, occupational health, and the production, handling, storage, and use of hazardous materials to prevent material environmental or other damage, and to limit the financial liability, which could result from such events. Environmental liabilities are recorded when the liability is probable and the costs can be reasonable estimated. No expense has been recorded for the fiscal year's ended October 31, 2012, 2011, or 2010.
Net Income per Unit
Basic net income per unit is computed by dividing net income by the weighted average number of members' units outstanding during the period. Diluted net income per unit is computed by dividing net income by the weighted average number of members' units and members' unit equivalents outstanding during the period. There were no member unit equivalents outstanding during the periods presented; accordingly, for all periods presented, the calculations of the Company's basic and diluted net income per unit are the same.
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 Company's revenues are derived from the sale and distribution of ethanol and distillers grains to customers located in the United States and internationally. Corn for the production process is supplied to our plant primarily from local agricultural producers and from purchases on the open market. Ethanol sales average approximately
80%
of total revenues and corn costs averaged
85%
of cost of goods sold.
The Company's 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
GRANITE FALLS ENERGY, LLC
Notes to Financial Statements
October 31, 2012 and 2011
factors such as supply and demand, the weather, government policies and programs. The Company follows a risk management program to protect against the price volatility of these commodities.
3. CONCENTRATIONS
The Company has identified certain concentrations that are present in their business operations. The Company's revenue from ethanol sales is derived from a single customer under an ethanol marketing agreement described in Note 12. Sales under that agreement account for approximately
80%
,
83%
, and
86%
of the Company's revenues, net of derivative activity, during fiscal 2012, 2011 and 2010, respectively. Accordingly,
79%
and
81%
of the Company's receivables are regularly due from that same customer at October 31, 2012 and 2011, respectively.
4. INVENTORY
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
October 31, 2012
|
|
October 31, 2011
|
Raw materials
|
$
|
8,977,820
|
|
|
$
|
5,323,615
|
|
Spare parts
|
682,896
|
|
|
584,011
|
|
Work in process
|
1,183,188
|
|
|
1,150,239
|
|
Finished goods
|
1,169,265
|
|
|
1,557,546
|
|
Totals
|
$
|
12,013,169
|
|
|
$
|
8,615,411
|
|
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. Based on the lower of cost or market analysis, the Company recorded a lower of cost or market charge on certain inventories for the fiscal year ended October 31, 2012 for approximately
$77,000
. The Company did not record a lower of cost or market charge on certain inventories for the fiscal years ended October 31, 2011 or 2010.
5. DERIVATIVE INSTRUMENTS
As of October 31, 2012, the total notional amount of the Company's outstanding corn derivative instruments was approximately
1,235,000
bushels that were entered into to hedge forecasted corn purchases through March 2013. There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding as disclosed above.
The following tables provide details regarding the Company's derivative instruments at October 31, 2012, none of which were designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet location
|
|
Assets
|
|
Liabilities
|
|
|
|
|
|
|
Corn contracts
|
Commodity derivative instruments
|
|
$
|
—
|
|
|
$
|
(45,563
|
)
|
|
|
|
|
|
|
Totals
|
|
|
$
|
—
|
|
|
$
|
(45,563
|
)
|
In addition, as of October 31, 2012 the Company maintained approximately
$494,000
of restricted cash related to margin requirements for the Company's derivative instrument positions.
As of October 31, 2011, the total notional amount of the Company's outstanding corn derivative instruments was approximately
2,580,000
bushels that were entered into to hedge forecasted corn purchases through March 2012. There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding as disclosed above.
GRANITE FALLS ENERGY, LLC
Notes to Financial Statements
October 31, 2012 and 2011
The following tables provide details regarding the Company's derivative instruments at October 31, 2011, none of which were designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet location
|
|
Assets
|
|
Liabilities
|
|
|
|
|
|
|
Corn contracts
|
Derivative instruments
|
|
$
|
404,050
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Totals
|
|
|
$
|
404,050
|
|
|
$
|
—
|
|
In addition, as of October 31, 2011 the Company maintained
$903,000
of restricted cash related to margin requirements for the Company's commodity derivative instrument positions.
The following tables provide details regarding the gains and (losses) from Company's derivative instruments in statements of operations, none of which are designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of
|
|
Fiscal Years Ended October 31,
|
|
|
Operations location
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
Ethanol contracts
|
|
Revenue
|
|
$
|
—
|
|
|
$
|
(4,626
|
)
|
|
$
|
(343,448
|
)
|
Corn contracts
|
|
Cost of Goods Sold
|
|
(1,651,799
|
)
|
|
1,280,413
|
|
|
2,339,286
|
|
Natural gas contracts
|
|
Cost of Goods Sold
|
|
—
|
|
|
(4,545
|
)
|
|
(113,710
|
)
|
Denaturant contracts
|
|
Cost of Goods Sold
|
|
—
|
|
|
—
|
|
|
7,708
|
|
|
|
|
|
|
|
|
|
|
Total gain (loss)
|
|
|
|
$
|
(1,651,799
|
)
|
|
$
|
1,271,242
|
|
|
$
|
1,889,836
|
|
6. REVOLVING LINE OF CREDIT AND LONG-TERM DEBT
The Company had a loan agreement with a bank. Under this agreement, the Company has a revolving line of credit with a maximum of
$6,000,000
available through April 2012 and was secured by substantially all of the Company's assets. At October 31, 2011, the Company had
no
outstanding balance on this line of credit. In August 2012, the Company terminated this revolving line of credit.
The Company has subsequently established two new credit facilities with a new lender. The first is a seasonal revolving operating loan facility in the amount of
$6,000,000
. The second is a revolving term loan facility in the amount of
$8,000,000
. The interest rates for both facilities are based on the bank's "One Month LIBOR Index Rate," plus
265
and
290
basis points on the seasonal and revolving term commitments, respectively. The outstanding balance on the revolving term loan on October 31, 2012 was
$4,891,952
. The Company currently has not made any advances on the seasonal revolving operating loan facility.
The credit facilities require the Company to comply with certain financial covenants, including (i) maintaining working capital of at least
$10,000,000
, (ii) maintaining local net worth, defined as total assets, minus total liabilities, minus investments by the Company in other entities, of at least
$45,000,000
, and (iii) achieving a debt service coverage ratio of at least
2.0
to 1.0. The debt service coverage ratio is calculated as follows: (1) net income, plus depreciation and amortization, minus extraordinary gains (plus extraordinary losses), minus gain on asset sales (plus loss on asset sales); (2) divided by
$2,000,000
. As of October 31, 2012, the Company was in compliance with these financial covenants.
The credit facilities are secured by substantially all assets of the Company. There are no savings account balance collateral requirements as part of this new credit facility.
At October 31, 2012, the Company also had letters of credit totaling
$386,928
with the bank as part of a credit requirement of Northern Natural Gas. These letters of credit reduce the amount available under the seasonal revolving operating loan to approximately
$5,613,000
. Subsequent to year end the letters of credit amount was reduced by
$49,000
.
GRANITE FALLS ENERGY, LLC
Notes to Financial Statements
October 31, 2012 and 2011
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
October 31, 2012
|
|
October 31, 2011
|
Shuttlewagon Railcar Mover Loan (5 year term at 3.875%)
|
$
|
497,636
|
|
|
$
|
—
|
|
Long Term Revolver
|
$
|
4,891,952
|
|
|
$
|
—
|
|
Less: Current Maturities
|
$
|
(114,718
|
)
|
|
$
|
—
|
|
|
|
|
|
Total Long-Term Debt
|
$
|
5,274,870
|
|
|
$
|
—
|
|
The estimated maturities of long-term debt at October 31, 2012 are as follows:
|
|
|
|
|
|
November 1, 2012 to October 31, 2013
|
|
$
|
114,718
|
|
November 1, 2013 to October 31, 2014
|
119,233
|
|
November 1, 2014 to October 31, 2015
|
2,015,877
|
|
November 1, 2015 to October 31, 2016
|
2,128,801
|
|
November 1, 2016 to October 31, 2017
|
1,010,959
|
|
Total debt
|
|
$
|
5,389,588
|
|
7. LEASES
The Company has a lease agreement with a leasing company for
75
hopper cars to assist with the transport of distiller's grains by rail. In November 2010, the original lease was renewed for an additional
five
-year period. Based on final manufacturing and interest costs, the Company will pay the leasing company
$620
per month plus
$0.03
per mile traveled in excess of
36,000
miles per year. Rent expense for these leases was
$552,000
,
$553,000
and
$604,000
for the fiscal years ended October 31, 2012, 2011 and 2010, respectively.
At October 31, 2012, the Company had lease agreements with three leasing companies for
177
rail car leases for the transportation of the Company's ethanol with various maturity dates through October 2017. The rail car lease payments are due monthly in the aggregate amount of approximately
$89,000
. Rent expense for these leases was
$1,278,000
,
$1,171,000
and
$1,058,000
for the fiscal years ended October 31, 2012, 2011 and 2010, respectively.
At October 31, 2012, the Company had the following commitments for payments of rentals under operating leases which at inception had a non-cancelable term of more than one year:
|
|
|
|
|
|
November 1, 2012 to October 31, 2013
|
|
$
|
1,582,614
|
|
November 1, 2013 to October 31, 2014
|
1,307,919
|
|
November 1, 2014 to October 31, 2015
|
1,034,139
|
|
November 1, 2015 to October 31, 2016
|
343,990
|
|
November 1, 2016 to October 31, 2017
|
127,504
|
|
Thereafter
|
60,816
|
|
Total minimum lease commitments
|
|
$
|
4,456,982
|
|
GRANITE FALLS ENERGY, LLC
Notes to Financial Statements
October 31, 2012 and 2011
8. FAIR VALUE
The following table provides information on those derivative assets measured at fair value on a recurring basis at October 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount in Balance Sheet
October 31, 2012
|
Fair Value
October 31, 2012
|
Fair Value Measurement Using
|
Quoted Prices in Active Markets
(Level 1)
|
Significant Other Observable Inputs
(Level 2)
|
Significant unobservable inputs
(Level 3)
|
Financial Liabilities:
|
|
|
|
|
|
Derivative Instruments
|
$
|
45,563
|
|
$
|
45,563
|
|
$
|
45,563
|
|
$
|
—
|
|
$
|
—
|
|
The following table provides information on those derivative assets measured at fair value on a recurring basis at October 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount in Balance Sheet
October 31, 2011
|
Fair Value
October 31, 2011
|
Fair Value Measurement Using
|
Quoted Prices in Active Markets
(Level 1)
|
Significant Other Observable Inputs
(Level 2)
|
Significant unobservable inputs
(Level 3)
|
Financial Assets:
|
|
|
|
|
|
Derivative Instruments
|
$
|
404,050
|
|
$
|
404,050
|
|
$
|
404,050
|
|
$
|
—
|
|
$
|
—
|
|
We determine the fair value of commodity derivative instruments by obtaining fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the Chicago Board of Trade market and New York Mercantile Exchange.
9. 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 October 31, 2012, 2011 and 2010, the Company had
30,606
,
30,656
and
30,656
membership units authorized, issued, and outstanding, respectfully.
In December 2011, the Board of Governors exercised its discretion to redeem
50
membership units totaling
$66,420
from an investor due to a unique restriction on transfers situation.
In October 2011, the Board of Governors declared a cash distribution of
$300
per unit or
$9,196,800
for unit holders of record as of October 27, 2011. The distribution was paid on December 15, 2011.
In November 2010, the Board of Governors declared a cash distribution of
$300
per unit or
$9,196,800
for unit holders of record as of November 23, 2010. The distribution was paid on December 15, 2010.
In November 2009, the Board of Governors 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.
10. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution plan available to all of its qualified employees. The Company contributes a match of
50%
of the participant's salary deferral up to a maximum of
3%
of the employee's salary. Company contributions totaled approximately
$51,000
,
$46,000
, and
$44,000
for the fiscal years ended October 31, 2012, 2011, and 2010, respectively.
GRANITE FALLS ENERGY, LLC
Notes to Financial Statements
October 31, 2012 and 2011
11. INCOME TAXES
The differences between the financial statement basis and tax basis of assets are based on the following:
|
|
|
|
|
|
|
|
|
|
October 31, 2012
|
|
October 31, 2011
|
|
|
|
|
Financial statement basis of assets
|
$
|
61,133,132
|
|
|
$
|
63,441,322
|
|
Organization & start-up costs capitalized for tax purposes, net
|
715,109
|
|
|
821,605
|
|
Tax depreciation greater than book depreciation
|
(25,653,678
|
)
|
|
(27,702,345
|
)
|
Unrealized derivatives gains
|
45,563
|
|
|
(404,050
|
)
|
Capitalized inventory
|
10,957
|
|
|
20,000
|
|
|
|
|
|
|
|
Income tax basis of assets
|
$
|
36,251,083
|
|
|
$
|
36,176,532
|
|
|
|
|
|
|
There were no material differences between the financial statement basis and tax basis of the Company's liabilities.
12. COMMITMENTS AND CONTINGENCIES
Corn Storage and Grain Handling Agreement and Purchase Commitments
The Company has a corn storage and grain handling agreement with Farmers Cooperative Elevator (FCE), a member. Under the agreement, the Company agrees to purchase all of the corn needed for the operation of the plant FCE. The price of the corn purchased will be the bid price FCE establishes for the plant plus a set fee of per bushel.
At October 31, 2012, the Company had basis contracts for forward corn purchase commitments with FCE for
1,000,000
bushels for delivery in November and December 2012. At October 31, 2012, the Company also had
885,000
bushels of stored corn totaling approximately
$6,511,000
with FCE that is included in inventory.
The Company purchased approximately
$148,289,000
of corn from the member during fiscal 2012, of which approximately
$1,996,000
is included in corn payable at October 31, 2012. The Company purchased approximately
$123,676,000
of corn from the member during fiscal 2011, of which approximately
$2,517,000
is included in corn payable at October 31, 2011. The Company purchased approximately
$63,089,000
of corn from the member during fiscal 2010.
Ethanol Marketing Agreement
Granite Falls currently has an Ethanol Marketing Agreement (“Eco Agreement”) with Eco-Energy, Inc. (“Eco-Energy”). Pursuant to the Eco Agreement, Eco-Energy agrees to purchase the entire ethanol output of GFE's ethanol plant and to arrange for the transportation of ethanol; however, GFE is responsible for securing all of the rail cars necessary for the transport of ethanol by rail. GFE will pay Eco-Energy a certain percentage of the FOB plant price in consideration of Eco-Energy's services. The contract had an initial term of
one
year, and will continue to remain in effect until terminated by either party at its unqualified option, by providing written notice of not less than
90 days
to the other party.
Ethanol marketing fees and commissions totaled approximately
$743,000
,
$1,006,000
, and
825,000
for the fiscal years ended October 31, 2012, 2011 and 2010 respectively, and are included net within revenues.
Ethanol Contracts
At October 31, 2012, the Company had forward contracts to sell approximately
$8,747,000
of ethanol for delivery in November 2012 which approximates
75%
of its anticipated ethanol sales during that period.
At October 31, 2011, the Company had forward contracts to sell approximately
$15,667,000
of ethanol for various delivery periods from November 2011 through December 2011.
GRANITE FALLS ENERGY, LLC
Notes to Financial Statements
October 31, 2012 and 2011
Distillers Grain Marketing Agreement
The Company has a Marketing Agreement with RPMG, an unrelated party, for the purpose of marketing and selling all distillers grains produced by the Company. The contract commenced on February 1, 2011 with an initial term of
one year
, and will continue to remain in effect until terminated by either party at its unqualified option, by providing written notice of not less than
90
days to the other party. Distillers grain commissions totaled approximately
$650,000
,
$460,000
and
$210,000
for the fiscal years ended October 31, 2012, 2011 and 2010 respectively, and are included net within revenues.
At October 31, 2012, the Company had forward contracts to sell approximately
$1,773,000
of distillers grains for delivery in November 2012 which approximates
65%
of its anticipated distillers grain sales during that period.
At October 31, 2011, the Company had forward contracts to sell approximately
$4,624,000
of distillers grains for various delivery periods from November 2011 through January 2012.
Natural Gas Contracts
At October 31, 2012, the Company had forward contracts to purchase
$719,000
of natural gas at prices with delivery periods from November 2012 through March 2013 which approximates
30%
of its anticipated natural gas purchases during that period.
At October 31, 2011, the Company had forward contracts to purchase
$1,797,600
of natural gas at prices with delivery periods from November 2011 through March 2012.
Contract for Natural Gas Pipeline to Plant
The Company has an agreement with an unrelated company for the construction of and maintenance of
9.5
miles of natural gas pipeline that will serve the plant. The agreement requires the Company to receive a minimum of
1,400,000
DT of natural gas annually through the term of the agreement. The Company is charged a fee based on the amount of natural gas delivered through the pipeline.
This agreement will continue in effect until December 31, 2015 at which time it will automatically renew for consecutive terms of
one year
. A
twelve months
prior written notice is required to be given by either party to terminate this agreement.
13. 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 contemplated by governmental authorities.
GRANITE FALLS ENERGY, LLC
Notes to Financial Statements
October 31, 2012 and 2011
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summary quarterly results are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
Fiscal year ended October 31, 2012
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
43,745,776
|
|
|
$
|
39,025,122
|
|
|
$
|
42,435,763
|
|
|
$
|
49,955,382
|
|
Gross profit (loss)
|
|
3,687,950
|
|
|
657,416
|
|
|
54,694
|
|
|
(1,946,091
|
)
|
Operating income (loss)
|
|
3,024,214
|
|
|
66,935
|
|
|
(597,187
|
)
|
|
(2,489,589
|
)
|
Net income (loss)
|
|
3,042,288
|
|
|
116,466
|
|
|
(565,637
|
)
|
|
(2,432,510
|
)
|
Basic and diluted earnings (loss) per unit
|
|
99.29
|
|
|
3.81
|
|
|
(18.49
|
)
|
|
(79.36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
Fiscal year ended October 31, 2011
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
30,716,346
|
|
|
$
|
34,537,750
|
|
|
$
|
45,414,923
|
|
|
$
|
45,852,470
|
|
Gross profit
|
|
3,533,733
|
|
|
3,704,535
|
|
|
2,068,381
|
|
|
4,861,424
|
|
Operating income
|
|
2,975,612
|
|
|
3,245,729
|
|
|
1,550,481
|
|
|
4,393,545
|
|
Net income
|
|
3,011,596
|
|
|
3,270,110
|
|
|
1,586,882
|
|
|
4,423,268
|
|
Basic and diluted earnings per unit
|
|
98.24
|
|
|
106.67
|
|
|
51.76
|
|
|
144.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
Fiscal year ended October 31, 2010
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
23,424,562
|
|
|
$
|
22,237,999
|
|
|
$
|
23,632,382
|
|
|
$
|
25,994,509
|
|
Gross profit
|
|
2,346,940
|
|
|
1,730,098
|
|
|
1,386,818
|
|
|
4,679,335
|
|
Operating income
|
|
1,837,999
|
|
|
1,267,328
|
|
|
919,429
|
|
|
4,160,693
|
|
Net income
|
|
1,927,176
|
|
|
1,298,247
|
|
|
939,019
|
|
|
4,197,870
|
|
Basic and diluted earnings per unit
|
|
62.86
|
|
|
42.35
|
|
|
30.63
|
|
|
136.94
|
|
The above quarterly financial data is unaudited, but in the opinion of management, all adjustments necessary for a fair presentation of the selected data for these periods presented have been included.