RED TRAIL ENERGY, LLC
Statements of Changes in Members' Equity
Twelve-Month Period Ended September 30, 2012
Nine-Month Transition Period Ended September 30, 2011
Twelve Month Period ended December 31, 2010
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Class A Member Units
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Treasury Units
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Units (a)
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Amount
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Additional Paid in Capital
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Accumulated Deficit/Retained Earnings
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Units
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Amount
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Total Member Equity
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Balance - December 31, 2009
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40,193,973
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$
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37,810,408
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$
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56,825
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$
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(3,786,729
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)
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180,000
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$
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(205,140
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)
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$
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33,875,364
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Net Income
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—
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—
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—
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9,028,772
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—
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—
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9,028,772
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Balance - December 31, 2010
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40,193,973
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37,810,408
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56,825
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5,242,043
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180,000
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(205,140
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)
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42,904,136
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Unit-based compensation
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—
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—
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20,000
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—
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—
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—
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20,000
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Net Income
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—
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—
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—
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3,852,295
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—
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—
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3,852,295
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Balance - September 30, 2011
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40,193,973
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37,810,408
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76,825
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9,094,338
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180,000
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(205,140
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)
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46,776,431
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Unit-based compensation
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20,000
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—
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(12,800
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)
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—
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(20,000
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)
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22,800
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10,000
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Units repurchased
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(35,813
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)
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—
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(29,800
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)
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—
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35,813
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(21,697
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)
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(51,497
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)
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Net Income (Loss)
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—
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—
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—
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(4,697,975
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)
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—
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—
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(4,697,975
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)
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Balance - September 30, 2012
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40,178,160
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$
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37,810,408
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$
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34,225
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$
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4,396,363
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195,813
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$
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(204,037
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)
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$
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42,036,959
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(a) - Amounts shown represent member units outstanding.
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Notes to Financial Statements are an integral part of this Statement.
RED TRAIL ENERGY, LLC
Statements of Cash Flows
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Twelve-Month
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Nine Month Transition
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Twelve-Month
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Period Ended
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Period Ended
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Period Ended
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September 30, 2012
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September 30, 2011
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December 31, 2010
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Cash Flows from Operating Activities
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Net income (loss)
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$
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(4,697,975
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)
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$
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3,852,295
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9,028,772
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Adjustments to reconcile net income to net cash provided by operating activities:
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Depreciation and amortization
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4,304,071
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4,448,266
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5,874,232
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Loss on disposal of fixed assets
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490
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—
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68,446
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Change in fair value of derivative instruments
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(201,173
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)
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102,825
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(18,829
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)
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Equity-based compensation
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10,000
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20,000
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—
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Lower of cost or market inventory adjustment
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327,000
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450,000
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—
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Loss on firm purchase commitments
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132,000
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444,000
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—
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Noncash patronage equity
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(1,217,566
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)
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(282,851
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)
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(250,602
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)
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Change in operating assets and liabilities:
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Restricted cash - commodities derivatives account including settlements
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(6,904
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)
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578,359
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888,654
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Accounts receivable
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2,554,108
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(1,806,308
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)
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(1,996,525
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)
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Other receivables
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1,480,628
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(1,386,498
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)
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—
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Inventory
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(2,450,044
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(5,713,339
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596,507
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Prepaid expenses and deposits
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72,582
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(222,766
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)
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153,150
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Accounts payable and accrued expenses
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765,842
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(388,220
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105,089
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Accrued purchase commitment losses
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(444,000
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)
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—
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—
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Cash settlements on interest rate swap
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(827,887
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(931,599
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(1,362,623
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)
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Net cash provided by (used in) operating activities
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(198,828
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)
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(835,836
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)
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13,086,271
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Cash Flows from Investing Activities
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Proceeds from disposal of fixed assets
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—
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—
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134,845
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Capital expenditures
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(3,233,449
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)
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(797,378
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)
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(1,206,585
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Net cash used in investing activities
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(3,233,449
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(797,378
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(1,071,740
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Cash Flows from Financing Activities
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Disbursements in excess of bank balances
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1,728,931
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—
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—
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Restricted cash
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—
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750,000
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—
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Unit repurchases
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(51,497
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)
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|
—
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—
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Loan fees
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(77,891
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)
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—
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—
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Net advances on revolving lines-of-credit
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4,992,000
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|
|
—
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—
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Debt repayments
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(7,831,263
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)
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(4,247,355
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)
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(15,425,056
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)
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Net cash used in financing activities
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(1,239,720
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)
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(3,497,355
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)
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(15,425,056
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)
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Net Increase (Decrease) in Cash and Equivalents
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(4,671,997
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)
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(5,130,569
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)
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(3,410,525
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)
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Cash and Equivalents - Beginning of Period
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4,672,997
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|
|
9,803,566
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13,214,091
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Cash and Equivalents - End of Period
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$
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1,000
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$
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4,672,997
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|
|
9,803,566
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|
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Supplemental Disclosure of Cash Flow Information
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Interest paid net of swap settlements
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$
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1,493,420
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$
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1,410,604
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|
|
2,739,854
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Noncash Investing and Financing Activities
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Assets acquired under capital lease
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$
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—
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$
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470,241
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|
—
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Capital expenditures in accounts payable
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$
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—
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|
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$
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53,448
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—
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Notes to Financial Statements are an integral part of this Statement.
RED TRAIL ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED SEPTEMBER 30, 2012
AND THE TRANSITION PERIOD ENDED SEPTEMBER 30, 2011
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Red Trail Energy, LLC, a North Dakota limited liability company (the “Company”), owns and operates a
50 million
gallon annual name-plate production ethanol plant near Richardton, North Dakota (the “Plant”). The plant commenced production on January 1, 2007. Fuel grade ethanol and distillers grains are the Company's primary products. Both products are marketed and sold primarily within the continental United States.
Accounting Estimates
Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. 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. Significant items subject to such estimates and assumptions include the useful lives of property, plant and equipment, valuation of derivatives, inventory, and purchase commitments; the analysis of long-lived assets impairment and other contingencies. Actual results could differ from those estimates.
Cash and Equivalents
The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The carrying value of cash and equivalents approximates fair value.
Accounts Receivable and Concentration of Credit Risk
The Company generates accounts receivable from sales of ethanol and distillers grains. The Company has entered into agreements with RPMG, Inc. (“RPMG”) and CHS, Inc. (“CHS”) for the marketing and distribution of the Company's ethanol and dried distiller's grains, respectively. Under the terms of the marketing agreements, both RPMG and CHS bear the risk of loss of nonpayment by their customers. The Company markets its modified distiller's grains internally.
For sales of modified distiller's grains, credit is extended based on evaluation of a customer's financial condition and collateral is not required. Accounts receivable are due 30 days from the invoice date. Accounts outstanding longer than the contractual payment terms are considered past due. Internal follow up procedures are followed accordingly. Interest is charged on past due accounts.
All receivables are stated at amounts due from customers net of any allowance for doubtful accounts. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company's previous loss history, the customer's perceived current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. The Company has an allowance for doubtful accounts of approximately
$1,500
and
$30,000
at September 30, 2012 and 2011, respectively.
The Company had a receivable in the amount of approximately
$1,500,000
at September 30, 2011 related to the alternative fuel tax credit which was newly issued in 2011. The amount was included in other receivables at September 30, 2011 on the Company’s balance sheet. The alternative fuel tax credit expired on December 31, 2011 so there is no receivable related to this credit as of September 30, 2012.
Inventory
Corn is the primary raw material and, along with other raw materials and supplies, is stated at the lower of cost or market on a first-in, first-out (FIFO) basis. Work in process and finished goods, which consists of ethanol and distillers grains produced, is stated at the lower of average cost or market. Spare parts inventory is valued at lower of cost or market on a FIFO basis.
Patronage Equity
The Company receives, from certain vendors organized as cooperatives, patronage dividends, which are based on several criteria, including the vendor's overall profitability and the Company's purchases from the vendor. Patronage equity typically represents
RED TRAIL ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED SEPTEMBER 30, 2012
AND THE TRANSITION PERIOD ENDED SEPTEMBER 30, 2011
the Company's share of the vendor's undistributed current earnings which will be paid in either cash or equity interests to the Company at a future date. Investments in cooperatives are stated at cost, plus unredeemed patronage refunds received in the form of capital stock and are included in Other Assets on the Company's balance sheet.
Derivative Instruments
The Company enters into derivative transactions to hedge its exposure to commodity and interest rate price fluctuations. The Company is required to record these derivatives in the balance sheet at fair value.
In order for a derivative to qualify as a hedge, specific criteria must be met and appropriate documentation maintained. Gains and losses from derivatives that do not qualify as hedges, or are undesignated, must be recognized immediately in earnings. If the derivative does qualify as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will be either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Changes in the fair value of undesignated derivatives related to corn are recorded in costs of goods sold within the statements of operations. Changes in the fair value of undesignated derivatives related to ethanol are recorded in revenue within the statements of operations. Changes of fair value of undesignated interest rate swaps are recorded in interest expense within the statement of operations.
Additionally the Company is required to evaluate its contracts to determine whether the contracts are derivatives. Certain contracts that literally meet the definition of a derivative may be exempted as “normal purchases or normal sales.” Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. Certain corn, ethanol and distiller's grain contracts that meet the requirement of normal purchases or sales are documented as normal and exempted from the accounting and reporting requirements, and therefore, are not marked to market in our financial statements.
Firm Purchase Commitments
The Company typically enters into fixed price contracts to purchase corn to ensure an adequate supply of corn to operate its plant. The Company will generally seek to use exchange traded futures, options or swaps as an offsetting economic hedge position. The Company closely monitors the number of bushels hedged using this strategy to avoid an unacceptable level of margin exposure. Contract prices are analyzed by management at each period end and, if necessary, valued at the lower of cost or market in the balance sheets.
Revenue Recognition
The Company generally sells ethanol and related products pursuant to marketing agreements. Revenues are recognized when the customer has taken title, which occurs when the product is shipped, has assumed the risks and rewards of ownership, prices are fixed or determinable and collectability is reasonably assured.
Revenues are shown net of any fees incurred under the terms of the Company's agreements for the marketing and sale of ethanol and related products.
Long-lived Assets
Property, plant, and equipment are stated at cost. Depreciation is provided over estimated useful lives by use of the straight line method. Maintenance and repairs are expensed as incurred. Major improvements and betterments are capitalized. The present values of capital lease obligations are classified as long-term debt and the related assets are included in property, plant and equipment. Amortization of equipment under capital leases is included in depreciation expense.
RED TRAIL ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED SEPTEMBER 30, 2012
AND THE TRANSITION PERIOD ENDED SEPTEMBER 30, 2011
Depreciation is computed using the straight-line method over the following estimated useful lives:
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Minimum Years
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Maximum Years
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Land improvements
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15
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30
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Buildings
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10
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40
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Plant and equipment
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7
|
40
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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.
Fair Value of Financial Instruments
The Company has adopted guidance for accounting for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements on a recurring basis. 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 September 30, 2012 and 2011 that required adjustment to the recognized balances of assets or liabilities, which are recorded at fair value on a nonrecurring basis.
Grants
The Company recognizes grant proceeds as other income for reimbursement of expenses incurred upon complying with the conditions of the grant. For reimbursements of capital expenditures, the grants are recognized as a reduction of the basis of the asset upon complying with the conditions of the grant. In addition, the Company considers production incentive payments received to be economic grants and includes such amounts in other income when received, as this represents the point at which they are fixed and determinable.
RED TRAIL ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED SEPTEMBER 30, 2012
AND THE TRANSITION PERIOD ENDED SEPTEMBER 30, 2011
Shipping and Handling
The cost of shipping products to customers is included in cost of goods sold. Amounts billed to a customer in a sale transaction related to shipping and handling is classified as revenue.
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 the members. Therefore, no provision or liability for federal or state income taxes has been included in these financial statements.
Differences between financial statement basis of assets and tax basis of assets is primarily related to depreciation, interest rate swaps, derivatives, inventory, compensation and capitalization and amortization of organization and start-up costs for tax purposes, whereas these costs are expensed for financial statement purposes.
The Company has evaluated whether it has any significant tax uncertainties that would require recognition or disclosure. Primarily due to its partnership tax status, the Company does not have any significant tax uncertainties that would require recognition or disclosure.
Net Income (Loss) Per Unit
Net income (loss) per unit is calculated on a basic and fully diluted basis using the weighted average units outstanding during the period.
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, if any, are recorded when the liability is probable and the costs can reasonably be estimated. The Company is not aware of any environmental liabilities identified as of September 30, 2012.
2. CONCENTRATIONS
Coal
Coal is an important input to our manufacturing process. During the fiscal year ended September 30, 2012, we used approximately
70,000
tons of coal. We have entered into a one year agreement with Westmoreland Coal Sales Company (“Westmoreland”) to supply PRB coal through December 2012 and the Company does not anticipate any problems negotiating a renewal of this contract. The Company's intentions are to renew this supply agreement with its current coal supplier. We believe there is sufficient supply of coal from the PRB coal regions in Wyoming and Montana to meet our demand for PRB coal. In addition to coal, we could use natural gas as a fuel source if our coal supply is significantly interrupted. Because we are already operating on coal, we do not expect to need natural gas unless coal interruptions impact our operations.
Sales
We are substantially dependent upon RPMG for the purchase, marketing and distribution of our ethanol. RPMG purchases
100%
of the ethanol produced at our Plant, all of which is marketed and distributed to its customers. Therefore, we are highly dependent on RPMG for the successful marketing of our ethanol. In the event that our relationship with RPMG is interrupted or terminated for any reason, we believe that we could locate another entity to market the ethanol. However, any interruption or termination of this relationship could temporarily disrupt the sale and production of ethanol and adversely affect our business and operations and potentially result in a higher cost to the Company. Amounts due from RPMG represent approximately
69%
and
80%
of the Company's outstanding trade receivables balance at September 30, 2012 and 2011, respectively. Approximately
79%
,
84%
, and
RED TRAIL ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED SEPTEMBER 30, 2012
AND THE TRANSITION PERIOD ENDED SEPTEMBER 30, 2011
84%
of revenues are comprised of sales to RPMG for the year ended September 30, 2012, the nine months ended September 30, 2011 and the year ended December 31, 2010, respectively.
We are substantially dependent on CHS for the purchase, marketing and distribution of our DDGS. CHS purchases
100%
of the DDGS produced at the plant, all of which are marketed and distributed to its customers. Therefore, we are highly dependent on CHS for the successful marketing of our DDGS. In the event that our relationship with CHS is interrupted or terminated for any reason, we believe that another entity to market the DDGS could be located. However, any interruption or termination of this relationship could temporarily disrupt the sale and production of DDGS and adversely affect our business and operations.
3. DERIVATIVE INSTRUMENTS
Commodity Contracts
As part of its hedging strategy, the Company may enter into ethanol, soybean oil, and corn commodity-based derivatives in order to protect cash flows from fluctuations caused by volatility in commodity prices in order to protect gross profit margins from potentially adverse effects of market and price volatility on ethanol sales, corn oil sales, and corn purchase commitments where the prices are set at a future date. These derivatives are not designated as effective hedges for accounting purposes. For derivative instruments that are not accounted for as hedges, or for the ineffective portions of qualifying hedges, the change in fair value is recorded through earnings in the period of change. Ethanol derivative fair market value gains or losses are included in the results of operations and are classified as revenue and corn derivative changes in fair market value are included in cost of goods sold.
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As of:
|
|
September 30, 2012
|
|
September 30, 2011
|
Contract Type
|
|
# of Contracts
|
Notional Amount (Qty)
|
Fair Value
|
|
# of Contracts
|
Notional Amount (Qty)
|
Fair Value
|
Corn options
|
|
400
|
|
2,000,000
|
|
bushels
|
|
$
|
173,750
|
|
|
—
|
|
—
|
|
—
|
|
$
|
—
|
|
Soybean oil futures
|
|
10
|
|
600,000
|
|
pounds
|
$
|
6,360
|
|
|
—
|
|
—
|
|
—
|
|
$
|
—
|
|
Corn futures
|
|
—
|
—
|
|
—
|
|
$
|
—
|
|
|
10
|
|
50,000
|
|
bushels
|
$
|
(21,062
|
)
|
Total fair value
|
|
|
|
|
$
|
180,110
|
|
|
|
|
|
$
|
(21,062
|
)
|
Amounts are recorded separately on the balance sheet - negative numbers represent liabilities
|
Interest Rate Contracts
The Company had
zero
and approximately
$25.1 million
of notional amount outstanding in interest rate swap agreements, as of September 30, 2012 and 2011, respectively, that exchange variable interest rates (one-month LIBOR and three-month LIBOR) for fixed interest rates over the terms of the agreements. At September 30 2012 and 2011, the fair value of the interest rate swaps totaled
zero
and approximately
$828,000
, respectively, and are recorded as a liability on the balance sheets. These agreements are not designated as effective hedges for accounting purposes and the change in fair market value and associated net settlements are recorded in interest expense. The swaps matured in April 2012 and upon execution of amended and restated loan agreements with its primary lender on April 16, 2012, the Company no longer had any swap agreements in place.
The Company recorded net settlements of approximately
$828,000
and
$932,000
for the twelve months ended September 30, 2012 and nine-month transitional period ended September 30, 2011, respectively.
RED TRAIL ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED SEPTEMBER 30, 2012
AND THE TRANSITION PERIOD ENDED SEPTEMBER 30, 2011
The following tables provide details regarding the Company's derivative financial instruments at September 30, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
Balance Sheet - as of September 30, 2012
|
|
Asset
|
|
Liability
|
Commodity derivative instruments, at fair value
|
|
$
|
180,110
|
|
|
$
|
—
|
|
Total derivatives not designated as hedging instruments for accounting purposes
|
|
$
|
180,110
|
|
|
$
|
—
|
|
|
|
|
|
|
Balance Sheet - as of September 30, 2011
|
|
Asset
|
|
Liability
|
Commodity derivative instruments, at fair value
|
|
$
|
—
|
|
|
$
|
21,062
|
|
Interest rate swaps, at fair value
|
|
—
|
|
|
827,887
|
|
Total derivatives not designated as hedging instruments for accounting purposes
|
|
$
|
—
|
|
|
$
|
848,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations Income/(expense)
|
|
Location of gain (loss) in fair value recognized in income
|
|
Amount of gain (loss) recognized in income during the year ended September 30, 2012
|
|
Amount of gain (loss) recognized in income during the nine months ended September 30, 2011
|
|
Amount of gain (loss) recognized in income during the year ended December 31, 2010
|
Corn derivative instruments
|
|
Cost of Goods Sold
|
|
$
|
(481,703
|
)
|
|
$
|
(1,086,381
|
)
|
|
$
|
(1,826,268
|
)
|
Ethanol derivative instruments
|
|
Revenue
|
|
—
|
|
|
—
|
|
|
1,830,306
|
|
Soybean oil derivative instruments
|
|
Revenue
|
|
28,476
|
|
|
—
|
|
|
—
|
|
Interest rate swaps
|
|
Interest Expense
|
|
2,126
|
|
|
(53,562
|
)
|
|
(707,859
|
)
|
Total
|
|
|
|
$
|
(451,101
|
)
|
|
$
|
(1,139,943
|
)
|
|
$
|
(703,821
|
)
|
4. INVENTORY
Inventory is valued at lower of cost or market. Inventory values as of September 30, 2012 and 2011 were as follows:
|
|
|
|
|
|
|
|
|
As of
|
September 30, 2012
|
|
September 30, 2011
|
Raw materials, including corn, chemicals and supplies
|
$
|
7,455,660
|
|
|
$
|
7,843,358
|
|
Work in process
|
1,231,096
|
|
|
1,276,576
|
|
Finished goods, including ethanol and distillers grains
|
3,704,046
|
|
|
1,480,899
|
|
Spare parts
|
1,260,105
|
|
|
1,059,030
|
|
Total inventory
|
$
|
13,650,907
|
|
|
$
|
11,659,863
|
|
RED TRAIL ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED SEPTEMBER 30, 2012
AND THE TRANSITION PERIOD ENDED SEPTEMBER 30, 2011
Lower of cost or market adjustments for the year ended September 30, 2012, the nine months ended September 30, 2011 and the year ended December 31, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended September 30, 2012
|
|
For the nine months ended September 30, 2011
|
|
For the year ended December 31, 2010
|
Loss on firm purchase commitments
|
|
$
|
132,000
|
|
|
$
|
444,000
|
|
|
$
|
—
|
|
Loss on lower of cost or market adjustment for inventory on hand
|
|
327,000
|
|
|
450,000
|
|
|
—
|
|
Total loss on lower of cost or market adjustments
|
|
$
|
459,000
|
|
|
$
|
894,000
|
|
|
$
|
—
|
|
The Company has entered into forward corn purchase contracts under which it is required to take delivery at the contract price. At the time the contracts were created, the price of the contract price approximated market price. Subsequent changes in market conditions could cause the contract prices to become higher or lower than market prices.
As of September 30, 2012, the average price of corn purchased under certain fixed price contracts, that had not yet been delivered, was close to approximated market price. Based on this information, the Company did not accrue an estimated loss on firm purchase commitments for the twelve months ended September 30, 2012. Losses of
$444,000
and
$0
were accrued for the nine month period ended September 30, 2011 and year ended December 31, 2010, respectively. The loss is recorded in “Loss on firm purchase commitments” on the statements of operations. The amount of the loss was determined by applying a methodology similar to that used in the impairment valuation with respect to inventory. Given the uncertainty of future ethanol prices, this loss may or may not be recovered, and further losses on the outstanding purchase commitments could be recorded in future periods.
The Company recorded inventory valuation impairments of
$327,000
,
$450,000
and
$0
for the year ended September 30, 2012, the nine month period ended September 30, 2011 and the year ended December 31, 2010, respectively. The impairments, as applicable, were attributable primarily to decreases in market prices of ethanol. The inventory valuation impairment was recorded in “Lower of cost or market adjustment” on the statements of operations.
5. BANK FINANCING
|
|
|
|
|
|
|
|
|
|
As of
|
|
September 30, 2012
|
|
September 30, 2011
|
Long-term notes payable under loan agreement to bank
|
|
$
|
23,750,000
|
|
|
$
|
25,116,771
|
|
Subordinated notes payable
|
|
—
|
|
|
5,525,000
|
|
Capital lease obligations (Note 7)
|
|
86,593
|
|
|
276,084
|
|
Total Long-Term Debt
|
|
23,836,593
|
|
|
30,917,855
|
|
Less amounts due within one year
|
|
2,584,429
|
|
|
30,831,502
|
|
Total Long-Term Debt Less Amounts Due Within One Year
|
|
$
|
21,252,164
|
|
|
$
|
86,353
|
|
|
|
|
|
|
Market value of interest rate swaps
|
|
$
|
—
|
|
|
$
|
827,887
|
|
Less amounts due within one year
|
|
—
|
|
|
827,887
|
|
Total Interest Rate Swaps Less Amounts Due Within One Year
|
|
$
|
—
|
|
|
$
|
—
|
|
On April 16, 2012, the Company executed amended and restated loan agreements with its primary lender, First National Bank of Omaha ("FNBO"). The purposes of the amended and restated loan agreements were to extend the maturity date of the Company's current credit facilities, to adjust the interest rates payable pursuant to the Company's various credit facilities with FNBO and to change the amounts available under the Company's revolving loans. The loan agreements all provide for a variable interest rate as of September 30, 2012 with the term loan interest rate at
3.93%
and long-term revolver interest rate at
3.93%
and the operating
RED TRAIL ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED SEPTEMBER 30, 2012
AND THE TRANSITION PERIOD ENDED SEPTEMBER 30, 2011
line-of-credit interest rate at
3.74%
. Repayment terms on the
$20,000,000
term loan are
$500,000
per quarter and
$125,000
per quarter reduction in the total amount available from the initial
$5,000,000
long-term revolver. Both of these loans mature on April 16, 2017. The
$5,000,000
operating line-of-credit has a maturity date of April 16, 2013. At September 30, 2012, the Company had
$4,750,000
drawn on the long-term revolver and
$242,000
drawn on the operating line of credit.
|
|
|
|
|
|
Scheduled debt maturities for the twelve months ending September 30
|
|
|
|
|
Totals
|
|
|
|
2013
|
|
$
|
2,584,429
|
|
2014
|
|
2,502,164
|
|
2015
|
|
2,500,000
|
|
2016
|
|
2,500,000
|
|
2017
|
|
2,500,000
|
|
Thereafter
|
|
11,250,000
|
|
Total
|
|
$
|
23,836,593
|
|
As of September 30, 2012, the Company was in compliance with its debt covenants with the exception of the Fixed Charge Coverage Ratio (FCCR) covenant. The Company executed a loan amendment effective November 1, 2012 which waived this FCCR covenant violation. See Note 14 - Subsequent Events.
Interest Rate Swap Agreements
The Company does not have any interest rate swap agreements in place pursuant to the terms of the refinance with its senior lender in April 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
For the year ended September 30, 2012
|
|
For the
nine months ended
September 30, 2011
|
|
For the year ended December 31, 2010
|
Interest expense on long-term debt
|
|
$
|
934,692
|
|
|
$
|
1,543,435
|
|
|
$
|
2,492,149
|
|
Change in fair value of interest rate swaps
|
|
(827,547
|
)
|
|
(878,037
|
)
|
|
(654,762
|
)
|
Net settlements on interest rate swaps
|
|
$
|
827,887
|
|
|
$
|
931,599
|
|
|
$
|
1,362,623
|
|
Total interest expense
|
|
$
|
935,032
|
|
|
$
|
1,596,997
|
|
|
$
|
3,200,010
|
|
RED TRAIL ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED SEPTEMBER 30, 2012
AND THE TRANSITION PERIOD ENDED SEPTEMBER 30, 2011
6. FAIR VALUE MEASUREMENTS
The following table provides information on those assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2012 and 2011, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement Using
|
|
Carrying Amount as of September 30, 2012
|
|
Fair Value as of September 30, 2012
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets
|
|
|
|
|
|
|
|
|
|
Commodities derivative instruments
|
$
|
180,110
|
|
|
$
|
180,110
|
|
|
$
|
180,110
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement Using
|
|
Carrying Amount as of September 30, 2011
|
|
Fair Value as of September 30, 2011
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Commodities derivative instruments
|
$
|
21,062
|
|
|
$
|
21,062
|
|
|
$
|
21,062
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest rate swaps
|
827,887
|
|
|
827,887
|
|
|
—
|
|
|
827,887
|
|
|
—
|
|
Total
|
$
|
848,949
|
|
|
$
|
848,949
|
|
|
$
|
21,062
|
|
|
$
|
827,887
|
|
|
$
|
—
|
|
The fair value of the corn, ethanol and soybean oil derivative instruments are based on quoted market prices in an active market. The fair value of the interest rate swap instruments are determined by using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each instrument. The analysis of the interest rate swaps reflect the contractual terms of the derivatives, including the period to maturity and uses observable market-based inputs and uses the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. The variable cash payments are based on an expectation of future interest rates derived from observable market interest rate curves.
Financial Instruments Not Measured at Fair Value
The estimated fair value of the Company's long-term debt, including the short-term portion, at September 30, 2012 and 2011 approximated the carrying value of approximately
$23.8 million
and
$30.9 million
, respectively. Fair value was estimated using estimated variable market interest rates as of September 30, 2012. The fair values and carrying values consider the terms of the related debt and exclude the impacts of debt discounts and derivative/hedging activity.
7. LEASES
The Company leases equipment under operating and capital leases through June 2015. The Company is generally responsible for maintenance, taxes, and utilities for leased equipment. Equipment under operating lease includes a locomotive and rail cars. Rent expense for operating leases was approximately
$670,000
for the year ended September 30, 2012,
$445,000
for the nine month period ended September 30, 2011 and
$546,000
for the year ended December 31, 2010. Equipment under capital leases consists of office equipment and plant equipment.
Equipment under capital leases is as follows at:
RED TRAIL ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED SEPTEMBER 30, 2012
AND THE TRANSITION PERIOD ENDED SEPTEMBER 30, 2011
|
|
|
|
|
|
|
|
|
As of
|
September 30, 2012
|
|
September 30, 2011
|
Equipment
|
$
|
483,217
|
|
|
$
|
483,217
|
|
Less accumulated amortization
|
(26,460
|
)
|
|
(5,839
|
)
|
Net equipment under capital lease
|
$
|
456,757
|
|
|
$
|
477,378
|
|
At September 30, 2012, the Company had the following minimum commitments, which at inception had non-cancelable terms of more than one year. Amounts shown below are for the 12 months period ending September 30:
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Capital Leases
|
2013
|
$
|
290,730
|
|
|
$
|
87,247
|
|
2014
|
144,306
|
|
|
2,236
|
|
2015
|
29,705
|
|
|
—
|
|
2016
|
—
|
|
|
—
|
|
Thereafter
|
—
|
|
|
—
|
|
Total minimum lease commitments
|
$
|
464,741
|
|
|
89,483
|
|
Less amount representing interest
|
|
|
(2,890
|
)
|
Present value of minimum lease commitments included in liabilities on the balance sheet
|
|
|
$
|
86,593
|
|
8. MEMBERS' EQUITY
The Company has one class of membership units outstanding (Class A) with each unit representing a pro rata ownership interest in the Company's capital, profits, losses and distributions. As of September 30, 2012 and 2011 there were
40,178,160
and
40,193,973
units issued and outstanding, respectively. The Company held a total of
195,813
and
180,000
treasury units as of September 30, 2012 and 2011, respectively.
Total units authorized are
40,373,973
as of September 30, 2012 and 2011.
9. GRANTS
In 2006, the Company entered into a contract with the State of North Dakota through the Industrial Commission for a lignite coal grant not to exceed
$350,000
. The Company received
$275,000
from this grant during 2006 with this amount currently shown in the liability section of the Company's Balance Sheet as Contracts Payable. Because the Company has not met the minimum lignite usage requirements specified in the grant for any year in which the plant has operated, it expects to have to repay the grant and is awaiting instructions from the Industrial Commission as to the terms of the repayment schedule. This repayment could begin in fiscal 2013.
The Company has entered into an agreement with Job Service North Dakota for a new jobs training program. This program provides incentives to businesses that are creating new employment opportunities through business expansion and relocation to the state. The program provides no-cost funding to help offset the cost of training. The Company is eligible to receive up to approximately
$270,000
over
ten
years. The Company received and earned approximately
$41,000
,
$29,000
and
$36,000
for the year ended September 30, 2012, the nine month period ended September 30, 2011 and the year ended December 31, 2010, respectively.
RED TRAIL ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED SEPTEMBER 30, 2012
AND THE TRANSITION PERIOD ENDED SEPTEMBER 30, 2011
10. COMMITMENTS AND CONTINGENCIES
Firm Purchase Commitments for Corn
To ensure an adequate supply of corn to operate the Plant, the Company enters into contracts to purchase corn from local farmers and elevators. At September 30, 2012, the Company had various fixed price contracts for the purchase of approximately
2.6 million
bushels of corn. Using the stated contract price for the fixed price contracts, the Company had commitments of approximately
$16.1 million
related to the
2.6 million
bushels under contract. The Company also enters into fixed basis contracts with the actual price set by the supplier at a future date. Using current market prices, if these basis contracts were fixed at September 30, 2012, the Company would have commitments of approximately $9.7 million.
11. DEFINED CONTRIBUTION RETIREMENT PLAN
The Company established a 401k retirement plan for its employees effective January 1, 2011. The Company matches employee contributions to the plan up to
4%
of employee's gross income. The Company contributed approximately
$75,000
and
$56,000
to the 401k plan for the year ended September 30, 2012 and the nine month period ended September 30, 2011, respectively.
Prior to January 1, 2011, the Company matched employee contributions up to
3%
of employee's gross income to a simple IRA retirement plan. The Company contributed approximately
$57,000
to the IRA plan for the year ended December 31, 2010.
12. RELATED-PARTY TRANSACTIONS
The Company has balances and transactions in the normal course of business with various related parties for the purchase of corn, sale of distillers grains and sale of ethanol. The related parties include Unit holders, members of the board of governors of the Company, and RPMG, Inc. (“RPMG”). Significant related party activity affecting the financial statements are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
September 30, 2011
|
Balance Sheet
|
|
|
|
|
|
Accounts receivable
|
|
|
$
|
2,853,704
|
|
|
$
|
5,392,559
|
|
Accounts payable
|
|
|
839,059
|
|
|
757,460
|
|
|
|
|
|
|
|
|
For the twelve months ended September 30, 2012
|
|
For the nine months ended September 30, 2011
|
|
For the twelve months ended December 31, 2010
|
Statement of Operations
|
|
|
|
|
|
Revenues
|
$
|
110,252,547
|
|
|
$
|
96,730,967
|
|
|
$
|
92,533,888
|
|
Cost of goods sold
|
2,432,609
|
|
|
2,057,245
|
|
|
3,317,920
|
|
General and administrative
|
103,371
|
|
|
60,804
|
|
|
114,614
|
|
|
|
|
|
|
|
Inventory Purchases
|
$
|
23,809,605
|
|
|
$
|
7,984,774
|
|
|
$
|
6,112,139
|
|
13. INCOME TAXES
As of September 30, 2012, the book basis of assets exceeded the estimated tax basis of assets by approximately
$28.3 million
and as of September 30, 2011, the book basis of assets exceeded the estimated tax basis of assets by approximately
$31.4 million
. As of September 30, 2012, there was
no
difference between the book basis of liabilities and the estimated tax basis of liabilities. As of September 30, 2011, the book basis of liabilities exceeded the estimated tax basis of liabilities by approximately
$1.3 million
.
14. SUBSEQUENT EVENTS
Effective November 1, 2012, the Company entered into a Loan Amendment with its primary lender, First National Bank of Omaha ("FNBO"). Pursuant to the Loan Amendment, FNBO increased the amount the Company was allowed to borrow on its Revolving
RED TRAIL ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED SEPTEMBER 30, 2012
AND THE TRANSITION PERIOD ENDED SEPTEMBER 30, 2011
Credit Loan from
$5 million
to
$12 million
until the date when the Revolving Credit Loan terminates on April 16, 2013. Further, FNBO changed the manner in which our fixed charge coverage ratio is calculated for our quarters ended December 31, 2012 and March 31, 2013. FNBO also waived the Company's non-compliance with the fixed charge coverage ratio covenant as of June 30, 2012 and September 30, 2012.
15. UNCERTAINTIES IMPACTING THE ETHANOL INDUSTRY AND OUR FUTURE OPERATIONS
The Company has certain risks and uncertainties that it experiences during volatile market conditions, which 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 primarily located in the U.S. Corn for the production process is supplied to the plant primarily from local agricultural producers and from purchases on the open market. The Company's operating and financial performance is largely driven by prices at which the Company sells ethanol and distillers grains and by the cost at which it is able to purchase corn for operations. The price of ethanol is influenced by factors such as prices, supply and demand, weather, government policies and programs, and unleaded gasoline and the petroleum markets, although since 2005 the prices of ethanol and gasoline began a divergence with ethanol selling for less than gasoline at the wholesale level. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol. The Company's largest cost of production is corn. The cost of corn is generally impacted by factors such as supply and demand, weather, government policies and programs. The Company's risk management program is used to protect against the price volatility of these commodities.
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summary quarter results are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2012
|
First Quarter
|
Second Quarter
|
Third Quarter
|
Fourth Quarter
|
Revenues
|
$
|
37,427,000
|
|
$
|
37,123,717
|
|
$
|
33,908,133
|
|
$
|
22,999,919
|
|
Gross profit (loss)
|
955,938
|
|
(405,303
|
)
|
(3,762,009
|
)
|
(1,343,785
|
)
|
Operating income (loss)
|
280,631
|
|
(979,526
|
)
|
(4,266,893
|
)
|
(1,813,722
|
)
|
Net income (loss)
|
1,620,750
|
|
(908,333
|
)
|
(4,291,284
|
)
|
(1,119,108
|
)
|
Net income per unit-basic and diluted
|
0.04
|
|
(0.02
|
)
|
(0.11
|
)
|
(0.03
|
)
|
|
|
|
|
|
Nine-Month Transition Period Ended September 30, 2011
|
First Quarter
|
Second Quarter
|
Third Quarter
|
Fourth Quarter
|
Revenues
|
$
|
31,953,093
|
|
$
|
35,142,332
|
|
$
|
45,194,797
|
|
N/A
|
Gross profit
|
998,644
|
|
277,220
|
|
2,877,274
|
|
N/A
|
Operating income (loss)
|
321,889
|
|
(340,688
|
)
|
2,199,258
|
|
N/A
|
Net income (loss)
|
(149,257
|
)
|
213,875
|
|
3,787,677
|
|
N/A
|
Net income per unit-basic and diluted
|
—
|
|
0.01
|
|
0.09
|
|
N/A
|
|
|
|
|
|
Year ended December 31, 2010
|
First Quarter
|
Second Quarter
|
Third Quarter
|
Fourth Quarter
|
Revenues
|
$
|
28,886,891
|
|
$
|
22,518,058
|
|
$
|
27,737,274
|
|
$
|
30,752,961
|
|
Gross profit
|
3,707,899
|
|
579,134
|
|
4,774,362
|
|
4,887,571
|
|
Operating income (loss)
|
3,067,744
|
|
(7,038
|
)
|
3,976,025
|
|
3,796,023
|
|
Net income (loss)
|
2,984,492
|
|
(773,587
|
)
|
3,534,146
|
|
3,283,721
|
|
Net income (loss) per unit-basic and diluted
|
0.07
|
|
(0.02
|
)
|
0.08
|
|
0.08
|
|
The above quarterly financial data is unaudited, but in the opinion of management, all material adjustments necessary for a fair presentation of the selected data for these periods presented have been included.