Item 1. Financial Statements
GRANITE FALLS ENERGY, LLC
Condensed Consolidated Balance Sheets
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ASSETS
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January 31, 2014
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October 31, 2013
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(Unaudited)
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Current Assets
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Cash
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$
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1,738,997
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$
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1,158,774
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Restricted cash
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731,500
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393,750
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Accounts receivable
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11,869,748
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6,450,694
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Inventory
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9,567,074
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12,370,277
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Commodity derivative instruments
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111,625
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—
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Prepaid expenses and other current assets
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1,342,777
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1,096,483
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Total current assets
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25,361,721
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21,469,978
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Property, Plant and Equipment
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Land and improvements
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13,348,732
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12,307,063
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Railroad improvements
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8,005,523
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8,005,523
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Process equipment and tanks
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112,439,217
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110,440,407
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Administration building
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1,014,001
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1,015,361
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Office equipment
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265,792
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265,792
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Rolling stock
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1,752,745
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1,691,857
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Construction in progress
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174,689
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2,067,213
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137,000,699
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135,793,216
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Less accumulated depreciation
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49,222,398
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46,984,361
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Net property, plant and equipment
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87,778,301
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88,808,855
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Goodwill
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1,372,473
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1,372,473
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Other Assets
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990,598
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1,021,916
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Total Assets
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$
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115,503,093
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$
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112,673,222
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Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of this Statement.
GRANITE FALLS ENERGY, LLC
Condensed Consolidated Balance Sheets
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LIABILITIES AND EQUITY
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January 31, 2014
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October 31, 2013
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(Unaudited)
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Current Liabilities
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Checks drawn in excess of bank balances
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$
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672,868
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$
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—
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Current portion of long-term debt
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3,490,517
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3,490,808
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Accounts payable
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3,683,880
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3,058,633
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Corn payable to FCE
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1,594,046
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4,001,852
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Commodity derivative instruments
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26,138
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75,113
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Accrued liabilities
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775,376
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696,858
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Total current liabilities
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10,242,825
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11,323,264
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Long-Term Debt, less current portion
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29,413,295
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32,981,955
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Commitments and Contingencies
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Members' Equity
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Members' equity attributable to Granite Falls Energy, LLC consists of 30,606 units authorized, issued and outstanding
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64,931,379
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59,887,346
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Noncontrolling interest
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10,915,594
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8,480,657
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Total Members' Equity
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75,846,973
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68,368,003
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Total Liabilities and Members' Equity
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$
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115,503,093
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$
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112,673,222
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Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of this Statement.
GRANITE FALLS ENERGY, LLC
Condensed Consolidated Statements of Operations
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Three Months Ended
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Three Months Ended
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January 31, 2014
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January 31, 2013
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(Unaudited)
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(Unaudited)
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Revenues
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$
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77,463,813
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$
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47,117,122
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Cost of Goods Sold
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63,043,355
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45,886,978
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Lower of Cost or Market Adjustment
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—
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398,000
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Gross Profit
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14,420,458
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832,144
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Operating Expenses
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1,295,501
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562,695
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Operating Income
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13,124,957
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269,449
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Other Income (Expense)
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Other income, net
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56,559
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1,146
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Interest income
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307
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54
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Interest expense
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(276,746
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)
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(49,222
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)
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Total other expense, net
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(219,880
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(48,022
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)
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Net Income
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$
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12,905,077
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$
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221,427
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Net Income Attributable to Noncontrolling Interest
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$
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2,350,130
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$
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—
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Net Income Attributable to Granite Falls Energy, LLC
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$
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10,554,947
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$
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221,427
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Weighted Average Units Outstanding - Basic and Diluted
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30,606
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30,606
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Amounts attributable to Granite Falls Energy, LLC:
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Net Income Per Unit - Basic and Diluted
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$
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344.87
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$
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7.23
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Distributions Per Unit - Basic and Diluted
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$
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180
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$
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—
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Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of this Statement.
GRANITE FALLS ENERGY, LLC
Condensed Consolidated Statements of Cash Flows
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Three Months Ended
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Three Months Ended
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January 31, 2014
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January 31, 2013
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(Unaudited)
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(Unaudited)
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Cash Flows from Operating Activities
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Net income
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$
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12,905,077
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$
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221,427
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Adjustments to reconcile net income to net cash provided by (used in) operations:
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Depreciation and amortization
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2,269,355
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1,177,637
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Change in fair value of derivative instruments
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40,772
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(275,537
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)
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Gain on sale of equipment
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(24,119
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)
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—
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Lower of cost or market adjustment
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—
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398,000
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Changes in operating assets and liabilities:
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Restricted cash
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(337,750
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(160,000
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Derivative Instruments
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(201,372
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)
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141,099
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Accounts receivable
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(5,419,054
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)
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(323,424
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)
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Inventory
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2,803,203
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(1,974,392
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Prepaid expenses and other current assets
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(246,294
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)
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(225,958
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Accounts payable
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(1,782,559
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)
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(759,783
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)
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Accrued liabilities
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163,325
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172,091
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Net Cash Provided by (Used in) Operating Activities
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10,170,584
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(1,608,840
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)
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Cash Flows from Investing Activities
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Proceeds from sale or disposal of assets
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22,285
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—
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Payments for capital expenditures
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(1,207,483
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)
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(497,699
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)
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Proceeds from sale of land
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—
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540,000
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Net Cash Provided by (Used in) Investing Activities
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(1,185,198
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)
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42,301
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Cash Flows from Financing Activities
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Proceeds from checks in excess of bank balance
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672,868
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—
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Proceeds from revolving line of credit and term loan
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—
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1,209,551
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Proceeds from long-term debt
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759,010
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—
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Payments on long-term debt
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(4,327,961
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)
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(29,378
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)
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Member distributions paid
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(5,509,080
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)
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—
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Net Cash Provided by (Used in) Financing Activities
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(8,405,163
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)
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1,180,173
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Net Increase (Decrease) in Cash
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580,223
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(386,366
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)
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Cash - Beginning of Period
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1,158,774
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685,828
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Cash - End of Period
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$
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1,738,997
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$
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299,462
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Supplemental Cash Flow Information
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Cash paid during the period for:
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Interest expense
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$
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385,419
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$
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49,223
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Supplemental Disclosure of Non-Cash Investing and Financing Activities
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Cancellation of accrued distribution to noncontrolling interest
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$
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84,523
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$
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—
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Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of this Statement.
GRANITE FALLS ENERGY, LLC
Notes to UNAUDITED Condensed Consolidated Financial Statements
January 31, 2014
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying financial statements consolidate the operating results and financial position of Granite Falls Energy, LLC (“GFE” or the “Company”), and its wholly owned subsidiary, Project Viking, L.L.C. ("Project Viking") which owns
60.8%
of Heron Lake BioEnergy, LLC (“HLBE”). The remaining
39.2%
ownership of HLBE is included in the consolidated financial statements as a non-controlling interest. All intercompany balances and transactions are eliminated in consolidation.
The accompanying condensed consolidated balance sheet as of October 31, 2013 is derived from audited consolidated financial statements. The unaudited interim condensed consolidated financial statements of the Company reflect all adjustments consisting only of normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of financial position and results of operations and cash flows. The results for the three month period ended January 31, 2014 are not necessarily indicative of the results that may be expected for a full fiscal year. Certain information and note disclosures normally included in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) are condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), although the Company believes that the disclosures made are adequate to make the information not misleading. These condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in its annual report for the year ended October 31, 2013 filed on Form 10-K with the SEC.
Nature of Business
GFE 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. 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.
HLBE is a Minnesota limited liability company currently producing fuel-grade ethanol, distillers grains, and crude corn oil near Heron Lake, Minnesota and sells these products, pursuant to marketing agreements, throughout the continental United States. HLBE's plant has an approximate annual production capacity of
50 million
gallons, but is currently permitted to produce up to
59.2 million
gallons.
Accounting Estimates
Management uses estimates and assumptions in preparing these condensed consolidated 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, the assumptions used in the impairment analysis of long-lived assets and goodwill, and the assumptions used to estimate the fair market value of acquired assets and liabilities. Actual results may differ from previously estimated amounts, and such differences may be material to our condensed consolidated financial statements. The Company periodically reviews estimates and assumptions, and the effects of revisions are reflected in the period in which the revision is made.
Revenue Recognition
The Company generally sells ethanol and related products pursuant to marketing agreements. Revenues from the production of ethanol and the related products are recorded when the customer has taken title and assumed the risks and rewards of ownership, prices are fixed or determinable and collectability is reasonably assured. 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.
GRANITE FALLS ENERGY, LLC
Notes to UNAUDITED Condensed Consolidated Financial Statements
January 31, 2014
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.
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 on 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. 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 condensed consolidated 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 4.
Business Combinations
The Company allocates the total purchase price of a business combination to the assets acquired and the liabilities assumed based on their estimated fair values at the acquisition date, with the excess purchase price recorded as goodwill. The Company used current market data to assist them in determining the fair value of the assets acquired and liabilities assumed, including goodwill, based on recognized business valuation methodology. Subsequent to the acquisition but not to exceed one year from the acquisition date, the Company will record any material adjustments retrospectively to the initial estimate based on new information obtained about facts and circumstances that existed as of the acquisition date. The Company expenses any acquisition-related costs as incurred in connection with business combinations. An income, market or cost valuation method may be utilized to estimate the fair value of the assets acquired or liabilities assumed in a business combination. The income valuation method represents the present value of future cash flows over the life of the asset using (i) discrete financial forecasts, which rely on management's estimates of revenue and operating expenses, (ii) long-term growth rates, and (iii) an appropriate discount rate. The market valuation method uses prices paid for a reasonably similar asset by other purchasers in the market, with adjustments relating to any differences between the assets. The cost valuation method is based on the replacement cost of a comparable asset at prices at the time of the acquisition reduced for depreciation of the asset.
GRANITE FALLS ENERGY, LLC
Notes to UNAUDITED Condensed Consolidated Financial Statements
January 31, 2014
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, distillers grains, and corn oil to customers primarily located in the United States. Corn for the production process is supplied to our plant primarily from local agricultural producers and from purchases on the open market. Ethanol sales typically average
80
-
85
% of total revenues and corn costs typically average
70
-
80
% 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 factors such as supply and demand, the weather, government policies and programs, and our risk management program used to protect against the price volatility of these commodities.
3. INVENTORY
Inventories consist of the following:
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|
January 31, 2014
|
|
|
|
|
|
|
(Unaudited)
|
|
October 31, 2013
|
|
|
|
Raw materials
|
$
|
3,204,969
|
|
|
$
|
4,652,465
|
|
|
|
|
Spare parts
|
1,848,339
|
|
|
1,636,466
|
|
|
|
|
Work in process
|
1,589,635
|
|
|
1,643,574
|
|
|
|
|
Finished goods
|
2,924,131
|
|
|
4,437,772
|
|
|
|
|
Totals
|
$
|
9,567,074
|
|
|
$
|
12,370,277
|
|
|
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 did not record a lower of cost or market adjustment on certain inventories for the three month period ended January 31, 2014. The Company recorded a lower of cost or market charge on certain inventories for the three month period ended January 31, 2013 for approximately
$398,000
.
4. DERIVATIVE INSTRUMENTS
As of
January 31, 2014
, the total notional amount of the Company's outstanding corn derivative instruments was approximately
2,090,000
bushels that were entered into to hedge forecasted corn purchases through December 2014. 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
January 31, 2014
, none of which were designated as hedging instruments:
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Balance Sheet location
|
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Assets
|
|
Liabilities
|
|
|
|
Corn contracts - GFE
|
Commodity derivative instruments
|
|
$
|
111,625
|
|
|
$
|
—
|
|
|
|
|
Corn contracts - HLBE
|
Commodity derivative instruments
|
|
—
|
|
|
26,138
|
|
|
|
|
Totals
|
|
|
$
|
111,625
|
|
|
$
|
26,138
|
|
|
In addition, as of
January 31, 2014
, the Company maintained
$731,500
of restricted cash related to margin requirements for the Company's commodity derivative instrument positions.
GRANITE FALLS ENERGY, LLC
Notes to UNAUDITED Condensed Consolidated Financial Statements
January 31, 2014
As of
October 31, 2013
, the total notional amount of the Company's outstanding corn derivative instruments was approximately
1,125,000
bushels that were entered into to hedge forecasted corn purchases through December 2013. There may be offsetting positions that are shown on a net basis that could lower the notional amount of positions outstanding as disclosed above.
The following tables provide details regarding the Company's derivative instruments at
October 31, 2013
, none of which are designated as hedging instruments:
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|
|
|
|
|
|
|
Balance Sheet location
|
|
Assets
|
|
Liabilities
|
|
|
|
Corn contracts - GFE
|
Commodity derivative instruments
|
|
—
|
|
|
(75,113
|
)
|
|
|
|
Totals
|
|
|
—
|
|
|
(75,113
|
)
|
|
In addition, as of
October 31, 2013
, the Company maintained
$393,750
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 Operations location
|
|
Three Months Ended
January 31
|
|
|
|
|
|
|
2014
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corn contracts
|
|
Cost of Goods Sold
|
|
$
|
(40,772
|
)
|
|
$
|
275,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gain
|
|
|
|
$
|
(40,772
|
)
|
|
$
|
275,537
|
|
|
|
|
|
|
|
|
|
|
|
|
5. DEBT FACILITIES
Granite Falls Energy
:
GFE has two credit facilities with a lender. The first is a seasonal revolving operating loan facility in the amount of
$5,600,000
. The second is a revolving term loan facility in the amount of
$18,000,000
. However, the amount available for borrowing under this facility reduces by
$2,000,000
semi-annually, beginning September 1, 2014, with final payment due March 1, 2018.
The interest rates for both facilities are based on the bank's
"One Month LIBOR Index Rate," plus 2.8% and 3.05%
on the seasonal and revolving term commitments, respectively. Both facilities are available through March 31, 2017 and March 31, 2018, respectively. The outstanding balance on the revolving term loan on
January 31, 2014
and
October 31, 2013
was
$2,065,495
and
$2,513,674
, respectively, and the interest rate as of both of those dates was 3.21%. GFE currently has no outstanding balance on the seasonal revolving operating loan facility.
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
January 31, 2014
and
October 31, 2013
, GFE was in compliance with these financial covenants and expects to be in compliance throughout fiscal
2014
.
The credit facilities are secured by substantially all assets of the Company. There are no savings account balance collateral requirements as part of this credit facility.
GRANITE FALLS ENERGY, LLC
Notes to UNAUDITED Condensed Consolidated Financial Statements
January 31, 2014
At
January 31, 2014
, GFE also had letters of credit totaling
$288,928
with the bank as part of a credit requirement of Northern Natural Gas. These letters of credit reduced the total amount available on the revolving operating facility to approximately $5,711,000.
Heron Lake BioEnergy
:
Term Note Payable
On May 17, 2013, HLBE renegotiated its term loan with AgStar in the amount of
$17,400,000
. HLBE must make equal monthly payments of principal and interest of approximately $223,000 on the term loan based on a
10
-year amortization, provided the entire principal balance and accrued and unpaid interest on the term loan is due and payable in full on the maturity date of
September 1, 2016
. In addition, HLBE is required to make additional payments annually on debt for up to
25%
of the excess cash flow, as defined by the agreement, up to
$2,000,000
per year. Through September 1, 2014, the loan bears interest at
5.75%
as long as HLBE is in compliance with their debt covenants.
On September 1, 2014, the interest term loan will be adjusted to
LIBOR plus 3.50% but not less than 5%
. The loan agreements are secured by substantially all business assets and are subject to various financial and non-financial covenants that limit distributions and debt and require minimum debt service coverage, net worth, and working capital requirements. As described above, HLBE was in compliance with the covenants of its master loan agreement with AgStar as of
January 31, 2014
.
Revolving Term Note
HLBE also obtained a three-year term revolving loan commitment in the amount of
$20,500,000
, under which AgStar agreed to make periodic advances to HLBE up to this original amount until September 1, 2016. Amounts borrowed by HLBE under the term revolving loan and repaid or prepaid may be re-borrowed at any time prior to maturity date of the term revolving loan, provided that outstanding advances may not exceed the amount of the term revolving loan commitment. Amounts outstanding on the term revolving loan bear interest at a variable rate equal to the greater of a
LIBOR
rate plus
3.50%
or
5.0%
, payable monthly. HLBE also pays an unused commitment fee on the unused portion of the term revolving loan commitment at the rate of
0.35%
per annum, payable in arrears in quarterly installments during the term of the term revolving loan. Under the terms of the new agreement, the term revolving loan commitment is scheduled to decline by
$2,000,000
annually, beginning on October 31, 2013 and each anniversary date thereafter. The maturity date of the term revolving loan is September 1, 2016
Subordinated Convertible Debt
On May 17, 2013, HLBE's previous Board of Governors loaned HLBE approximately
$1,400,000
as part of the convertible secured debt offering. An additional
$3,700,000
was raised as part of a convertible debt offering during September 2013. The convertible secured debt is subordinated to the AgStar debt. The notes bear interest at
7.25%
(which is paid semi-annually) and all outstanding principle is due in May 2018. On October 1, 2014, or immediately prior to the sale of all or effectively all of HLBE assets, each note is convertible to Class A stock at a rate of
$0.30
per class A unit. HLBE reserves the right to issue Class B units upon conversion if the principal balance of the convertible debt exceeds the authorized Class A units at the conversion rate. At the issuance, each debt holder had the option to convert to Class A units. As a result, holders elected to convert
$934,500
in September 2013 for
3,115,000
Class A units.
GRANITE FALLS ENERGY, LLC
Notes to UNAUDITED Condensed Consolidated Financial Statements
January 31, 2014
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2014
|
|
October 31, 2013
|
|
Granite Falls Energy:
|
(unaudited)
|
|
|
|
Capital One Shuttlewagon Railcar Mover (5 year term at 3.875%, due in monthly installments of $10,995) This note was paid in full January 2014.
|
$
|
—
|
|
|
$
|
382,918
|
|
|
Revolving Term Loan - see terms above
|
2,065,495
|
|
|
2,513,674
|
|
|
Heron Lake BioEnergy:
|
|
|
|
|
Term note payable to lending institution (including premium of approximately $1.56m) - see terms above
|
17,715,311
|
|
|
18,317,800
|
|
|
Revolving term note payable to lending institution (including premium of approximately $252k) - see terms above
|
3,632,234
|
|
|
6,263,158
|
|
|
Assessment payable as part of water treatment agreement, due in semi-annual installments of $189,393 with interest at 6.55%, enforceable by statutory lien, with the final payment due in 2021. The Company made deposits for one years' worth of debt service payments that are held on deposit to be applied with the final payments of the assessment.
|
2,246,771
|
|
|
2,246,771
|
|
|
Assessment payable as part of water treatment agreement, due in semi-annual installments of $25,692 with interest at 0.50%, enforceable by statutory lien, with the final payment due in 2016.
|
152,698
|
|
|
152,698
|
|
|
Assessment payable as part of water supply agreement, due in monthly installments of $3,942 with interest at 8.73%, enforceable by statutory lien, with the final payment due in 2019.
|
197,154
|
|
|
205,209
|
|
|
Note payable to electrical company with monthly payments of $6,250 with a 1% maintenance fee due each October, due September 2017. The electrical company is a member of the Company.
|
275,000
|
|
|
293,750
|
|
|
Note payable to a lending institution for the construction of the pipeline assets initially due in December 2011, converted in February 2012 to a term loan with a three year repayment period. Monthly payments of $52,093 with interest is at 5.29% and the note, along with the line of credit in Note 8, is secured by substantially all assets of Agrinatural.
|
1,684,469
|
|
|
1,013,132
|
|
|
Note payable to non-controlling interest member of Agrinatural. Interest is payable monthly at 5.425% with principle due at the maturity date of October 2014.
|
300,000
|
|
|
300,000
|
|
|
Equipment payable on corn oil separation equipment from a vendor. The Company pays approximately $40,000 per month conditioned upon revenue generated from the corn oil equipment. The monthly payment includes implicit interest of 5.57% until maturity in May 2015 and the note is secured by the equipment.
|
491,680
|
|
|
640,653
|
|
|
Subordinated Convertible Debt with interest of 7.25% paid on a semi-annual basis - see terms above.
|
4,143,000
|
|
|
4,143,000
|
|
|
Total debt
|
32,903,812
|
|
|
36,472,763
|
|
|
Less: Current Maturities
|
(3,490,517
|
)
|
|
(3,490,808
|
)
|
|
Total Long-Term Debt
|
$
|
29,413,295
|
|
|
$
|
32,981,955
|
|
6. LEASES
GFE has a lease agreement with Trinity Industries Leasing Company (“Trinity”) for
75
hopper cars to assist with the transport of distiller's grains by rail through April 2018. GFE will pay Trinity
$620
per month plus
$0.03
per mile traveled in excess of
36,000
miles per year. Rent expense for these leases was approximately
$139,500
for the three month periods ended
January 31, 2014
and
2013
.
GFE has lease agreements with three leasing companies for
176
rail car leases for the transportation of GFE's ethanol with various maturity dates through October 2017. The rail car lease payments are due monthly in the aggregate amount of approximately
$121,000
. Rent expense for these leases was approximately
$398,000
for the three month periods ended
January 31, 2014
and
2013
, respectively.
GRANITE FALLS ENERGY, LLC
Notes to UNAUDITED Condensed Consolidated Financial Statements
January 31, 2014
HLBE leases equipment, primarily rail cars, under operating leases through 2017. Rent expense for the three months ended
January 31, 2014
and
2013
was approximately
$448,000
and
$532,000
, respectively.
7. MEMBERS' EQUITY
GFE 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
January 31, 2014
and
2013
, GFE had
30,606
membership units authorized, issued, and outstanding.
In December 2013, the Board of Governors declared a cash distribution of
$180
per unit or
$5,509,080
for unit holders of record as of December 19, 2013. The distribution was paid on December 31, 2013.
8. COMMITMENTS AND CONTINGENCIES
Corn Storage and Grain Handling Agreement and Purchase Commitments
GFE has a corn storage and grain handling agreement with Farmers Cooperative Elevator Company (FCE), a member. Under the current agreement, the Company agrees to purchase all of the corn needed for the operation of the plant from FCE. The price of the corn purchased will be the bid price the member establishes for the plant plus a set fee per bushel.
At
October 31, 2013
, GFE also had
550,000
bushels of stored corn totaling approximately
$2,346,000
with FCE that is included in inventory. All of this corn was consumed in production during the three months ended January 31, 2014.
At
January 31, 2014
, GFE had basis contracts for forward corn purchase commitments with FCE for
1,455,000
bushels for deliveries through October 2014.
Ethanol Marketing Agreement
GFE 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.
During the fourth quarter of fiscal year 2013, HLBE entered into a new marketing agreement with Eco-Energy, for the sale of ethanol. Under this ethanol agreement, Eco-Energy will purchase, market and resell
100%
of the ethanol produced at the Company's
ethanol production facility and the Company will pay Eco-Energy a marketing fee based on a percentage of the applicable sale price of the ethanol. The marketing fee was negotiated based on prevailing market-rate conditions for comparable ethanol marketing services.
Ethanol Contracts
At
January 31, 2014
, GFE had forward contracts to sell approximately
$6,148,000
of ethanol for various delivery periods from February 2014 through March 2014 which approximates
35%
of its anticipated ethanol sales during that period.
At
January 31, 2014
, HLBE had forward contracts to sell approximately
$6,061,000
of ethanol for various delivery periods from February 2014 through March 2014 which approximates
35%
of its anticipated ethanol sales during that period.
Distillers Grain Contracts
GFE 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.
GRANITE FALLS ENERGY, LLC
Notes to UNAUDITED Condensed Consolidated Financial Statements
January 31, 2014
At
January 31, 2014
, GFE had forward contracts to sell approximately
$1,453,587
of distillers grain for deliveries in February 2014 through June 2014 which approximates
19%
of its anticipated distillers grain sales during that period.
At
January 31, 2014
, HLBE had forward contracts to sell approximately
$4,828,565
of distillers grains for delivery in February 2014 through September 2014 which approximates
24%
of its anticipated distillers grain sales during that period.
Corn Oil Marketing Agreement
GFE has a Marketing Agreement with RPMG, an unrelated party, for the purpose of marketing and selling all corn oil produced by the Company. The contract commenced on April 29, 2010 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.
Natural Gas
At
January 31, 2014
, GFE had
no
forward contracts to purchase natural gas.
HLBE has natural gas agreements with a minimum purchase commitment of approximately
1.6 million
MMBTU per year until October 31, 2014.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
We prepared the following discussion and analysis to help you better understand our financial condition, changes in our financial condition, and results of operations for the three and nine month periods ended
January 31, 2014
, compared to the same period of the prior fiscal year. This discussion should be read in conjunction with the condensed financial statements and notes and the information contained in the Company's Annual Report on Form 10-K for the fiscal year ended
October 31, 2013
.
Available Information
Our website address is www.granitefallsenergy.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available, free of charge, on our website under the link “SEC Compliance,” as soon as reasonably practicable after we electronically file such materials with, or furnish such materials to, the Securities and Exchange Commission. The contents of our website are not incorporated by reference in this Quarterly Report on Form 10-Q.
Disclosure Regarding Forward-Looking Statements
This report contains historical information, as well as forward-looking statements regarding our business, financial condition, results of operations, performance and prospects. All statements that are not historical or current facts are forward-looking statements. You can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” and similar expressions intended to identify forward-looking statements. Forward-looking statements are subject to a number of known and unknown risks, uncertainties and other factors, many of which may be beyond our control, and may cause actual results, performance or achievements to differ materially from those projected in, expressed or implied by forward-looking statements. Certain of these risks and uncertainties are described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended
October 31, 2013
and in this Form 10-Q. These risk, uncertainties and factors include, but are not limited to:
|
|
|
|
•
|
Reduction or elimination of the federal Renewable Fuels Standard;
|
|
|
|
|
•
|
Changes in the availability and price of corn and natural gas;
|
|
|
|
|
•
|
Demand for corn exceeding supply; and corresponding corn price increases;
|
|
|
|
|
•
|
Changes in our business strategy, capital improvements or development plans;
|
|
|
|
|
•
|
Our ability to profitably operate the ethanol plant and maintain a positive spread between the selling price of our products and our raw materials costs;
|
|
|
|
|
•
|
Results of our hedging transactions and other risk management strategies;
|
|
|
|
|
•
|
Decreases in the market prices of ethanol and distillers grains;
|
|
|
|
|
•
|
Ethanol supply exceeding demand; and corresponding ethanol price reductions;
|
|
|
|
|
•
|
Changes in the environmental regulations that apply to our plant operations and changes in our ability to comply with such regulations;
|
|
|
|
|
•
|
Changes in plant production capacity or technical difficulties in operating the plant;
|
|
|
|
|
•
|
Changes in the performance of Heron Lake BioEnergy, LLC, an ethanol production company in which we indirectly own approximately
60.8%
of the outstanding membership units;
|
|
|
|
|
•
|
Changes in general economic conditions or the occurrence of certain events causing an economic impact in the agriculture, oil or automobile industries;
|
|
|
|
|
•
|
Lack of transport, storage and blending infrastructure preventing ethanol from reaching high demand markets;
|
|
|
|
|
•
|
Changes in federal and/or state laws ;
|
|
|
|
|
•
|
Changes and advances in ethanol production technology;
|
|
|
|
|
•
|
Effects of mergers, consolidations or contractions in the ethanol industry;
|
|
|
|
|
•
|
Competition from alternative fuel additives;
|
|
|
|
|
•
|
The development of infrastructure related to the sale and distribution of ethanol;
|
|
|
|
|
•
|
Our inelastic demand for corn, as it is the only available feedstock for our plant;
|
|
|
|
|
•
|
Our ability to retain key employees and maintain labor relations;
|
|
|
|
|
•
|
Changes to our current water intake system, or our ability to cost-effectively construct a modified water intake system;
|
|
|
|
|
•
|
The imposition of tariffs or other duties on ethanol imported into Europe; and
|
|
|
|
|
•
|
Volatile commodity and financial markets.
|
The cautionary statements referred to in this section also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We do not undertake any duty to update forward-looking statements after the date they are made or to conform forward-looking statements to actual results or to changes in circumstances or expectations. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits, completely and with the understanding that our actual future results may be materially different from what we currently expect. We qualify all of our forward-looking statements by these cautionary statements.
Overview
Granite Falls Energy, LLC is a Minnesota limited liability company operating an ethanol plant in Granite Falls, Minnesota. References to "we," "us," "our", Granite Falls Energy", "GFE", and the "Company" refer to Granite Falls Energy, LLC. GFE's ethanol 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 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. Eco-Energy, LLC markets our ethanol and Renewable Products Marketing Group, LLC (“RPMG”) markets our distillers grains and our corn oil produced at the GFE plant. We also independently market a small portion of our ethanol production as E-85 to local retailers.
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. Farmers Cooperative Elevator Company is the exclusive supplier of corn to the GFE ethanol plant.
In July 2013, we indirectly acquired a majority interest in Heron Lake BioEnergy, LLC ("Heron Lake" or "HLBE"), a Minnesota limited liability company, through our purchase of 100% of the membership units of Project Viking, L.L.C. (“Project Viking”). HLBE owns a 50 million gallon per year ethanol plant located in Heron Lake, Minnesota, but is currently permitted to produce up to 59.2 million gallons. As of
March 17, 2014
, we are the indirect owner of approximately
60.8%
of HLBE's outstanding membership units and are entitled to appoint five (5) of the nine (9) governors to HLBE's board of governors under HLBE's member control agreement.
In July 2013, we entered into a Management Services Agreement with HLBE pursuant to which our Chief Executive Officer, Chief Financial Officer, and Commodity Risk Manager also hold those same offices with HLBE. The initial term of the Management Services Agreement expires in July 2016, but automatically renews for successive one-year terms unless either party gives the other party written notice of termination prior to expiration of the then current term. The Management Services Agreement may also be terminated by either party for cause under certain circumstances.
HLBE's revenues are primarily derived from the sale of its ethanol, distillers grains and corn oil. HLBE has contracted with Eco-Energy, LLC to market all of its ethanol, Gavilon Ingredients, LLC to market its distillers grains and RPMG to market its corn oil. HLBE grinds approximately 1,640,000 bushels of corn each month at the HLBE plant. HLBE generally does not have long-term, fixed price contracts for the purchase of corn. Typically, HLBE purchases its corn directly from grain elevators, farmers, and local dealers within approximately 80 miles of Heron Lake, Minnesota.
We expect to have sufficient cash generated by continuing operations and current lines of credit to fund our operations. However, should we experience unfavorable operating conditions in the ethanol industry that prevent us from profitably operating the ethanol plant, we may need to seek additional funding.
On November 14, 2013, the GFE board of directors declared a cash distribution of $180 per unit for GFE members of record as of that date. The distribution was paid in December 2013 and totaled $5,509,080.
Trends and Uncertainties Impacting Our Operations
Our current results of operation are affected and will continue to be affected by factors such as (a) volatile and uncertain pricing of ethanol and corn; (b) availability of corn that is, in turn, affected by trends such as corn acreage, weather conditions, and yields on existing and new acreage diverted from other crops; and (c) the supply and demand for ethanol, which is affected by acceptance of ethanol as a substitute for fuel, public perception of the ethanol industry, government incentives and regulation, and competition from new and existing construction, among other things.
The ethanol industry is dependent on several economic incentives which if reduced or eliminated could significantly impact ethanol demand. One of these is the Renewable Fuels Standard (“RFS”) mandate. If the mandate is not changed, the RFS will require approximately 18.15 billion gallons in 2014, of which corn based ethanol can be used to satisfy approximately 14.4 billion gallons. However, in November 2013 the EPA issued a proposed rule that would reduce the RFS levels for 2014 to 15.21 billion gallons of which corn-based ethanol could only be used to satisfy 13 billion gallons. This proposal will result in a reduction the 2014 volume requirement below the 13.8 billion gallons required for 2013. The EPA also sought comment on several petitions it has received for partial waiver of the statutory volumes for 2014. The 60-day public comment period for the proposal ended on January 28, 2014. Furthermore, there have also been recent proposals in Congress to reduce or eliminate the RFS. If the EPA's proposal becomes a final rule, or if RFS were to be otherwise reduced or eliminated by the exercise of the EPA's waiver authority or by Congress, the demand for ethanol may be negatively impacted.
Other factors that may affect our future results of operation include those factors below in our Results of Operations of this Form 10-Q and those discussed in “Item 1. Business” and “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended October 31, 2013, and in other filings we make with the Securities and Exchange Commission.
Results of Operations for the
Three Months
Ended
January 31, 2014
and
2013
The following table shows the results of our operations from our unaudited consolidated statements of operations for the three months ended
January 31, 2014
and
2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
2013
|
|
Income Statement Data
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Revenue
|
$
|
77,463,813
|
|
|
100.0
|
%
|
|
$
|
47,117,122
|
|
|
100.0
|
%
|
|
Cost of Goods Sold
|
63,043,355
|
|
|
81.4
|
%
|
|
46,284,978
|
|
|
98.2
|
%
|
|
Gross Profit
|
14,420,458
|
|
|
18.6
|
%
|
|
832,144
|
|
|
1.8
|
%
|
|
Operating Expenses
|
1,295,501
|
|
|
1.7
|
%
|
|
562,695
|
|
|
1.2
|
%
|
|
Operating Income
|
13,124,957
|
|
|
16.9
|
%
|
|
269,449
|
|
|
0.6
|
%
|
|
Other Expense, net
|
(219,880
|
)
|
|
(0.3
|
)%
|
|
(48,022
|
)
|
|
(0.1
|
)%
|
|
Net Income
|
12,905,077
|
|
|
16.6
|
%
|
|
221,427
|
|
|
0.5
|
%
|
|
Net Income Attributable to Noncontrolling Interest
|
2,350,130
|
|
|
3.0
|
%
|
|
—
|
|
|
—
|
%
|
|
Net Income Attributable to Granite Falls Energy, LLC
|
$
|
10,554,947
|
|
|
13.6
|
%
|
|
$
|
221,427
|
|
|
0.5
|
%
|
Revenues
Nearly all of our revenues from operations come from three primary sources: sales of fuel ethanol, sales of distillers grains and sales of corn oil. The remaining 0.5% is made up of incidental sales of syrup at HLBE's plant and revenues from Agrinatural Gas, LLC, a pipeline company, of which HLBE owns 73% of the outstanding membership interests.
Revenues increased by 64.4% for the three months ended January 31, 2014 as compared to the three months ended January 31, 2013 due primarily to as a result of the HLBE acquisition. Our results of operations will continue to be affected by volatility in the commodity markets. In the event that we experience a prolonged period of negative operating margins, our liquidity may be negatively impacted.
The following table shows the sources of our revenue for the three months ended
January 31, 2014
(unaudited):
|
|
|
|
|
|
|
|
|
|
|
Revenue Sources
|
Amount
|
|
Percentage of
Total Revenues
|
|
Ethanol sales
|
$
|
60,079,982
|
|
|
77.6
|
%
|
|
Distillers grains sales
|
15,106,894
|
|
|
19.5
|
%
|
|
Corn oil sales
|
1,822,373
|
|
|
2.4
|
%
|
|
Miscellaneous other
|
454,564
|
|
|
0.5
|
%
|
|
Total Revenues
|
$
|
77,463,813
|
|
|
100.0
|
%
|
The following table shows the sources of revenue from the GFE plant for the three months ended
January 31, 2013
(unaudited):
|
|
|
|
|
|
|
|
|
|
|
Revenue Sources
|
Amount
|
|
Percentage of
Total Revenues
|
|
Ethanol sales
|
$
|
35,286,120
|
|
|
74.9
|
%
|
|
Distillers grains sales
|
10,704,680
|
|
|
22.7
|
%
|
|
Corn oil sales
|
1,126,322
|
|
|
2.4
|
%
|
|
Total Revenues
|
$
|
47,117,122
|
|
|
100.0
|
%
|
We experienced a 64.4% increase in our total revenues for the three month period ended
January 31, 2014
compared to the same period in fiscal year
2013
. Management attributes this increase in revenues primarily to an increase in the quantities sold as a result of our indirect acquisition of HLBE, since its results of operations were not consolidated into our statements of operations until the fourth fiscal quarter in 2013.
In the three month period ended
January 31, 2014
, ethanol sales comprised
77.6%
of our revenues and distillers grains sales comprised
19.5%
percent of our revenues, while corn oil sales comprised
2.4%
of our revenues. For the three month period ended
January 31, 2013
, ethanol sales comprised
74.9%
of our revenue, distillers grains sales comprised
22.7%
of our revenue, while corn oil sales comprised
2.4%
of our revenues.
Ethanol
Our revenues from ethanol increased for our three month period ended
January 31, 2014
as compared to the same period in
2013
, despite a decrease in the average price per gallon of 13.9% from period to period due to an increase in ethanol sold as a result of the HLBE acquisition. Although our average ethanol price was lower during the three month period ended
January 31, 2014
as compared to the same period in
2013
, there was a favorable spread between the price of ethanol and the price of corn. Management attributes the drop in ethanol prices due to significantly lower corn prices, which fell as result of a record 2013 corn crop, and changes in ethanol prices are typically follow changes in corn prices. However, the decline in ethanol prices has been less than the corresponding decline in corn prices due to increased ethanol exports and higher gasoline demand, which has contributed to the lower ethanol stocks during the three month period ended
January 31, 2014
. This has created a favorable spread between the price of ethanol and the price of corn and resulted in an improvement in operating margins.
Management anticipates that ethanol prices will continue to be volatile during the remainder of our
2014
fiscal, changing in relation to changes in corn and energy prices. In addition, continuing favorable operating margins may cause some plants that have suspended or reduced production may resume or increase production, which may cause excess supply and pressure ethanol prices downward. 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. The EPA's approval of E15 for use in certain vehicles has led us to be 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 E15 will impact ethanol demand or pricing in the near term. Additionally, if the EPA reduces or waives the RFS from statutory levels as currently proposed, domestic demand for ethanol could decline and ethanol prices may decrease.
Distillers Grains
Total revenue from the sales of distillers grains increased during the three months ended
January 31, 2014
compared to the same period of
2013
. However, distillers grains sales comprised
19.5%
of our revenues for the three months ended
January 31, 2014
, as compared to
22.7%
for the same period of
2013
.
The price we received for our distillers grains in the three month period ended
January 31, 2014
was approximately 19.0% lower than the price we received during the three months ended
January 31, 2013
. Management believes these lower distillers grains prices are primarily result of the decline in price of corn and other feed products available to livestock producers. The decline in distillers grains prices, however, was mitigated by the quantity of distillers grains sold which increased approximately 74.1% in three month period ended
January 31, 2014
compared to the same period in
2013
. This increase in quantity sold was a result of the HLBE acquisition, as we sold 27.8% less distillers grains at our Granite Falls plant in fiscal quarter ended
January 31, 2014
compared to the same quarter
2013
.
We anticipate that the market price of our dried distillers grains will continue to be volatile as a result of changes in the price of corn and competing animal feed substitutes such as soybean meal. Volatility in distillers grains supplies related to changes in ethanol production is another factor that may impact the sales price of our distillers grains. As plants that have suspended or reduced production begin to resume or increase production, distillers grains prices may be pushed downward.
Corn Oil
Corn oil revenues only increased slightly for the three months ended
January 31, 2014
compared to the same period of
2013
; however, corn oil sales accounted for approximately
2.4%
of our revenues for both periods. The average price per pound of corn oil was approximately 8.9% lower for the quarter ended
January 31, 2014
as compared to the same period in
2013
. Management attributes the decrease in corn oil prices to additional corn oil entering the market. The decline in corn oil prices was offset by an increase in the amount of corn oil sold due to the additional corn oil sales as result of HLBE acquisition, as we sold 3.5% less corn oil at our Granite Falls plant in fiscal quarter ended
January 31, 2014
compared to the same quarter
2013
. Corn oil prices could experience further decreases if additional plants enter into the market and cause in an oversupply unless additional demand can be created.
Cost of Goods Sold
Our costs of goods sold as a percentage of revenues were
81.4%
for the three month period ended
January 31, 2014
compared to
98.2%
for the same period of
2013
. Our two largest costs of production are corn (72.0% of cost of goods sold for our three months ended
January 31, 2014
) and natural gas (8.7% of cost of goods sold for our three months ended
January 31, 2014
). Our total cost of goods sold increased to $
63,043,355
for the three months ended
January 31, 2014
from $
45,886,978
in the three months ended
January 31, 2013
.
Corn
The volume of corn we processed was up 85.7% for the three months ended
January 31, 2014
as compared to the same period for our
2013
fiscal year due primarily to the acquisition of HLBE. However, for the quarter ended
January 31, 2014
, our average cost of corn per bushel, net of hedging activity, was approximately $2.84 less than our cost of corn for the same period ended
January 31, 2013
, which offset the increase in our volume of corn processed. The decrease in corn price is largely attributable to the record 2013 corn harvest which eased corn prices substantially in the last fiscal quarter of 2013 and has continued into the quarter ended
January 31, 2014
. Due to the 2013 harvest, we expect corn prices to remain lower over the next several months than what we have experienced during the first several months of our 2013 fiscal year. However, weather, world supply and demand, current and anticipated stocks, agricultural policy and other factors can contribute to volatility in corn prices. If corn prices increase again, and 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.
Realized and unrealized losses related to our corn derivative instruments totaled $40,772 for the three month period ended
January 31, 2014
, which increased our cost of goods sold. By comparison, we experienced gains of $275,537 for the three months ended
January 31, 2013
related to our corn derivative instruments, which decreased our cost of goods sold. We recognize the gains or losses that result from the changes in the value of our derivative instruments from 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.
Natural Gas
For the three month period ended
January 31, 2014
, we experienced an increase of approximately 198.7% in our overall natural gas costs compared to the same period of
2013
. This increase was primarily the result of the HLBE acquisition (approximately $2.9 million, or a 54.2% increase); although we also experienced a 37.0% increase in
natural gas costs at our Granite Falls plant for the quarter ended
January 31, 2014
compared to the same period for the prior year as a result of the increase in natural gas prices. We expect the market price for natural gas to remain steady in the near term as a result of an 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.
Operating Expenses
Our operating expenses as a percentage of revenues increased to
1.7%
for the three month period ended
January 31, 2014
up from
1.2%
for the same period ended
January 31, 2013
. Operating expenses include salaries and benefits of administrative employees, insurance, taxes, professional fees and other general administrative costs. We continue to focus on increasing our operating efficiency and we strive to lower our operating expenses. We expect that going forward our operating expenses will remain relatively steady.
Operating Income
We had income from operations of
$13,124,957
for the three months ended
January 31, 2014
, compared to income from operations of
$269,449
for the three months ended
January 31, 2013
. This increase in our operating income is primarily due to more favorable operating margins.
Other Expense, Net
Our other expense net for the three months ended
January 31, 2014
was a $219,880, compared to $48,022 for the three months ended
January 31, 2013
. This change is primarily a result of increased interest expense during the quarter ended
January 31, 2014
as compared to the same period the prior year, attributable to HLBE borrowings on our United FCS credit facilities.
Changes in Financial Condition for the
Three Months
Ended
January 31, 2014
The following table highlights our financial condition at
January 31, 2014
and
October 31, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2014
|
October 31, 2013
|
|
Current Assets
|
$
|
25,361,721
|
|
$
|
21,469,978
|
|
|
Total Assets
|
$
|
115,503,093
|
|
$
|
112,673,222
|
|
|
Current Liabilities
|
$
|
10,242,825
|
|
$
|
11,323,264
|
|
|
Long-Term Debt
|
$
|
29,413,295
|
|
$
|
32,981,955
|
|
|
Members' Equity Attributable to Granite Falls Energy, LLC
|
$
|
64,931,379
|
|
$
|
59,887,346
|
|
|
Non-controlling Interest
|
$
|
10,915,594
|
|
$
|
8,480,657
|
|
Our total current assets were approximately $25,362,000 at
January 31, 2014
compared to approximately $21,470,000 at
October 31, 2013
. We experienced an increase in trade accounts receivable of approximately $5,419,000 at
January 31, 2014
as compared to
October 31, 2013
, which was offset by a decrease of approximately $2,803,000 in the value of our inventory at
January 31, 2014
compared to
October 31, 2013
due to having more corn and ethanol on hand at
October 31, 2013
. We also experienced an increase in commodity derivative instruments of $111,635 at
January 31, 2014
as compared to
October 31, 2013
.
Total current liabilities totaled approximately $10,243,000 at
January 31, 2014
, a decrease of approximately $1,080,000 from
October 31, 2013
. This decrease was mainly due to a decrease in our accounts payable for corn of approximately $2,408,000 at
January 31, 2014
as compared to
October 31, 2013
due to paying off accounts payable deferred from fiscal 2013. This decrease in our accounts payable for corn was partially offset by an increase in checks drawn in excess of bank balances of approximately $673,000 at
January 31, 2014
as compared to
October 31, 2013
due to timing on bank account sweeps.
Our long-term debt decreased approximately $3,569,000 from
October 31, 2013
to
January 31, 2014
. The decrease is due to our paying the balance of our Capital One Shuttlewagon Railcar Mover note and payments on HLBE’s debt facilities.
Members’ equity attributable to Granite Falls Energy, LLC totaled
$64,931,379
at
January 31, 2014
, which is more than our Members’ equity attributable to Granite Falls Energy, LLC as of
October 31, 2013
which totaled
$59,887,346
. The increase was directly related to the net income attributable to Granite Falls Energy, LLC of
$10,554,947
for the quarter ended
January 31, 2014
. The net income was offset by the declaration and payment of $5,509,080 in distributions to members during the quarter ended
January 31, 2014
.
Noncontrolling interest totaled
$10,915,594
at
January 31, 2014
compared to
$8,480,657
at
October 31, 2013
. This is directly related to recognition of the
39.2%
noncontrolling interest in HLBE at
January 31, 2014
and net income attributable to the noncontrolling interest during the quarter ended
January 31, 2014
.
LIQUIDITY AND CAPITAL RESOURCES
The following table shows our cash flows for the
three months
ended
January 31, 2014
and
2013
:
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
2013
|
|
Net cash provided by (used in) operating activities
|
10,170,584
|
|
|
(1,608,840
|
)
|
|
Net cash provided by (used in) investing activities
|
(1,185,198
|
)
|
|
42,301
|
|
|
Net cash provided by (used in) financing activities
|
(8,405,163
|
)
|
|
1,180,173
|
|
Operating Cash Flows.
Cash provided by operating activities was approximately $10,171,000 for the
three months
ended
January 31, 2014
, as compared to cash used in operations of approximately $1,609,000 for the
three months
ended
January 31, 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 $1,185,000 for the
three months
ended
January 31, 2014
, compared to cash provided by investing activities of approximately $42,000 for the
three months
ended
January 31, 2013
. Our payments for capital expenditures during the
three months
ended
January 31, 2014
totaled approximately $1,207,000, compared to payments of approximately $498,000 for the
three months
ended
January 31, 2013
. Additionally, during the
three months
ended
January 31, 2013
we received proceeds from the sale of land of approximately $540,000, as compared to the most recent quarter ended
January 31, 2014
, when did not sell any land.
Financing Cash Flows.
Cash used in financing activities was approximately $8,405,000 for the
three months
ended
January 31, 2014
, consisting primarily of payments made on our credit facilities and a distribution to our members. For the
three months
ended
January 31, 2013
, our cash provided by financing activities was approximately $1,180,000, which consisted primarily of result of proceeds from our credit facilities.
Indebtedness
Granite Falls Energy
In August 2012, we 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 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
January 31, 2014
and
October 31, 2013
, we were in compliance with these financial covenants and expect to be in compliance throughout fiscal
2014
.
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 credit facility.
GFE Short-Term Debt Sources
The Company's short-term credit facility with United FCS is a revolving line of credit. This facility allows us to borrow, repay, and re-borrow up to $5,600,000 subject to outstanding letters of credit and a borrowing base calculation. Final payment of amounts borrowed under this credit facility is due August 1, 2014. The interest rate for the Company's short-term credit facility is based on the bank's "One Month LIBOR Index Rate" plus 2.8%. The short-term credit facility is available through March 31, 2017. As of
January 31, 2014
, there was no outstanding balance on the short-term credit facility and the interest rate was 3.21%.
We expect to utilize this credit facility to finance inventory and receivables as needed.
GFE 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 re-borrow up to $18,000,000. However, the amount available for borrowing under this facility reduces by $2,000,000 every six months, beginning September 1, 2014, with final payment due March 1, 2018. Interest on amounts borrowed is payable monthly in arrears. The interest rates for this facility is based on the bank's "One Month LIBOR Index Rate" plus 3.05%. The facility is available through March 31, 2018. The outstanding balance on the revolving term loan at
January 31, 2014
was
$2,065,495
, and the interest rate was 3.21%.
We have used this credit facility to fund our rail infrastructure improvement project and working capital.
Other GFE Credit Arrangements
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. In January 2014, the Company paid the loan balance in full.
Heron Lake BioEnergy
Credit Arrangements with AgStar
HLBE entered into an amended and restated master loan agreement with AgStar Financial Services, PCA ("AgStar") under which it has two forms of debt as of
January 31, 2014
: a term note and a revolving term note. HLBE's total indebtedness to AgStar as of
January 31, 2014
was approximately $21.3 million (which includes a fair value premium of approximately $1.8 million), consisting of approximately $17.7 million under the term note and approximately $3.6 million under the revolving term note.
HLBE's loan agreements with AgStar are secured by substantially all business assets and are subject to various financial and non-financial covenants that limit distributions and debt and require minimum debt service coverage, net worth, and working capital requirements. HLBE was in compliance with the covenants of its loan agreements with AgStar as of
January 31, 2014
.
In the past, HLBE’s failure to comply with the covenants of the master loan agreement and failure to timely pay required installments of principal has resulted in events of default under the master loan agreement, entitling AgStar to accelerate and declare due all amounts outstanding under the master loan agreement. There can be no assurance that HLBE will be able to maintain compliance with its agreements with AgStar. Upon an occurrence of an event of default or an event that will lead to HLBE's default, AgStar may upon notice terminate its commitment to loan funds and declare the entire unpaid principal balance of the loans, plus accrued interest, immediately due and payable. An event of default includes, but is not limited to, HLBE's failure to make payments when due, insolvency, any material adverse change in HLBE's financial condition or HLBE's breach of any of the covenants, representations or warranties we have given in connection with the transaction.
AgStar
Term Note
With respect to the term loan, HLBE must make equal monthly payments of principal and interest of approximately $223,000 on the term loan based on a 10-year amortization, provided the entire principal balance and accrued and unpaid interest on the term loan is due and payable in full on the maturity date of September 1, 2016. In addition, HLBE is required to make additional payments annually on debt for up to 25% of the excess cash flow, as defined by the agreement, up to $2 million per year. Through September 1, 2014, the loan bears interest at 5.75% as long as HLBE is in compliance with its debt covenants. On September 1, 2014, the interest on the term loan will be adjusted to LIBOR plus 3.50%, but the total interest rate shall not be less than 5.00%.
AgStar
Revolving Term Note
With respect to the revolving term loan, the loan matures in September 2016. Amounts borrowed by HLBE under the term revolving loan can be repaid and may be re-borrowed at any time prior to maturity date of the term revolving loan, provided that outstanding advances may not exceed the amount of the term revolving loan commitment. Amounts outstanding on the term revolving loan bear interest at a variable rate equal to the greater of a LIBOR rate plus 3.50% or 5.00%, payable monthly. At October 31, 2013, the revolving term loan carried an interest rate of 5.00%. HLBE also pays an unused commitment fee on the unused portion of the term revolving term loan commitment at
the rate of 0.35% per annum, payable in arrears in quarterly installments during the term of the revolving term loan. At
January 31, 2014
, HLBE had approximately $3.4 million outstanding under the revolving term loan and an additional approximately $15.1 million was available. The amount available under the revolving term loan is reduced by $2 million at October 31 each year until September 2016, when the unpaid balance is due.
HLBE Subordinated Convertible Debt
On September 18, 2013, HLBE entered into an indenture with U.S. Bank National Association (“U.S. Bank”), as trustee and collateral agent, in connection with the closing of HLBE's offering of a maximum of $12 million aggregate principal amount of 7.25% Secured Subordinated Notes due 2018 (the “Notes”). On September 18, 2013, HLBE sold an aggregate principal amount of approximately $3.7 million of the Notes. Prior to that, HLBE sold approximately $1.4 million of the notes in May 2013. Additionally, subscribers from HLBE's subordinated notes offering holding an aggregate principal amount of approximately $935,000 of HLBE's subordinated notes elected to exchange their notes for Notes under the indenture, per the original terms of the interim subordinated notes. Therefore, HLBE has an aggregate principal amount of approximately $4.1 million in Notes. The Notes are subordinated secured obligations, with interest payable on April 1 and October 1 of each year, beginning April 1, 2014, through the maturity date of October 1, 2018 at a rate of 7.25% per annum. The Notes are secured by a second mortgage and lien position on, among other assets, HLBE's property, plant and equipment located in Heron Lake, Minnesota, which mortgage and lien position are junior to and subordinated to HLBE's senior debt with AgStar.
Beginning on October 1, 2014, and each anniversary date thereafter prior to the maturity date of the Notes, and on the maturity date of the Notes, and prior to the effective time of certain corporate actions, each holder of Notes has the right, at such holder’s option, to irrevocably convert all (but not less than all) of such holder’s Notes into HLBE's membership units at the rate of $0.30 of principal amount per unit. In addition to the anniversary and event conversion rights, prior to any prepayment date, each holder of Notes has the right, at such holder’s option, to irrevocably convert the principal amount to be prepaid into HLBE's membership units at the rate of $0.30 of principal amount per unit. Subject to this conversion right, HLBE may, by at least 45 days but not more than 60 days notice to the holders thereof, prepay the outstanding amount of the Notes in whole or in part with accrued interest to the date of such prepayment on the amount prepaid, without penalty or premium, provided that any prepayment of Notes must be done pro rata to all holders of Notes.
Other HLBE Credit Arrangements
In addition to HLBE's primary credit arrangement with AgStar and our subordinated convertible debt, HLBE has other material credit arrangements and debt obligations.
In October 2003, HLBE entered into an industrial water supply development and distribution agreement with the City of Heron Lake, Jackson County, and Minnesota Soybean Processors. In consideration of this agreement, HLBE and Minnesota Soybean Processors are allocated equally the debt service on $735,000 in water revenue bonds that were issued by the City to support this project that mature in February 2019. The parties have agreed that prior to the scheduled expiration of the agreement, they will negotiate in good faith to replace the agreement with a further agreement regarding the wells and related facilities. In May 2006, HLBE entered into an industrial water supply treatment agreement with the City of Heron Lake and Jackson County. Under this agreement, HLBE pays monthly installments over 24 months starting January 1, 2007 equal to one years' debt service on approximately $3.6 million in water revenue bonds, which will be returned to HLBE if any funds remain after final payment in full on the bonds and assuming HLBE complies with all payment obligations under the agreement. As of
January 31, 2014
, there was a total of $2.2 million in outstanding water revenue bonds. HLBE classifies its obligations under these bonds as assessments payable. The interest rates on the bonds range from 0.50% to 8.73%.
To fund the purchase of the distribution system and substation for the plant, HLBE entered into a loan agreement with Federated Rural Electric Association pursuant to which HLBE borrowed $600,000 by a secured promissory note. Under the note HLBE is required to make monthly payments to Federated Rural Electric Association of $6,250 consisting of principal and an annual fee of 1% beginning on October 10, 2009. In exchange for this loan, Federated Rural Electric Association was granted a security interest in the distribution system and substation for the plant. The balance of this loan at
January 31, 2014
was $275,000.
HLBE has a note payable in connection with the construction of its pipeline assets. This loan was initially due in December 2011, but was converted in February 2012 to a term loan with a three-year repayment period. The balance of this loan at
January 31, 2014
was approximately $1.7 million. Interest on the loan is at 5.29%. The note is secured by the assets of Agrinatural Gas, LLC.
HLBE financed its corn oil separation equipment from the equipment vendor. HLBE pays approximately $40,000 per month on this debt, conditioned upon revenue generated from the corn oil separation equipment. The monthly payment includes implicit interest of 5.57% until maturity in May 2015. The note is secured by the corn oil separation equipment. The balances of this loan at
January 31, 2014
was approximately $492,000
HLBE also has a note payable to the minority owner of Agrinatural Gas, LLC in the amount of $300,000 at
January 31, 2014
. Interest on the note is 5.43% and the note has a maturity date in October 2014.
Critical Accounting Policies and 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. We believe that of our significant accounting policies summarized in Note 1 to our condensed consolidated financial statements included with this Form 10-Q. At
January 31, 2014
, our critical accounting estimates continue to include those described in our Annual Report on Form 10-K for the fiscal year ended
October 31, 2013
. Management has not changed the method of calculating and using estimates and assumptions in preparing our condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States of America.
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements.