UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x |
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
|
|
For the quarterly period ended September 30, 2007 | ||
|
|
|
o |
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
COMMISSION FILE NO. 0-50711
NORTHERN GROWERS, LLC
(Exact name of registrant as specified in its charter)
SOUTH DAKOTA |
| 77-0589881 |
(State or other jurisdiction of |
| (I.R.S. Employer |
48416 144th Street, PO Box 356, Big Stone City, SD 57216
(Address of principal executive offices)
605-862-7902
(Registrant’s telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o |
| Accelerated Filer x |
| Non-Accelerated Filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
| o Yes x No |
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes o No o
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: On November 1, 2007, the issuer had 50,628,000 Class A capital units outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
NORTHERN GROWERS, LLC
Table of Contents
CONSOLIDATED FINANCIAL STATEMENTS |
|
| |
| |
| |
|
NORTHERN GROWERS, LLC
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
| September 30, |
| December 31, |
| ||
|
| 2007 |
| 2006* |
| ||
|
|
|
|
|
| ||
ASSETS |
|
|
|
|
| ||
|
|
|
|
|
| ||
CURRENT ASSETS |
|
|
|
|
| ||
Cash |
| $ | 7,760,340 |
| $ | 9,925,200 |
|
Accounts receivable |
|
|
|
|
| ||
Trade related party |
| 6,918,138 |
| 6,445,387 |
| ||
Trade |
| 654,205 |
| 850,565 |
| ||
Other |
| 609,290 |
| 911,359 |
| ||
Inventory |
| 8,081,071 |
| 15,493,876 |
| ||
Prepaid expenses |
| 205,469 |
| 81,992 |
| ||
Investment in commodities contracts |
| 2,244,209 |
| 1,121,151 |
| ||
|
|
|
|
|
| ||
Total current assets |
| 26,472,722 |
| 34,829,530 |
| ||
|
|
|
|
|
| ||
PROPERTY AND EQUIPMENT |
|
|
|
|
| ||
Land improvements |
| 6,546,917 |
| 5,105,996 |
| ||
Equipment |
| 68,868,483 |
| 45,061,239 |
| ||
Buildings |
| 15,198,448 |
| 9,349,073 |
| ||
Construction in progress |
| 3,151,880 |
| 18,017,902 |
| ||
|
| 93,765,728 |
| 77,534,210 |
| ||
Less accumulated depreciation |
| (14,219,316 | ) | (11,120,828 | ) | ||
|
|
|
|
|
| ||
Net property and equipment |
| 79,546,412 |
| 66,413,382 |
| ||
|
|
|
|
|
| ||
OTHER ASSETS |
| 257,378 |
| 236,996 |
| ||
|
|
|
|
|
| ||
|
| $ | 106,276,512 |
| $ | 101,479,908 |
|
* Derived from audited financial statements
See Notes to Unaudited Consolidated Financial Statements
NORTHERN GROWERS, LLC
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
| September 30, |
| December 31, |
| ||
|
| 2007 |
| 2006* |
| ||
|
|
|
|
|
| ||
LIABILITIES AND MEMBERS’ EQUITY |
|
|
|
|
| ||
|
|
|
|
|
| ||
CURRENT LIABILITIES |
|
|
|
|
| ||
Accounts payable - trade |
| $ | 1,976,568 |
| $ | 1,254,171 |
|
Accounts payable - corn |
| 1,752,343 |
| 1,981,804 |
| ||
Accounts payable - related party |
| 614,135 |
| 896,678 |
| ||
Accounts payable - construction - related party |
| 168,632 |
| 2,173,905 |
| ||
Other accrued liabilities |
| 593,862 |
| 548,909 |
| ||
Accrued interest |
| 17,246 |
| 1,321 |
| ||
Distribution payable - Northern Growers |
| — |
| 6,787,696 |
| ||
Distribution payable - minority member |
| — |
| 2,512,400 |
| ||
Notes payable - due upon demand |
| 5,000 |
| 5,000 |
| ||
Current portion of notes payable |
| 5,057,553 |
| 2,685,475 |
| ||
Derivative financial instruments |
| 282,034 |
| 187,069 |
| ||
|
|
|
|
|
| ||
Total current liabilities |
| 10,467,373 |
| 19,034,428 |
| ||
|
|
|
|
|
| ||
LONG-TERM NOTES PAYABLE |
| 43,637,569 |
| 33,391,741 |
| ||
|
|
|
|
|
| ||
COMMITMENTS AND CONTINGENCIES |
|
|
|
|
| ||
|
|
|
|
|
| ||
MINORITY INTEREST |
| 11,431,302 |
| 10,790,823 |
| ||
|
|
|
|
|
| ||
MEMBERS’ EQUITY |
|
|
|
|
| ||
Capital units, $0.25 stated value, 50,628,000 units issued and outstanding |
| 12,657,000 |
| 12,657,000 |
| ||
Additional paid-in capital |
| 64,900 |
| 64,900 |
| ||
Accumulated other comprehensive income (loss) |
| (217,617 | ) | (144,342 | ) | ||
Retained earnings |
| 28,235,985 |
| 25,685,358 |
| ||
|
|
|
|
|
| ||
Total members’ equity |
| 40,740,268 |
| 38,262,916 |
| ||
|
|
|
|
|
| ||
|
| $ | 106,276,512 |
| $ | 101,479,908 |
|
* Derived from audited financial statements
See Notes to Unaudited Consolidated Financial Statements
2
NORTHERN GROWERS, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||
|
| 2007 |
| 2006 |
| 2007 |
| 2006 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
REVENUES |
|
|
|
|
|
|
|
|
| ||||
Sales related party |
| $ | 34,589,824 |
| $ | 30,720,882 |
| $ | 92,116,005 |
| $ | 79,899,456 |
|
Sales |
| 5,360,277 |
| 3,909,394 |
| 14,754,732 |
| 12,245,999 |
| ||||
Incentive |
| 250,000 |
| 266,044 |
| 500,000 |
| 534,884 |
| ||||
Total revenues |
| 40,200,101 |
| 34,896,320 |
| 107,370,737 |
| 92,680,339 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
COST OF REVENUES |
| 31,397,187 |
| 14,732,663 |
| 85,127,185 |
| 48,112,452 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
GROSS PROFIT |
| 8,802,914 |
| 20,163,657 |
| 22,243,552 |
| 44,567,887 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
EXPENSES |
|
|
|
|
|
|
|
|
| ||||
General and administrative |
| 1,301,220 |
| 1,815,977 |
| 3,730,742 |
| 4,489,727 |
| ||||
Total operating expenses |
| 1,301,220 |
| 1,815,977 |
| 3,730,742 |
| 4,489,727 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
INCOME FROM OPERATIONS |
| 7,501,694 |
| 18,347,680 |
| 18,512,810 |
| 40,078,160 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
OTHER INCOME (EXPENSES) |
|
|
|
|
|
|
|
|
| ||||
Interest income |
| 118,129 |
| 62,825 |
| 345,852 |
| 219,891 |
| ||||
Interest expense |
| (880,660 | ) | (322,576 | ) | (1,898,756 | ) | (958,413 | ) | ||||
Other |
| 16,215 |
| 9,704 |
| 52,674 |
| 16,074 |
| ||||
Total other income (expenses) |
| (746,316 | ) | (250,047 | ) | (1,500,230 | ) | (722,448 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
INCOME BEFORE MINORITY INTEREST |
| 6,755,378 |
| 18,097,633 |
| 17,012,580 |
| 39,355,712 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
MINORITY INTEREST IN SUBSIDIARY (INCOME) |
| (1,549,455 | ) | (4,137,618 | ) | (3,928,290 | ) | (9,013,122 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
NET INCOME |
| $ | 5,205,923 |
| $ | 13,960,015 |
| $ | 13,084,290 |
| $ | 30,342,590 |
|
|
|
|
|
|
|
|
|
|
| ||||
BASIC AND DILUTED EARNINGS PER CAPITAL UNIT |
| $ | 0.103 |
| $ | 0.276 |
| $ | 0.258 |
| $ | 0.599 |
|
|
|
|
|
|
|
|
|
|
| ||||
BASIC AND DILUTED WEIGHTED AVERAGE CAPITAL UNITS OUTSTANDING |
| 50,628,000 |
| 50,628,000 |
| 50,628,000 |
| 50,628,000 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
DISTRIBUTIONS PER CAPITAL UNIT DECLARED |
| $ | — |
| $ | 0.165 |
| $ | 0.208 |
| $ | 0.384 |
|
|
|
|
|
|
|
|
|
|
| ||||
DISTRIBUTIONS PER CAPITAL UNIT PAID |
| $ | 0.081 |
| $ | 0.165 |
| $ | 0.342 |
| $ | 0.283 |
|
See Notes to Unaudited Consolidated Financial Statements
3
NORTHERN GROWERS, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
| Nine Months |
| Nine Months |
| ||
|
| Ended |
| Ended |
| ||
|
| September 30, |
| September 30, |
| ||
|
| 2007 |
| 2006 |
| ||
OPERATING ACTIVITIES |
|
|
|
|
| ||
Net income |
| $ | 13,084,290 |
| $ | 30,342,590 |
|
Changes to net income not affecting cash |
|
|
|
|
| ||
Depreciation |
| 3,133,976 |
| 1,874,329 |
| ||
Amortization of loan fees |
| 25,925 |
| 2,374 |
| ||
Minority interest in subsidiary’s earnings |
| 3,928,290 |
| 9,013,122 |
| ||
Decrease (increase) in current assets |
|
|
|
|
| ||
Accounts receivable |
|
|
|
|
| ||
Related party |
| (472,751 | ) | (2,012,526 | ) | ||
Trade |
| 196,360 |
| (166,997 | ) | ||
Other |
| (195 | ) | (291,292 | ) | ||
Inventory |
| 7,412,805 |
| (4,376,550 | ) | ||
Prepaid expenses |
| (123,477 | ) | (135,033 | ) | ||
Investment in commodity contracts |
| (1,123,058 | ) | (261,495 | ) | ||
Increase (decrease) in current liabilities |
|
|
|
|
| ||
Accounts payable |
|
|
|
|
| ||
Trade |
| 722,397 |
| (468,028 | ) | ||
Corn |
| (229,461 | ) | (1,233,194 | ) | ||
Related party |
| (282,543 | ) | 649,210 |
| ||
Accrued liabilities |
| 44,953 |
| 57,523 |
| ||
Accrued interest |
| 15,925 |
| 3,861 |
| ||
|
|
|
|
|
| ||
NET CASH PROVIDED BY OPERATING ACTIVITIES |
| 26,333,436 |
| 32,997,894 |
| ||
|
|
|
|
|
| ||
INVESTING ACTIVITIES |
|
|
|
|
| ||
Purchase of property and equipment |
| (17,618,867 | ) | (21,130,668 | ) | ||
Cash paid for capitalized construction interest |
| (653,413 | ) | — |
| ||
Tax refund on construction |
| 302,264 |
| 263,410 |
| ||
|
|
|
|
|
| ||
NET CASH (USED FOR) INVESTING ACTIVITIES |
| (17,970,016 | ) | (20,867,258 | ) | ||
|
|
|
|
|
| ||
FINANCING ACTIVITIES |
|
|
|
|
| ||
Long-term notes payable issued |
| 14,040,126 |
| — |
| ||
Principal paid on long-term notes payable |
| (1,422,220 | ) | (1,360,989 | ) | ||
Distributions paid - Northern Growers |
| (17,321,359 | ) | (14,332,787 | ) | ||
Distributions paid - minority member |
| (5,778,520 | ) | (4,279,643 | ) | ||
Cash paid for financing costs |
| (46,307 | ) | (227,885 | ) | ||
NET CASH (USED FOR) FINANCING ACTIVITIES |
| (10,528,280 | ) | (20,201,304 | ) | ||
|
|
|
|
|
| ||
NET (DECREASE) IN CASH |
| (2,164,860 | ) | (8,070,668 | ) | ||
|
|
|
|
|
| ||
CASH AT BEGINNING OF PERIOD |
| 9,925,200 |
| 12,057,017 |
| ||
|
|
|
|
|
| ||
CASH AT END OF PERIOD |
| $ | 7,760,340 |
| $ | 3,986,349 |
|
|
|
|
|
|
| ||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
|
|
|
|
| ||
Cash paid for interest |
| $ | 2,609,547 |
| $ | 952,136 |
|
|
|
|
|
|
| ||
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES |
|
|
|
|
| ||
Accounts payable incurred for construction costs |
| $ | 168,632 |
| $ | 2,630,712 |
|
Accounts receivable for tax refund on construction |
| $ | 384,920 |
| $ | — |
|
Distributions payable |
| $ | — |
| $ | 10,849,819 |
|
See Notes to Unaudited Consolidated Financial Statements
4
NORTHERN GROWERS, LLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
Principal Business Activity
Northern Growers, LLC or Northern Growers (formerly Northern Growers Cooperative or the “Cooperative”), is a South Dakota limited liability company that was organized to pool investors, provide a portion of the corn supply for an ethanol plant (“the plant”) owned by Northern Lights Ethanol, LLC (d/b/a POET Biorefining – Big Stone) (“POET Biorefining – Big Stone”), and own a 77.16% interest in POET Biorefining – Big Stone. For purposes of the financial statements and notes, the “Company” refers to both Northern Growers and POET Biorefining – Big Stone on a consolidated basis. On June 26, 2002, the plant began grinding corn and on July 5, 2002, the plant commenced its principal operations at a 40 million gallon nameplate capacity. On May 14, 2007, the plant completed its expansion to a 75 million gallon nameplate capacity. The Company sells ethanol and related products primarily in the United States.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited financial statements contained herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America.
In the opinion of management, all adjustments considered necessary for a fair presentation have been included in the accompanying financial statements. All such adjustments are of a normal, recurring nature. The results of operations for the three and nine month periods ended September 30, 2007 and 2006 are not necessarily indicative of the results to be expected for a full year.
These financial statements should be read in conjunction with the financial statements and notes included in the Company’s financial statements for the year ended December 31, 2006.
Principles of Consolidation
The consolidated financial statements include the accounts of Northern Growers and its 77.16% owned subsidiary, POET Biorefining - Big Stone. All significant inter-company transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.
Environmental Liabilities
The Company’s operations are subject to environmental laws and regulations adopted by various governmental authorities in the jurisdiction in which it operates. These laws require the Company to investigate and remediate the effects of the release or disposal of materials at its locations. Accordingly, the Company has adopted policies, practices and procedures in the areas of pollution control, occupational health, and the production, handling, storage and use of hazardous materials to prevent material environmental or other damage, and to limit the financial liability which could result from such events. Environmental liabilities are recorded when the liability is probable and the costs can be reasonably estimated.
(continued on next page)
5
NORTHERN GROWERS, LLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Cost of Revenues
The primary components of cost of revenues from the production of ethanol and related products are corn expense, energy expense (steam, natural gas and electricity), raw materials expense (chemicals and denaturant), shipping costs on sales, and depreciation on process equipment.
All shipping costs incurred with regard to the sale of ethanol and related product inventory are included in the consolidated statements of operations as a component of gross revenues. Accordingly, those shipping costs are deducted and are all classified as a component of cost of revenues. Shipping costs in relation to sales are defined as the cost to transport products to the customers. Other shipping costs in the cost of revenues include inbound freight charges on inventory.
General and Administrative Expenses
The primary components of general and administrative expenses are management fees, insurance expense, administrative wages and professional fees (legal and audit).
Investment in Commodities Contracts, Derivative Instruments and Hedging Activities
SFAS No. 133 requires a company to evaluate its contracts to determine whether the contracts are derivatives. Certain contracts that literally meet the definition of a derivative may be exempted from SFAS No. 133 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 are documented as normal and exempted from the accounting and reporting requirements of SFAS No. 133.
The Company enters into short-term cash, options and futures contracts as a means of securing corn and natural gas for the ethanol plant and managing exposure to changes in commodity prices. All derivatives are designated as non-hedge derivatives. Although the contracts are effective economic hedges of specified risks, they are not designated as and accounted for as hedging instruments.
As part of its trading activity, the Company uses futures and option contracts offered through regulated commodity exchanges to reduce risk and is exposed to risk of loss in the market value of inventories. To reduce that risk, the Company generally takes positions using cash and futures contracts and options.
Unrealized gains and losses related to derivative contracts are included as a component of cost of revenues in the accompanying consolidated financial statements. Inventories are recorded at net realizable value so that gains and losses on derivative contracts are offset by gains and losses on inventories and reflected in current earnings. For the statement of cash flows, such contract transactions are classified as operating activities.
The Company has recorded a decrease to cost of revenues of $1,497,446 and $184,508 related to our derivative contracts for the nine months ended September 30, 2007 and 2006, respectively. These derivative contracts can be found on the Balance Sheet under “Investment in commodities contracts”.
During the year ended December 31, 2006, the Company entered into derivative financial instruments to limit its exposure to changes in interest rates. The Company entered into an interest rate swap agreement as part of its interest rate risk management strategy and to effectively convert a portion of its variable rate debt to fixed rate debt. The swap agreement is accounted for as a cash flow hedge under SFAS No. 133, as amended. The Company did not have any derivative instruments designated as cash flow hedges as of December 31, 2005.
(continued on next page)
6
NORTHERN GROWERS, LLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Interest Rate Swap Agreement
During the year ended December 31, 2006, the Company entered into an interest rate swap agreement as part of its interest rate risk management strategy, effectively converting a portion of its variable rate debt to fixed rate debt. The swap agreement, which expires August 31, 2014, is accounted for as a cash flow hedge under SFAS No. 133, as amended. Under the terms of the swap, in exchange for receiving a variable rate, the Company’s net monthly interest payment is fixed based on the notional amount. The swap transaction qualifies for the shortcut method of recognition under SFAS No. 133; therefore, no portion of the swap is treated as ineffective. The notional amount of the interest rate swap was $16,500,000 and $16,252,000 as of September 30, 2007 and December 31, 2006, respectively. As of September 30, 2007, $282,034 has been recorded as a current derivative liability to record the fair value of the swap, with a corresponding entry of $217,617 to accumulated other comprehensive loss in the members’ equity section of the balance sheet and a decrease of $64,417 to minority interest. At December 31, 2006, $187,069 had been recorded as a current derivative liability to record the fair value of the swap, with a corresponding entry of $144,342 to accumulated other comprehensive loss in the members’ equity section of the balance sheet and a decrease of $42,727 to minority interest.
Other Comprehensive Income (Loss)
The Company has adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (“SFAS 130”) that establishes standards for reporting comprehensive income. The Statement defines comprehensive income as the changes in equity of an enterprise except those resulting from stockholder transactions. As of September 30, 2007 and December 31, 2006, accumulated other comprehensive income (loss) consists of unrealized income and loss from our interest rate swap agreement designated as a cash flow hedge. Other comprehensive loss for the three and nine month periods ending September 30, 2007 was ($298,290) and ($73,275), respectively. There was no other comprehensive income (loss) for the periods ending September 30, 2006.
Recently Issued Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” to increase consistency and comparability in fair value measurements by defining fair value, establishing a framework for measuring fair value in generally accepted accounting principles, and expanding disclosures about fair value measurements. SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We are in the process of evaluating the effect that the adoption of SFAS No. 157 will have on our consolidated results of operations and financial condition.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 provides entities with an option to report certain financial assets and liabilities at fair value – with changes in fair value reported in earnings – and requires additional disclosures related to an entity’s election to use fair value reporting. It also requires entities to display the fair value of those assets and liabilities for which the entity has elected to use fair value on the face of the balance sheet. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We are in the process of evaluating the effect that the adoption of SFAS No. 159 will have on our consolidated results of operations and financial condition.
(continued on next page)
7
NORTHERN GROWERS, LLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVENTORY
Inventory consisted of the following:
|
| September 30, |
| December 31, |
| ||
|
| 2007 |
| 2006* |
| ||
|
|
|
|
|
| ||
Finished goods |
| $ | 2,144,682 |
| $ | 3,256,330 |
|
Raw materials |
| 3,868,601 |
| 10,461,893 |
| ||
Work-in-process |
| 917,280 |
| 807,185 |
| ||
Spare parts inventory |
| 1,150,508 |
| 968,468 |
| ||
|
|
|
|
|
| ||
|
| $ | 8,081,071 |
| $ | 15,493,876 |
|
* Derived from audited financial statements
NOTE 4 - NOTES PAYABLE
On August 28, 2006, POET Biorefining - Big Stone and US Bank National Association, Sioux Falls, South Dakota (Bank) entered into an amended and restated loan agreement for the purpose of financing the plant’s expansion and restructuring the $3.0 million and $5.0 million revolving notes into one note. On September 21, 2007, an amendment to the loan agreement became effective. The purpose of the amendment was to finance $4,300,000 for additional grain storage and to finance a $9,000,000 revolving note. Under the amended loan agreement and the September 21, 2007 amendment, POET Biorefining — Big Stone is subject to seven notes: a $15.8 million fixed-rate note; a $3.9 million variable-rate, non-revolving note; an $8 million variable-rate, revolving long term note; a $1.2 million note; a $33 million construction note; a $4.3 million variable-rate note; and a $9 million variable-rate, revolving short term note.
The $15.8 million fixed-rate note bears an interest rate of 6.38%. This note requires quarterly payments of interest and amortized principal on the basis of a ten-year term and is subject to maturity on March 31, 2012. The first payment was made on June 30, 2005.
The $3.9 million variable-rate, non-revolving note bears interest at the Bank’s prime rate, or 7.75% at September 30, 2007. This note requires quarterly payments of interest and amortized principal on the basis of a ten-year term, the first payment being made on June 30, 2005. The note matures on March 31, 2012.
The restated loan agreement restructured the $3.0 million and $5.0 million notes into a single $8 million revolving note. The new revolving note permits POET Biorefining - Big Stone to borrow, on a revolving basis, the difference between the unpaid principal balance and $8 million. The revolving note bears a variable-interest rate equal to the prime rate announced by the Bank from time to time, adjusted each time the Prime Rate changes. Quarterly payments of interest on any unpaid balance are due March 31, June 30, September 30, and December 31 of each year. The total unpaid principal balance is due at maturity, or August 31, 2014. The loan is subject to a quarterly unused commitment fee of .0375% and prepayment is without penalty.
The $1.2 million fixed rate note, which was retired on April 30, 2007, bore interest at 4.7%, and required quarterly payments of principal and interest.
The construction note of $33,000,000 was converted to a term note on August 31, 2007. The notional amount ($16.5 million as of September 30, 2007) is subject to the interest rate swap agreement discussed in Note 2 under
(continued on next page)
8
NORTHERN GROWERS, LLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
“Interest Rate Swap Agreement”. The loan will be amortized over a ten-year period commencing August 31, 2007 and is subject to a maturity of August 31, 2014. Payments of principal are due quarterly beginning November 30, 2007 and payments of interest are due monthly, subject to a variable rate of one-month LIBOR plus 2.75%, adjusted monthly (8.315% at September 30, 2007).
The $4.3 million note, which was issued on September 21, 2007 and funded in full on October 5, 2007 to finance additional grain storage and handling equipment, is subject to a variable rate of LIBOR plus 3.00%, adjusted and due monthly. A principal payment of $154,000 is due quarterly, which was begun on October 31, 2007.
The $9 million note, which was issued on September 21, 2007, permits us to borrow, on a revolving basis, the difference of the outstanding principal amount and the lesser of the borrowing base or $9.0 million. The borrowing base is defined as 75% of the total of the fair market value of the outstanding inventory, eligible accounts receivable, and hedging accounts at fair market value. The principal purpose of this revolver is to cover the cost of purchasing corn. It bears a variable-interest rate equal to one-month LIBOR plus 3.00%, payable monthly when there is an outstanding balance (8.148% at September 30, 2007). The loan is subject to a quarterly unused commitment fee of .0250%. The total unpaid principal balance is due at maturity, or July 30, 2008. $9 million was available at September 30, 2007.
POET Biorefining - Big Stone is subject to certain restrictive covenants establishing minimum reporting requirements, ratios, working capital and net worth requirements and is in full compliance at September 30, 2007. Under the September 21, 2007 loan agreement amendment, the working capital requirement increases from $7.5 million to $10 million on October 1, 2007. Collateral for the notes is multiple mortgages and security agreements, multiple UCC filings on all business assets, and assignments of certain agreements related to the construction and operation of the plant.
Long-term notes payable with the Bank consisted of the following:
|
| September 30, 2007 |
| December 31, 2006* |
| ||
|
| (Unaudited) |
|
|
| ||
Variable rate, non-revolving note |
| $ | 2,925,000 |
| $ | 3,217,500 |
|
Fixed rate note |
| 12,770,122 |
| 13,733,942 |
| ||
Fixed rate note |
| — |
| 165,901 |
| ||
Term note |
| 33,000,000 |
| 18,959,873 |
| ||
|
|
|
|
|
| ||
|
| 48,695,122 |
| 36,077,216 |
| ||
Less current portion |
| (5,057,553 | ) | (2,685,475 | ) | ||
|
|
|
|
|
| ||
|
| $ | 43,637,569 |
| $ | 33,391,741 |
|
* Derived from audited financial statements
(continued on next page)
9
NORTHERN GROWERS, LLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2007 and December 31, 2006, there were no outstanding borrowings against the long-term variable rate revolving note and the balance available on this note was $8,000,000.
Minimum principal payments, through the maturity of the notes, are estimated as follows:
Twelve Months Ending September 30, |
| Amount |
| |
|
|
|
| |
2008 |
| $ | 5,057,553 |
|
2009 |
| 5,146,913 |
| |
2010 |
| 5,242,112 |
| |
2011 |
| 5,343,531 |
| |
2012 |
| 11,405,013 |
| |
2013 to August 31, 2014 |
| 16,500,000 |
| |
|
|
|
| |
|
| $ | 48,695,122 |
|
NOTE 5 - COMMITMENTS, CONTINGENCIES AND AGREEMENTS
Substantially all of the Company’s endeavors are subject to federal, state and local regulations relating to the discharge of materials into the environment. Management believes that the current practices and procedures for the control and disposition of such wastes comply with the applicable federal, state and local requirements.
Due to a recent name change of Broin Companies, LLC (“Broin”) to POET, LLC, and a corresponding change in the name of some Broin-related companies, the Company’s existing contractual arrangements and agreements for plant development, operations and marketing are now with newly named entities containing POET. All of the newly named POET-related entities are the same Broin-related entities that existed prior to the Broin to POET name change. Broin Investments I, LLC, the minority member of POET Biorefining – Big Stone, has not changed its name, yet is still a related party to all POET-named companies listed here.
The Company has entered into contracts and agreements regarding the construction, operation and management of the ethanol plant. Agreements with the minority member, or parties related to the minority member through common ownership, are as follows:
Expansion Construction Agreement – The Company entered into a Design/Build Agreement with POET Design and Construction, Inc. (formerly known as Broin & Associates, Inc.) on October 25, 2005. The purpose of this agreement is to expand the name-plate production capacity of the plant from 40 million gallons of ethanol annually to 75 million gallons of ethanol annually, as well as to make certain capital improvements to the plant for the incorporation of new raw starch technology. The final cost of construction and improvements for both projects is $42.3 million, with a remaining commitment at September 30, 2007, of $297,883 to be met with cash. The liability incurred on this construction contract was $100,000 and $2,173,905 at September 30, 2007 and December 31, 2006, respectively.
Additional Corn Storage Construction Agreement – The Company entered into a Design/Build Agreement with POET Design and Construction, Inc. on April 3, 2007. The purpose of this agreement is to expand the corn storage capacity at the plant. The estimated cost of construction for the project is $4.3 million and is anticipated to be fully financed by the Bank. The liability incurred on this construction contract was $68,632 at September 30, 2007 and $0 at December 31, 2006. In anticipation of financing from the Bank for the total cost of construction for this project, the Company made cash payments of $3.36 million on the construction note through September 30, 2007.
(continued on next page)
10
NORTHERN GROWERS, LLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Ethanol Marketing Agreement – The Company has renewed its agreement with Ethanol Products, LLC (d/b/a/ POET Ethanol Products) for the sale, marketing, billing and receipt of payment and other administrative services for all ethanol produced by the plant. The new agreement is effective July 1, 2007 and terminates on July 1, 2012, automatically renewing for a five-year term unless a notice of termination is provided by either party prior to the end of the term, and increases marketing fees by $0.002 per gallon sold.
Management Agreement – On April 20, 2005, the Company renewed its agreement with POET Plant Management, LLC (formerly known as Broin Management, LLC) for the management and operation of the plant. The original agreement was executed on November 2, 2000 and remained in effect until July 1, 2005. The term of the new management agreement, as amended, continues through June 30, 2015. In exchange for these services, POET Plant Management receives an annual fee of $450,000, payable in equal monthly installments, plus an incentive bonus based on a percentage of net income, payable quarterly. The annual fee is adjusted each year on March 1st for changes in the consumer price index. The fees and bonus paid to POET Plant Management include the salary and benefits of the general manager and technical manager and certain other services related to operation of the plant.
Technology and Patent Rights License Agreement - - On October 25, 2005, the Company entered into a Technology and Patent Rights License Agreement with POET Design and Construction, Inc. (formerly known as Broin and Associates, Inc.). Under this agreement, POET Design and Construction granted the Company a non-exclusive license to use certain technology and patents owned, developed, or obtained by POET Design and Construction relating to the ethanol and related product production processes. The Company is required to pay an annual licensing fee for the right to use such technology and patents. The term of this agreement continues until June 30, 2015.
Risk Management Agreement – On April 1, 2007, the Company entered into a new corn and natural gas price risk management agreement with POET Plant Management. The new risk management agreement became effective on July 1, 2007 and terminates on July 1, 2012, automatically renewing for a five-year term unless a notice of termination is provided by either party prior to the end of the term. In exchange for providing certain risk management services relating to corn and natural gas prices, including hedging and pooling services, the Company pays POET Plant Management an annual fee of $59,580 payable in quarterly installments, subject to modification in the case of plant expansions or increases in corn usage.
Distillers Grains Marketing Agreement – The Company has an agreement with POET Nutrition, Inc. (formerly known as Dakota Gold Marketing, Inc.), a related party through ownership by entities related to the minority member, to provide marketing and administrative services for the sale of distillers grains. The agreement commenced March 8, 2002, with a current expiration date of March 8, 2012, renewing for five-year terms unless terminated by either party with 90 days notice prior to expiration. The agreement provides for an agency relationship in that POET Nutrition does not take title to the distillers grains but acts as a broker on behalf of the Company.
(continued on next page)
11
NORTHERN GROWERS, LLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
There were no other changes to other agreements during this period. Minimum payments related to the management and other agreements are summarized in the following table:
|
|
|
|
|
| Unconditional |
|
|
| |||||
Twelve Months Ending |
| Lease |
| Management |
| Purchase |
|
|
| |||||
September 30, |
| Agreements |
| Agreements |
| Agreements |
| Total |
| |||||
2008 |
|
| $ | 2,520 |
| $ | 547,509 |
| $ | 217,080 |
| $ | 767,109 |
|
2009 |
|
| 2,520 |
| 547,509 |
| 217,080 |
| 767,109 |
| ||||
2010 |
|
| 2,520 |
| 547,509 |
| 217,080 |
| 767,109 |
| ||||
2011 |
|
| 2,572 |
| 547,509 |
| 217,080 |
| 767,161 |
| ||||
2012 |
|
| 2,646 |
| 509,607 |
| 144,720 |
| 656,973 |
| ||||
2013-2100 |
|
| 366,346 |
| 1,297,189 |
| — |
| 1,663,535 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
| $ | 379,124 |
| $ | 3,996,832 |
| $ | 1,013,040 |
| $ | 5,388,996 |
|
Corn Delivery – On August 9, 2005, POET Biorefining - Big Stone agreed to release Northern Growers and, accordingly, all of its members from delivering corn to the plant starting on January 1, 2006. Prior to January 1, 2006, Northern Growers’ members were obligated to deliver corn to the plant unless the plant released the member from the member’s corn delivery obligation. Effective January 1, 2006, however, Northern Growers’ members are no longer obligated to deliver corn to the plant. Instead, the plant purchases all of its corn from local corn producers and the open market. In addition, POET Biorefining - Big Stone agreed to honor all member forward contracts for 2006 delivery if the contract was written by September 15, 2005.
Incentive Revenue - - The Company previously received incentive payments from the United States Department of Agriculture (USDA) for the use of corn to produce ethanol. The program ended June 30, 2006. The USDA had set the annual maximum not to exceed $7,500,000 for each eligible producer. The incentive was calculated on the USDA fiscal year of October 1 to September 30. Revenue of $31,385, $26,835 and $1,064,644 has been earned for the USDA program years ended September 30, 2006, 2005 and 2004, respectively. Incentive revenue of $0 and $8,552 was recorded for the nine months ended September 30, 2007 and 2006, respectively, for this program due to the variability of program rules for payout ratios.
The Company also receives an incentive payment from the State of South Dakota to produce ethanol. In accordance with the terms of this arrangement, revenue is recorded based on ethanol sold. The State of South Dakota has set a maximum of up to $1,000,000 per year for this program per qualifying producer. The Company has earned $250,000, $750,000 and $776,333 for the program years ended June 30, 2008, 2007 and 2006, respectively. Incentive revenue of $500,000 and $526,332 was recorded for the nine months ended September 30, 2007 and 2006, respectively, for this program.
Legal Proceedings – The Company is involved in various legal actions arising in the normal course of business. Management is of the opinion that their outcome will not have a significant effect on the Company’s consolidated financial statements.
Capital Unit Trading - On March 8, 2004, Northern Growers’ members and non-members began trading Northern Growers capital units on an alternative trading system operated by Alerus Securities Corporation of West Fargo, North Dakota.
Environmental Contingency - In January 2003, the Environmental Protection Agency (EPA) issued formal information requests to, among others, plants designed, constructed, and/or managed by POET Design and Construction and POET Plant Management. By virtue of the nature and timing of these requests, the Company’s plant became subject to these requests. The requests required that the subject plants provide the EPA with certain
(continued on next page)
12
NORTHERN GROWERS, LLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
data regarding emissions, presumably to determine whether the applicable plants were in compliance with the Clean Air Act. After this information was provided to the EPA, POET Design and Construction, on behalf of the Company and the subject plants managed by POET Plant Management, initiated discussions with the EPA regarding the application and use of testing methods for quantifying certain types of emissions emanating from these plants.
To date, no legal proceeding is pending with or threatened by the EPA, nor has POET Design and Construction resolved with the EPA the application and use of the proper testing method for quantifying emissions. If a proceeding were initiated or settlement reached with the EPA, fines and/or other penalties against the Company could result, the nature and scope of which is uncertain. While there is a reasonable possibility of fines and/or other penalties in the event of any proceeding or settlement, until the EPA and POET Design and Construction resolve the outstanding issues, the Company is unable to estimate the scope and magnitude of any possible fine or other penalty. Accordingly, the Company has not accrued any amount to its consolidated statement of operations relating to any potential claim.
NOTE 6 - DISTRIBUTIONS
During April 2006, POET Biorefining - Big Stone approved a $3,675,448 distribution, which it paid on May 1, 2006. Northern Growers received $2,835,976 and the minority member received $839,472. In conjunction with this cash distribution, on May 8, 2006, Northern Growers paid a distribution of $2,760,998 to its members of record as of March 31, 2006.
During July 2006, POET Biorefining - Big Stone approved a $10,899,284 distribution, which it paid on August 2, 2006. Northern Growers received $8,409,888 and the minority member received $2,489,396. In conjunction with this cash distribution, on August 7, 2006, Northern Growers paid a distribution of $8,359,696 to its members of record as of June 30, 2006.
During October 2006, POET Biorefining - Big Stone approved an $11,000,000 distribution, which it paid on October 30, 2006. Northern Growers received $8,487,600 and the minority member received $2,512,400. In conjunction with this cash distribution, on November 6, 2006, Northern Growers paid a distribution of $8,337,419 to its members of record as of September 30, 2006.
During January 2007, POET Biorefining - Big Stone approved an $11,000,000 distribution, which it paid on January 26, 2007. Northern Growers received $8,487,600 and the minority member received $2,512,400. In conjunction with this cash distribution, on January 29, 2007, Northern Growers retained $1,699,904 by a super majority vote of the Board of Managers, and paid a distribution of $6,787,696 to its members of record as of December 31, 2006. The above distributions are recorded as a liability as of December 31, 2006.
During April 2007, POET Biorefining - Big Stone approved a $9,000,000 distribution, which it paid on April 24, 2007. Northern Growers received $6,944,400 and the minority member received $2,055,600. In conjunction with this cash distribution, on April 25, 2007, Northern Growers retained $499,961 by a super majority vote of the Board of Managers, and paid a distribution of $6,444,439 to its members of record as of March 31, 2007. The above distributions are recorded as a liability as of March 31, 2007.
During July 2007, POET Biorefining - Big Stone approved a $5,300,000 distribution, which it paid on July 27, 2007. Northern Growers received $4,089,480 and the minority member received $1,210,520. In conjunction with this cash distribution, on August 2, 2007, Northern Growers retained $256 and paid a distribution of $4,089,224 to its members of record as of June 30, 2007. The above distributions are recorded as a liability as of June 30, 2007.
(continued on next page)
13
NORTHERN GROWERS, LLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - CAPITAL UNITS
On June 20, 2005, Northern Growers approved a four-for-one (4-for-1) capital unit split of its Class A capital units, effective for September 1, 2005. Under the terms of the Class A capital units’ split, members of record as of September 1, 2005 received four capital units for each one capital unit held in Northern Growers.
On June 2, 2006, Northern Growers approved a two-for-one (2-for-1) capital unit split of its Class A capital units, effective for July 1, 2006. Under the terms of the Class A capital units’ split, members of record as of July 1, 2006 received two capital units for each one capital unit held in Northern Growers.
Prior period financial statements have been restated to reflect the capital unit splits stated above.
NOTE 8 – SUBSEQUENT EVENTS
The $4.3 million note with US Bank, which was issued on September 21, 2007 to finance additional grain storage and handling equipment, was funded in full on October 5, 2007.
The final payment on the Company’s Design/Build Agreement with POET Design and Construction to expand the name-plate production capacity of the plant from 40 million gallons of ethanol annually to 75 million gallons of ethanol annually, as well as to make certain capital improvements to the plant for the incorporation of new raw starch technology, was made on October 26, 2007 for $297,883. The final cost of construction and improvements for both projects is $42,331,892.
The Company has an agreement with the co-owners of the Big Stone Plant, Otter Tail Corporation, Montana-Dakota Utilities Co. and Northwestern Public Service, for the use of the Big Stone Plant's steam resulting from its manufacturing process. On October 25, 2007, the Big Stone Plant suspended operations for approximately six weeks for its preventative maintenance program, consequently increasing our reliance on natural gas. The Company’s production will be slowed down during this period by approximately 33% to compensate for lack of the Company's natural gas flow capacity.
14
Item 2. Management’s Discussion and Analysis of Results of Operations.
Forward-Looking Statements
The information in this quarterly report on Form 10-Q for the three and nine month period ended September 30, 2007, (including reports filed with the Securities and Exchange Commission (the “SEC” or “Commission”), contains “forward-looking statements” that deal with future results, expectations, plans and performance, and should be read in conjunction with the consolidated financial statements and Annual Report on Form 10-K for the year ended December 31, 2006. Forward-looking statements may include statements which use words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “predict,” “hope,” “will,” “should,” “could,” “may,” “future,” “potential,” or the negatives of these words, and all similar expressions. Forward-looking statements involve numerous assumptions, risks and uncertainties. Actual results or actual business or other conditions may differ materially from those contemplated by any forward-looking statements. Factors that could cause actual results to differ materially from the forward-looking statements are identified in our Form 10-K for the year ended December 31, 2006.
We are not under any duty to update the forward-looking statements contained in this report, nor do we guarantee future results or performance or what future business conditions will be like. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report.
2
Overview and Executive Summary
Northern Growers, LLC (“Northern Growers”) owns and manages a 77.16% interest in its subsidiary, POET Biorefining - Big Stone (POET Biorefining - Big Stone and Northern Growers are also collectively referred to as “we” “us” or “our”). Broin Investments I, LLC, owns the remaining minority interest in POET Biorefining - Big Stone. POET Biorefining - Big Stone owns and operates an ethanol plant (the “plant”) near Big Stone City, South Dakota. The plant produces fuel-grade ethanol and distillers grains through the processing of corn. In May 2007 the plant completed a major expansion, increasing its annual name-plate production capacity from 40 million gallons of ethanol and 156,000 tons of distillers grains to 75 million gallons of ethanol and 290,000 tons of distillers grains. Corn is supplied to the plant from purchases of corn on the local open market. The ethanol produced at the plant is sold to POET Ethanol Products (f/k/a as Ethanol Products), which subsequently markets and sells the ethanol to gasoline blenders and refineries located throughout the continental United States. Distillers grains, a livestock feed product, are sold through POET Nutrition (f/k/a Dakota Gold Marketing), which markets and sells the product to livestock feeders primarily located in the United States.
Our operating and financial performance is largely driven by the prices at which we sell ethanol and distillers grains and the costs related to production. Federal and state government incentive programs, unlike prior to 2005, are now an immaterial source of revenue and income. The price of ethanol is generally influenced by factors such as supply and demand, prices of unleaded gasoline and the petroleum markets, weather, and government policies and programs. The price of distillers grains is generally influenced by supply and demand, and the price of corn, soybean meal and other protein-based feed products. Our two largest costs of production are corn and natural gas, although the plant’s use of natural gas is offset by the use of steam supplied from the adjacent Big Stone Plant, a coal fired, electrical generating facility located immediately adjacent to the plant. The cost of natural gas and corn is generally impacted by factors such as supply and demand, weather, government policies and programs, and our risk management program used to protect against the price volatility of these commodities.
Our net income decreased by approximately $8.7 million from the three months ended September 30, 2006 to the three months ended September 30, 2007, and by $17.2 million from the nine months ended September 30, 2006 to the nine months ended September 30, 2007. Despite a 35 million gallon increase in our plant’s name-plate production capacity following the completion of an expansion in May, net income still decreased between periods because of an increase in corn costs and a decrease in ethanol prices. Corn costs were primarily affected by a 69% increase in the price of corn between quarters and a 67% increase between the nine month periods. The price increase was mainly driven by an increase in demand for corn from new and expanding ethanol plants and increases in the price of other agricultural commodities such as soybeans and wheat.
We expect the downward trend in net income to continue for the foreseeable future. Accordingly, cash distributions to our members will be curtailed during this time, as we preserve our cash for payment of expenses, such as corn, energy, and production costs. The primary driving force of the income trend is the declining price of ethanol.
3
Since the end of the third quarter 2007, the price of ethanol has declined sharply by approximately 16%, the price being adversely impacted by the existing oversupply in the market. Currently, 130 ethanol biorefineries nationwide have a capacity to produce more than 6.8 billion gallons annually. Another 76 biorefineries are under construction and ten are expanding, which will add more than 6.7 billion gallons of new production capacity in 2009. At the same time, however, demand for ethanol through the opening of new markets is expected to remain sluggish, especially in the East and Southeast. Unless U.S. Congress adopts an amendment to the current Renewable Fuels Standard (RFS), we anticipate that the demand and supply imbalance will continue through the end of 2008. While the U.S. Senate passed a bill in June requiring that 13 billion gallons of ethanol be in use by 2013 and 36 billions by 2022, on top of the current mandate of 7.5 billion gallons of ethanol in use by 2012, it is uncertain whether this or a similar bill will become law. In addition, although the corn yield for the 2007 harvest season is expected to be very favorable given the number of acres planted and fortunate good weather, we do not anticipate that the improved corn yield will positively affect the corn price and, therefore, provide any material improvement on our margins.
Results of Operations
Comparison of the three months ended September 30, 2007 and 2006
The following table presents, for the periods indicated, the relative composition of selected income data:
|
| Quarter Ended September 30, |
| ||||||
|
| 2007 |
| 2006 |
| ||||
|
| $ |
| % |
| $ |
| % |
|
Revenues: |
|
|
|
|
|
|
|
|
|
Ethanol |
| 34,589,824 |
| 86 | % | 30,720,882 |
| 88 | % |
Distillers Grains |
| 5,360,277 |
| 13 | % | 3,909,394 |
| 11 | % |
Incentive |
| 250,000 |
| 1 | % | 266,044 |
| 1 | % |
Total |
| 40,200,101 |
| 100 | % | 34,896,320 |
| 100 | % |
|
|
|
|
|
|
|
|
|
|
Cost of Revenues |
| 31,397,187 |
| 78 | % | 14,732,663 |
| 42 | % |
|
|
|
|
|
|
|
|
|
|
General and Administrative Expenses |
| 1,301,200 |
| 3 | % | 1,815,977 |
| 5 | % |
|
|
|
|
|
|
|
|
|
|
Other Operating Income (Expense) |
| (746,316 | ) | (2 | )% | (250,047 | ) | (1 | )% |
|
|
|
|
|
|
|
|
|
|
Minority Interest |
| (1,549,455 | ) | (4 | )% | (4,137,618 | ) | (12 | )% |
|
|
|
|
|
|
|
|
|
|
Net Income |
| 5,205,923 |
| 13 | % | 13,960,015 |
| 40 | % |
4
Revenues - Revenue increased $5.3 million, or 15%, to $40.2 million for the three months ended September 30, 2007 from $34.9 million for the three months ended September 30, 2006. Revenues increased due to an increase in sales of ethanol and distillers grains.
Revenue from the sale of ethanol increased $3.9 million, or 13%, to $34.6 million for the three months ended September 30, 2007 from $30.7 million for the three months ended September 30, 2006. The increase was primarily driven by a 52% increase in sales volume between periods, offset by a 26% decrease in the average sales price per gallon. Additional sales were made possible because more ethanol was available for sale following the completion of our plant expansion. Ethanol prices, however, decreased between periods due to an excess supply of ethanol in the market.
Revenue from the sale of distillers grains increased $1.5 million, or 37%, to $5.4 million for the three months ended September 30, 2007 from $3.9 million for the three months ended September 30, 2006. The increase was primarily driven by an increase in sales volume and an increase in sales price per ton. Like ethanol, sales increased due to an increase in plant production following our plant expansion. The price of distillers grains increased in parallel with increases in the price of corn and soybean meal.
Cost of Revenues - Cost of revenues, which includes production expenses, increased $16.7, or 113%, to $31.4 million for the three months September 30, 2007 from $14.7 million for the three months ended September 30, 2006. The increase was primarily due to a 97% increase in corn costs per bushel between periods and a 49% increase in production volume, offset by a 7% decrease in energy costs per gallon. Depreciation and maintenance and repairs expenses also contributed to the increase.
The 97% increase in corn costs per bushel was primarily the result of an increase in market prices. The market price continued to be adversely impacted by low corn carryout from 2006 and from very strong demand from the ever-growing ethanol industry. While we expect the corn yield from the 2007 harvest to be positive, we believe that corn prices are not likely to decrease significantly and alter the current trend.
The 7% decrease in energy costs per gallon was primarily due to a 19% decrease in natural gas costs per unit. Natural gas cost decreased because of above average inventories in storage nationwide. We anticipate, however, that our natural gas costs will increase in the fourth quarter due to an increase in natural gas usage. Costs will increase because our use of steam from Big Stone Plant will be unavailable for at least six weeks due to a maintenance shut down at Big Stone Plant, consequently increasing our reliance on our boilers for steam production. Our plant’s production will be slowed down during this period by approximately 33% to compensate for lack of natural gas flow capacity.
Depreciation expense on production assets increased by 100% between periods due to our plant expansion. Expansion also increased our maintenance and repairs expense by 117%.
5
General and Administrative Expenses - General and administrative expenses decreased $520,000, or 28%, to $1.3 million for the three months ended September 30, 2007 from $1.82 million for the three months ended September 30, 2006. The decrease was primarily due to a decrease in management incentive fees and costs, which resulted from a decrease in net income.
Net Income - Net income decreased $8.7 million, or 63%, to $5.2 million for the three months ended September 30, 2007 from $13.9 million for the three months ended September 30, 2006. This change was caused primarily by, as discussed above, an increase in corn costs, offset by an increase in revenues from the sale of ethanol following our expansion.
Comparison of the nine months ended September 30, 2007 and 2006
The following table presents, for the periods indicated, the relative composition of selected income data:
|
| Nine Months Ended September 30, |
| ||||||
|
| 2007 |
| 2006 |
| ||||
|
| $ |
| % |
| $ |
| % |
|
Revenues: |
|
|
|
|
|
|
|
|
|
Ethanol |
| 92,116,005 |
| 86 | % | 79,899,456 |
| 86 | % |
Distillers Grains |
| 14,754,732 |
| 14 | % | 12,245,999 |
| 13 | % |
Incentive |
| 500,000 |
| 0 | % | 534,884 |
| 1 | % |
Total |
| 107,370,737 |
| 100 | % | 92,680,339 |
| 100 | % |
|
|
|
|
|
|
|
|
|
|
Cost of Revenues |
| 85,127,185 |
| 79 | % | 48,112,452 |
| 52 | % |
|
|
|
|
|
|
|
|
|
|
General and Administrative Expenses |
| 3,730,742 |
| 3 | % | 4,489,727 |
| 5 | % |
|
|
|
|
|
|
|
|
|
|
Other Operating Income (Expense) |
| (1,500,230 | ) | (1 | )% | (722,448 | ) | (1 | )% |
|
|
|
|
|
|
|
|
|
|
Minority Interest |
| (3,928,290 | ) | (4 | )% | (9,013,122 | ) | (10 | )% |
|
|
|
|
|
|
|
|
|
|
Net Income |
| 13,084,290 |
| 12 | % | 30,342,590 |
| 33 | % |
Revenues - Revenue increased $14.7 million, or 16%, to $107.4 million for the nine months ended September 30, 2007 from $92.7 million for the nine months ended September 30, 2006. Total revenues increased due to an increase in revenue from the sale of ethanol and distillers grains.
Revenue from the sale of ethanol increased $12.2 million, or 15%, to $92.1 million for the nine months ended September 30, 2007 from $79.9 million for the nine
6
months ended September 30, 2006. The increase was generated by a 23% increase in sales volume, which principally resulted from a 22% increase in production volume during the third quarter following our plant expansion, offset by a 6% decrease in the average sales price per gallon.
Revenue from the sale of distillers grains increased $2.6 million, or 20%, to $14.8 million for the nine months ended September 30, 2007 from $12.2 million for the nine months ended September 30, 2006. The increase was primarily driven by an increase in sales volume and an increase in sales price per ton.
Cost of Revenues - Cost of revenues, including production expenses, increased $37 million, or 77%, to $85.1 million for the nine months September 30, 2007 from $48.1 million for the nine months ended September 30, 2006. Cost of revenues increased between periods due to a 22% increase in production volume of ethanol and an 86% increase in the cost of corn per bushel, offset by a 7% decrease in energy costs per gallon.
The 86% increase in corn costs per bushel was primarily the result of an increase in market prices between periods. The market price continued to be impacted adversely by low corn carryout from 2006, in contrast to an extremely high corn carryout in 2006. The price of corn was also affected by an increase in demand for corn from the ethanol industry, as ethanol production in 2007 grew exponentially compared to in 2006.
Although corn costs increased between periods, our energy costs decreased between periods. Energy costs per gallon decreased primarily due to a 16% decrease in the cost of natural gas per unit from the nine months ended September 30, 2006 to the nine months ended September 30, 2007. Natural gas cost decreased due to above average inventories in storage nationwide.
Depreciation expense on production assets increased by 69% between periods due principally to our expansion in the third quarter. Expansion also increased our maintenance and repairs expense by 114%.
General and Administrative Expenses - General and administrative expenses decreased $760,000, or 17%, to $3.73 million for the nine months ended September 30, 2007 from $4.49 million for the nine months ended September 30, 2006. The decrease was primarily due to a decrease in management incentive fees and costs, which resulted from a decrease in net income.
Net Income - Net income decreased $17.2 million, or 57%, to $13.1 million for the nine months ended September 30, 2007 from $30.3 million for the nine months ended September 30, 2006. This change was caused primarily by, as discussed above, an increase in corn costs and production volume, offset by an increase in revenues from the sale of ethanol.
Liquidity and Capital Resources
7
Our primary sources of liquidity are cash provided by operations and borrowings under our $8.0 million and $9.0 million revolving credit facilities which are discussed below under “Indebtedness.” Net working capital, which includes the amount that may be borrowed under the $8.0 million revolving note, was $24.0 million as of September 30, 2007, compared to $7.9 million as of September 30, 2006.
The following table shows the cash flows between the nine months ended September 30, 2007 and the nine months ended September 30, 2006:
|
| Nine Months Ended |
| ||||
|
| 2007 |
| 2006 |
| ||
|
| $ |
| $ |
| ||
Net cash from operating activities |
| $ | 26,333,436 |
| $ | 32,997,894 |
|
Net cash (used for) investing activities |
| $ | (17,970,016 | ) | $ | (20,867,258 | ) |
Net cash (used for) financing activities |
| $ | (10,528,280 | ) | $ | (20,201,304 | ) |
Cash Flow From Operating Activities - Net cash flow from operating activities decreased $6.7 million between periods, principally due to a decrease in cash provided by net income between periods, offset by an increase in cash provided by inventory. Ethanol inventory decreased 53% from 2006 to 2007 due to a decrease in the number of gallons in inventory and decrease in the net realizable value.
Cash Flow From Investing Activities - Net cash flow used for investing activities decreased $2.9 million between periods, primarily due to a decrease in payments for property and equipment on the plant’s expansion and BPX™ project. The total cost of the plant’s expansion and BPX™ project is $42.3 million, of which $33 million is financed with debt from our lender and the remainder with cash from operations.
Cash Flow From Financing Activities - Net cash used for financing activities decreased by $9.7 million between periods, primarily due to the receipt of $14.0 million from our lender to pay for the plant’s expansion, BPX™ project and grain bin expansion. The $14.0 million increase was offset by a $4.5 million increase in distributions paid to Northern Growers’ members and the minority member of POET Biorefining – Big Stone.
We believe that cash flows from operations and our revolving debt will be sufficient to meet our expected capital and liquidity requirements for the foreseeable future. However, because we anticipate less cash flow from operations due to ethanol market conditions, we may rely more on our revolving debt to fund operations. Until we see an improvement in ethanol market conditions, we do not anticipate paying distributions to our members.
Indebtedness
We have six notes and loans outstanding under our current loan agreement with our lender, US Bank: 1) a $33.0 million term note; 2) a $15.8 million fixed-rate note; 3) a $3.9 million variable-rate, non-revolving note; 4) an $8 million variable rate, revolving
8
note; 5) a $9 million variable rate, revolving note; and 6) a $4.3 million variable rate note.
The $8 million note permits us to borrow, on a revolving basis, the difference between the unpaid principal balance and $8 million. We had $8 million available for use as of September 30, 2007. The principal purpose of this revolver is to cover the cost of non-corn related items at the plant at any time.
The $9 million note, which was issued on September 21, 2007, permits us to borrow, on a revolving basis, the difference of the outstanding principal amount and the lesser of the borrowing base or $9.0 million. The borrowing base is defined as 75% of the total of the fair market value of the outstanding inventory, eligible accounts receivable, and hedging accounts at fair market value. The principal purpose of this revolver is to cover the cost of purchasing corn during a time of tightened margins, which is expected to occur in the fourth quarter and into 2008. We had $9 million available for use as of September 30, 2007.
The $33 million term note, which was converted from a construction note on August 31, 2007, is subject to two interest rate arrangements. The notional amount ($16.5 million as of September 30, 2007) is subject to, under an interest rate swap agreement, (see also Item 7A below-”Quantitative and Qualitative Disclosures About Market Risk”) a fixed rate of 7.98%, due monthly, until maturity on August 30, 2014, while the remaining amount is subject to a variable rate of one-month LIBOR plus 2.75%, adjusted and due monthly (8.315% at September 30, 2007). A principal payment of $825,000 is due quarterly, which will begin on November 30, 2007.
The principal balance outstanding on the $15.8 million fixed-rate note (6.38%) was $12.77 million as of September 30, 2007. Principal payments of $324,064 and $963,820 were made on this note during the quarter and nine months ended September 30, 2007, respectively.
The principal balance outstanding on the $3.9 million variable rate (8.25 %) non-revolving loan was $2.93 million as of September 30, 2007. Principal payments of $97,500 and $292,500 were made on this note during the quarter and nine months ended September 30, 2007, respectively.
The $4.3 million note, which was issued on September 21, 2007 and funded to us in full on October 5, 2007 to finance the purchase of additional grain storage and handling equipment, is subject to a variable rate of LIBOR plus 3.00%, adjusted and due monthly. A principal payment of $154,000 is due quarterly, which was begun on October 31, 2007.
All of loans and notes outstanding are secured by our tangible and intangible property, including a leasehold interest, easement rights, improvements, equipment, personal property, accounts receivable, inventory and contracts. In addition to standard covenants and conditions in the amended and restated loan agreement, we are subject to certain conditions and covenants which are discussed in our Form 10-K for the year ended December 31, 2006, one of which was amended on September 21, 2007. Under the amendment, the working capital requirement increases from $7.5 million to $10
9
million on October 1, 2007. We were in compliance with all conditions and covenants under our loan agreement with US Bank as of September 30, 2007 and the date of this filing.
Off-Balance Sheet Arrangements
We do not use or have any material off-balance sheet financial arrangements.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” to increase consistency and comparability in fair value measurements by defining fair value, establishing a framework for measuring fair value in generally accepted accounting principles, and expanding disclosures about fair value measurements. SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We are continuing to evaluate the effect that the adoption of SFAS No. 157 will have on our consolidated results of operations and financial condition.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 provides entities with an option to report certain financial assets and liabilities at fair value – with changes in fair value reported in earnings – and requires additional disclosures related to an entity’s election to use fair value reporting. It also requires entities to display the fair value of those assets and liabilities for which the entity has elected to use fair value on the face of the balance sheet. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We are in the process of evaluating the effect that the adoption of SFAS No. 159 will have on our consolidated results of operations and financial condition.
Critical Accounting Policies and Estimates
Preparation of our financial statements require estimates and judgments to be made that affect the amounts of assets, liabilities, revenues and expenses reported. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. We continually evaluate these estimates based on historical experience and other assumptions we believe to be reasonable under the circumstances.
The difficulty in applying these policies arises from the assumptions, estimates and judgments that have to be made currently about matters that are inherently uncertain, such as future economic conditions, operating results and valuations as well as management intentions. As the difficulty increases, the level of precision decreases, meaning that actual results can and probably will be different from those currently estimated. Of the significant accounting policies described in the notes to the financial statements, we believe that the following may involve a higher degree of estimates, judgments, and complexity:
10
Commitments and Contingencies. Contingencies, by their nature, relate to uncertainties that require management to exercise judgment both in assessing the likelihood that a liability has been incurred, as well as in estimating the amount of the potential expense. In conformity with accounting principles generally accepted in the United States, we accrue an expense when it is probable that a liability has been incurred and the amount can be reasonably estimated.
Inventory Valuation. We account for corn inventory at estimated net realizable market value. Corn is an agricultural commodity that is freely traded, has quoted market prices, may be sold without significant further processing, and has predictable and insignificant costs of disposal. We derive our estimates from local market prices determined by grain terminals in our area. Changes in the market value of corn inventory are recognized as a component of cost of revenues. Ethanol and distillers grains are stated at net realizable value. Work-in-process, chemical and parts inventory are stated at an average cost method.
Revenue Recognition. Revenue from the production of ethanol and related products is recorded when title transfers to customers, net of allowances for estimated returns. Interest income is recognized when earned.
Revenue from federal and state incentive programs is recorded when we have produced or sold the ethanol and satisfied the reporting requirements under each applicable program.
Long-Lived Assets. Depreciation and amortization of our property, plant, and equipment is provided on the straight-line method by charges to operations at rates based upon the expected useful lives of individual or groups of assets. Economic circumstances or other factors may cause management’s estimates of expected useful lives to differ from actual.
Long-lived assets, including property, plant and equipment, and investments are evaluated for impairment on the basis of undiscounted cash flows whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impaired asset is written down to our estimated fair market value based on the best information available. Considerable management judgment is necessary to estimate discounted future cash flows and may differ from actual cash flows.
Accounting for Derivative Instruments and Hedging Activities. We enter into derivative instruments to hedge our exposure to price risk related to forecasted corn and natural gas purchases, forward corn purchase contracts and forecasted ethanol sales. We do not typically enter into derivative instruments other than for hedging purposes. All derivative contracts are recognized on the September 30, 2007 and December 31, 2006 balance sheets at their fair market value. Currently, none of the derivative instruments are classified as cash-flow hedges for accounting purposes.
11
On the date the derivative instrument is entered into, we designate the derivative as either (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge), (2) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge) or (3) will not designate the derivative as a hedge. Changes in the fair value of a derivative that is designated as and meets all the required criteria for a fair value hedge, along with the gain or loss on the hedged asset or liability that is attributable to the hedged risk, are recorded in current period earnings. Changes in the fair value of a derivative that is designated as and meets all the required criteria for a cash flow hedge are recorded in accumulated other comprehensive income and reclassified into earnings as the underlying hedged item affects earnings. Changes in the fair value of a derivative that is not designated as a hedge are recorded in current period earnings.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to the impact of market fluctuations associated with commodity prices and interest rates as discussed below. We have no exposure to foreign currency risk as all of our business is conducted in U.S. Dollars. We use derivative financial instruments as part of an overall strategy to manage market risk. Specifically, we use forward, futures and option contracts to hedge changes to the commodity prices of corn and natural gas, as well as interest rate swaps to hedge against changes in interest rates. However, we do not enter into these derivative financial instruments for trading or speculative purposes, nor do we designate these contracts as hedges for accounting purposes pursuant to the requirements of SFAS 133, Accounting for Derivative Instruments and Hedging Activities.
Commodity Price Risk
We produce ethanol and its co-product, distillers grains, from corn, and, as such, we are sensitive to changes in the price of corn. The price of corn is subject to fluctuations due to unpredictable factors such as weather, total corn planted and harvested acreage, changes in national and global supply and demand, and government programs and policies. We also use natural gas in the production process, and as such are sensitive to changes in the price of natural gas. The price of natural gas is influenced by such weather factors as heat or cold in the summer and winter, in addition to the threat of hurricanes in the spring, summer and fall. Other natural gas price factors include the domestic onshore and offshore rig count, and the amount of natural gas in underground storage during both the injection (April 1st – November 7th) and withdrawal (November 14th – March 31st) seasons. The price of distillers grains is principally influenced by the price of corn and soybean meal, competing protein feed products.
We attempt to reduce the market risk associated with fluctuations in the price of corn and natural gas by employing a variety of risk management strategies. Strategies include the use of derivative financial instruments such as futures and options initiated on the Chicago Board of Trade and/or the New York Mercantile Exchange, as well as the daily cash management of our total corn and natural gas ownership relative to our
12
monthly demand for each commodity, which may incorporate the use of forward cash contracts or basis contracts.
Corn is hedged with derivative instruments including futures and options contracts offered through the Chicago Board of Trade. Forward cash corn and basis contracts are also utilized to minimize future price risk. Likewise, natural gas is hedged with futures and options contracts offered through the New York Mercantile Exchange. Basis contracts are also utilized to minimize future price risk.
Gains and losses on futures and options contracts used as economic hedges of corn inventory, as well as on forward cash corn and basis contracts, are recognized as a component of cost of revenues for financial reporting on a monthly basis using month-end settlement prices for corn futures on the Chicago Board of Trade. Corn inventories are marked to fair value using market based prices so that gains or losses on the derivative contracts, as well as forward cash corn and basis contracts, are offset by gains or losses on inventories during the same accounting period.
Gains and losses on futures and options contracts used as economic hedges of natural gas, as well as basis contracts, are recognized as a component of cost of revenues for financial reporting on a monthly basis using month-end settlement prices for natural gas futures on the New York Mercantile Exchange. The natural gas inventories hedged with these derivatives or basis contracts are valued at the spot price of natural gas, plus or minus the gain or loss on the futures or options positions relative to the month-end settlement price on the New York Mercantile Exchange.
A sensitivity analysis has been prepared to estimate our exposure to commodity price risk The table presents the fair value of corn inventory, forward purchase contracts and open futures and option positions for corn and natural gas as of September 30, 2007 and September 30, 2006 and the potential loss in fair value resulting from a hypothetical 10% adverse change in corn and natural gas prices. The fair value of the positions is a summation of the fair values calculated by valuing each net position at quoted market prices as of the applicable date. The results of this analysis, which may differ from actual results, are as follows:
Year Ended |
| Fair Value |
| Effect of Hypothetical |
| ||
September 30, 2007 |
| $ | 3,708,867 |
| $ | 370,887 |
|
September 30, 2006 |
| $ | 16,856,325 |
| $ | 1,685,633 |
|
Interest Rate Risk
Our interest rate risk exposure pertains primarily to our variable rate, long-term debt. Specifically, we had $19.43 million in variable rate, long-term debt outstanding as of September 30, 2007, or approximately 40% of our total indebtedness. The interest rate on $2.93 million of the variable rate, long-term debt is US Bank’s prime rate, which was 8.25% as of September 30, 2007. The variable rate on the $16.748 million portion of the
13
term note was 8.315% (One-Month LIBOR plus 2.75%) as of September 30, 2007. We manage our interest rate risk by monitoring the effects of market changes on the interest rates and using fixed-rate debt whenever possible and using the interest rate swap agreement on the term note.
In order to achieve a fixed interest rate on a portion of our $33.0 term note, we entered into an interest rate swap agreement with US Bank. The swap agreement covers a seven-year term financing period through August 30, 2014. This agreement assists us in protecting against exposure to increases in interest rates and fixes the interest rate at 7.98% on the notional amount ($16.5 million as of September 30, 2007). The remaining amount, $16.5 million, is subject to a variable rate of One-Month LIBOR plus 2.75%. While our exposure is now reduced, there is no assurance that the interest rate swap will provide us with protection in all scenarios. For example, under the swap agreement, when One-Month LIBOR plus 2.75% exceeds 7.98%, we receive payments for the difference between the market rate and the swap rate. Conversely, when the One-Month LIBOR plus 2.75% falls below 7.98%, we make payments for the difference.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our chief executive officer and chief financial officer and management, after evaluating the effectiveness of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this quarterly report, have concluded that the disclosure controls and procedures are effective in ensuring that material information required to be disclosed is included in the reports that it files with the Securities and Exchange Commission.
Changes in Internal Controls
There have been no changes in our internal controls over financial reporting that occurred during the three months ended September 30, 2007 that have materially affected, or are reasonably likely to materially affect, the internal controls over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 1A. Risk Factors.
During the quarter ended September 30, 2007, except as stated below, there were no material changes to the Risk Factors disclosed in Item 1A. to Part I of our 2006 Annual Report on our Form 10-K.
14
As ethanol production increases in the industry, the price of ethanol is expected to remain depressed or decrease further. According to the Renewable Fuels Association, domestic ethanol production capacity has increased steadily from 1.7 billion gallons per year in January 1999 to 7.02 billion gallons per year as of October 2007. Additionally, there is a significant amount of capacity being added to the ethanol industry. As of October 2007 approximately 6.4 billion gallons per year of production capacity is currently under construction at new and existing facilities. Of the 6.4 billion gallons, approximately 3.4 billion gallons are expected to come into production in the next seven to nine months with the remaining capacity coming into production in 2009. The added production capacity, however, is not being met equally with increased demand. As a result, the price of ethanol has decreased, and could decrease even further with new production coming on line in the near future. Since the third quarter ended September 30, 2007, for example, the price has decreased by 16%. If the current price of ethanol remains the same or decreases further, and our costs and expenses remain the same or increase, it is likely to have a material adverse effect on our business, results of operations and financial condition, including the curtailment of any distributions to our members.
We have limited natural gas available for operations and rely heavily on the adjacent Big Stone Power Plant. We rely on the adjacent Big Stone Power Plant to supply approximately 50% of the necessary steam for ethanol production and drying of distillers grains. Any time Big Stone Power Plant steam is unavailable, we rely on natural gas solely to generate steam for the production process. The natural gas supplied to our plant, however, is limited as the supply cannot fuel our plant to operate at its new name-plate production capacity following expansion. Thus, if Big Stone Power Plant shuts down for any prolonged period of time, our plant is unable to operate at full name-plate production capacity and must typically scale back production based on the amount of natural gas that can be supplied to the plant. During the fourth quarter of 2007, for instance, our plant will scale back production approximately 33% because Big Stone Power Plant will be shut down for approximately six weeks. Our financial condition and results of operations could suffer as a result.
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
15
None.
Item 6. Exhibits.
See Exhibit Index following the signature page to this report.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| NORTHERN GROWERS, LLC | ||
|
|
| |
Dated: November 9, 2007 |
|
| |
| By | /s/ Robert Narem |
|
|
| Robert Narem | |
|
| Chief Executive Officer and |
EXHIBIT INDEX
TO
FORM 10-Q
OF
NORTHERN GROWERS, LLC
Exhibit |
| Description |
2.1 |
| Plan of Reorganization (1) |
3.1 |
| Articles of Organization (2) |
3.2 |
| Fourth Amended and Restated Operating Agreement dated July 1, 2006 (3) |
4.1 |
| Form of Class A Unit Certificate(4) |
10.1 |
| Amendment to Amended and Restated Loan Agreement with US Bank dated September 21, 2007 |
10.2 |
| $9.0 Million Promissory Note with US Bank dated September 21, 2007 |
10.3 |
| $4.3 Million Promissory Note with US Bank dated September 21, 2007 |
10.4 |
| Mortgage in favor of US Bank dated September 21, 2007 |
31 |
| Rule 13a-14(a)/15d-14(a) Certification |
32 |
| Section 1350 Certification |
(1) Appendix A to registrant’s prospectus filed with the Commission on March 17, 2003.
(2) Appendix B to registrant’s prospectus filed with the Commission on March 17, 2003.
(3) Exhibit 3(ii)(a) to the registrant’s Form 8-K filed with the Commission on January 5, 2006.
(4) Exhibit 4.1 to the registrant’s Form S-4 filed with the Commission on July 26, 2002.
16