ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On February 18, 2009, we held the 2009 Annual Meeting of Members for the purpose of electing ten directors to the Board of Directors. Votes were solicited in person and by proxy. The initial Board of Directors was comprised of thirteen Directors. Two Directors resigned and were not replaced and the Board of Directors consisted of eleven Directors prior to the Annual Meeting of Members. In April 2007 Terry Hart resigned from the board and in February 2008 J. Harris Morgan resigned from the board. The initial term for these remaining eleven (11) Directors ended with the first annual or special meeting of the Members following the date on which substantial operations of our ethanol production facilities commence. Operations of the facilities commenced in October 2008; therefore, initial terms of the eleven Directors expired on February 18, 2009 at the 2009 Annual Meeting of the Members. Our board Secretary, Bryant Campbell did not stand for reelection and our Board of Directors decided to reduce the board size to ten Directors.
Pursuant to our Second Amended and Restated Operating Agreement, members of the Board of Directors were divided into three groups which serve staggered terms. The Board of Directors nominated the following persons for election as Directors: Murray Campbell, Tommy Hilliard, Steve Collins, Miley Adams, Thomas Dollar, II, John Johnson, Donald Shirah, Kenneth Hunnicutt, Robert Holden, Sr., and Michael Harrell. All nominees were incumbent Directors. The ten nominees who received the highest vote totals were elected as Directors of the Company at the 2009 Annual Meeting.
Each of the ten nominees was elected by a plurality vote of the members eligible to vote, to serve a term, which will expire in 2010, 2011 or 2012. There were 36,510 membership units represented in person or by proxy. The names of the ten Director nominees elected to serve on our Board of Directors, the number of votes each received and their respective terms are as follows:
We will be asking our members to vote on the election of directors at our 2010 members’ meeting, through the solicitation of proxies in a definitive proxy statement. The information required by Item 4 for solicitations, which will be submitted during the first quarter of fiscal year 2010, is incorporated by reference to our definitive proxy statement relating to our 2010 annual meeting of members. In accordance with Regulation 14A, we will be filing our definitive proxy statement no later than 120 days after the end of the last fiscal year. The 2010 annual meeting, at which voting on the proposed amendments and directors will take place, is scheduled for February 3, 2010.
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS ISSUER PURCHASES OF EQUITY SECURITIES.
As of September 30, 2009, we had 81,984 membership units outstanding and approximately 800 unit holders of record. There is no public trading market for our units.
However, in November 2008, we established a Unit Trading Bulletin Board, a private online matching service, in order to facilitate trading among our members. The Unit Trading Bulletin Board consists of an electronic bulletin board on our website that provides a list of interested buyers and a list of interested sellers, along with their non-firm price quotes. The Unit Trading Bulletin Board does not automatically effect matches between potential sellers and buyers and it is the sole responsibility of sellers and buyers to contact each other to make a determination as to whether an agreement to transfer units may be reached. We do not become involved in any purchase or sale negotiations arising from our Unit Trading Bulletin Board and have no role in effecting transactions beyond approval, as required under our operating agreement, and the issuance of new certificates. We do not give advice regarding the merits or shortcomings of any particular transaction. We do not receive, transfer or hold funds or securities as an incident of operating the Unit Trading Bulletin Board. In advertising our Unit Trading Bulletin Board, we do not characterize First United Ethanol as being a broker or dealer or an exchange. We do not use the Unit Trading Bulletin Board to offer to buy or sell securities other than in compliance with the securities laws, including any applicable registration requirements.
There are detailed timelines that must be followed under the Unit Trading Bulletin Board rules and procedures with respect to offers and sales of membership units, with which all transactions must comply. In addition, all transactions must comply with our operating agreement, and are subject to approval by our board of directors.
The following table contains historical information by quarter for the past two years regarding the actual unit transactions that were completed by the Company’s unit-holders during the periods specified. The Company believes providing this information is the way to most accurately represent the current trading value of the Company’s units. As of September 30, 2009, no unit transfers had been completed through our qualified matching service bulletin board.
The following table contains the bid and asked prices that were posted on the Company’s qualified matching service bulletin board and includes some transactions that were not completed. The Company believes the table above more accurately describes the trading value of its units as the bid and asked prices below include some offers that never resulted in completed transactions. The information was compiled by reviewing postings that were made on the Company’s qualified matching service bulletin board.
As a limited liability company, we are required to restrict the transfers of our membership units in order to preserve our partnership tax status. Our membership units may not be traded on any established securities market or readily traded on a secondary market (or the substantial equivalent thereof). All transfers are subject to a determination that the transfer will not cause First United Ethanol to be deemed a publicly traded partnership.
Our Board of Directors has adopted a Membership Unit Option Plan (the “Plan”). The Plan permits the company to grant unit options and units to its employees for up to two percent (2%) of the total number of units outstanding at the close of our registered offering, or 1,532 units. We believe that the awards will better align the performance goals of its employees with those of its members. Option awards are generally granted with an exercise price of $1,000 per unit, and they generally vest over three to five years of continuous service and have ten-year contractual terms. Certain option awards may provide for accelerated vesting if there is a change in control of the Company or the employee is terminated without cause. The following table summarizes the outstanding units pursuant to the option agreements, as of the date of this report:
In May 2009 we commenced a private placement offering where we sold 5,369 membership units in exchange for an aggregate offering price of $2,032,550. Our private placement offering expired on October 31, 2009; however, no sales were made after our fiscal year ended on September 30, 2009. We used the proceeds for working capital purposes, and for general corporate purposes, including purchases of raw materials. The sale of these membership units was deemed to be exempt from registration in reliance on Section 4(2) and Rule 506 of the Securities Act of 1933 as transactions by an issuer not involving a public offering. No underwriting discounts or commissions were paid in these transactions and we conducted no general solicitation in connection with the offer or sale of securities. The acquirers of our membership units made representations to us regarding their status as accredited investors as defined in Regulation D, or as investors with such knowledge and experience in financial and business matters that they were capable of evaluating the merits and risks of the investment (alone or with a purchaser representative), and their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof. Appropriate legends were affixed to unit certificates and instruments issued in such transactions. All acquirers were provided a private placement memorandum containing all material information concerning FUEL and the offering. On May 4, 2009, the same date we initiated our private placement offering, we suspended trading of our membership units. On October 14, 2009 we resumed trading of our membership units on our Unit Trading Bulletin Board.
We have not declared or paid any distributions on our units. Our board of directors and our lending syndicate control the timing and amount of distributions to our unit holders, however, our operating agreement requires the board of directors to endeavor to make cash distributions at such times and in such amounts as will permit our unit holders to satisfy their income tax liability in a timely fashion. Our expectations with respect to our ability to make future distributions are discussed in greater detail under “Item 7
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This report contains forward-looking statements that involve future events, our future performance and our expected future operations and actions. In some cases you can identify forward-looking statements by the use of words such as “may,” “will,” “should,” “anticipate,” “believe,” “expect,” “plan,” “future,” “intend,” “could,” “estimate,” “predict,” “hope,” “potential,” “continue,” or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions and involve numerous assumptions, risks and uncertainties. Our actual results or actions may differ materially from these forward-looking statements for many reasons, including the reasons described in this report. We are not under any duty to update the forward-looking statements contained in this report. We cannot guarantee future results, levels of activity, performance or achievements. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits, completely and with the understanding that our actual future results may be materially different from what we currently expect. We qualify all of our forward-looking statements by these cautionary statements.
Results of Operations
Comparison of Fiscal Years Ended September 30, 2009 and 2008
Revenues
During the fiscal year ended September 30, 2009, we transitioned from a development stage company to an operational company. Accordingly, we do not yet have comparable income, production and sales data for the year ended September 30, 2009, from our previous fiscal year.
Our revenues from operations come from two primary sources: sales of fuel ethanol and sales of distillers grains.
The following table shows the sources of our revenue for the fiscal year ended September 30, 2009.
Our ethanol revenue was approximately $135,900,000 for the fiscal year ended September 30, 2009. We sold approximately 79,500,000 gallons of ethanol during the fiscal year ended September 30, 2009 at an average price of $1.71 per gallon.
At the time we commenced plant operations in October 2008, we began marketing our ethanol in the south eastern United States. At that time we were the only ethanol plant distributing ethanol by truck to this market. Accordingly, our marketing agent and our staff developed the truck market for ethanol in the Southeast. Developing this market for our ethanol has taken time and effort, but we have succeeded in creating this market and are now shipping approximately 95 percent of our ethanol to the regional truck market. From October 2008 through June 2009, while we were developing this truck market for our ethanol, the entire ethanol industry experienced a decline in ethanol prices which, when combined with our market development activities, had a negative impact on our revenues. The drop in ethanol prices during this period is attributable to the weak economy in the United States which caused a reduction in the demand for oil and gasoline. A reduction in gasoline usage has a negative impact on the price we receive for our ethanol. Subsequent to our fiscal year ended September 30, 2009, ethanol prices have rebounded and our local truck market prices have enabled FUEL to produce positive operating margins which should be reflected in our fiscal quarter ending December 31, 2009.
We anticipate receiving higher ethanol prices during the summer months due to a seasonal increase in the demand for gasoline and ethanol. However, if the price of ethanol were to decrease and remain low for an extended period of time it would have significant negative impact on our liquidity, even if our raw material costs remain steady. We anticipate that the price of distillers grains will continue to fluctuate in reaction to changes in the price of corn and soybean meal. The ethanol industry needs to continue to expand the market for distillers grains in order to maintain current price levels.
Management anticipates that ethanol prices will continue to change in relation to changes in corn and energy prices. These prices have been somewhat volatile due to the uncertainty that we are experiencing in the overall economy which has been affecting commodities prices for the last year. Further, difficult weather conditions during the harvest in the fall of 2009 has resulted in increased corn prices which has positively impacted ethanol prices. Management believes that there will be a surplus of ethanol production capacity in the United States. Management believes this has resulted in several ethanol producers decreasing ethanol and distillers grains production or halting operations altogether. The amount of this idled ethanol production capacity has changed throughout our 2009 fiscal year as a result of changes in the spread between corn prices and ethanol prices. Ethanol producers decreasing or ceasing production has an effect on the supply of ethanol in the market which can positively impact the price of ethanol. Much of this idled ethanol capacity could come back online within a reasonably short period of time which could negatively impact ethanol prices. We anticipate that the ethanol industry must continue to grow demand for ethanol in order to support current ethanol prices and retain profitability in the ethanol industry.
A debate continues with respect to changes in the allowable percentage of ethanol blended with gasoline for use in standard (non-flex fuel) vehicles. Currently, ethanol is blended with conventional gasoline for use in standard vehicles to create a blend which is 10% ethanol and 90% gasoline. Estimates indicate that approximately 135 billion gallons of gasoline are sold in the United States each year. However, gasoline demand may be shrinking in the United States as a result of the global economic slowdown. Assuming that all gasoline in the United States is blended at a rate of 10% ethanol and 90% gasoline, the maximum demand for ethanol is 13.5 billion gallons per year. This is commonly referred to as the “blending wall,” which represents a theoretical limit where more ethanol cannot be blended into the national gasoline pool. This is a theoretical limit because it is believed that it would not be possible to blend ethanol into every gallon of gasoline that is used in the United States and it discounts the possibility of additional ethanol being used in higher percentage blends such as E85 used in flex fuel vehicles. Many in the ethanol industry believe that we will reach this blending wall in 2010 or 2011. The RFS mandate requires that 36 billion gallons of renewable fuels be used each year in the United States by 2022 which equates to approximately 27% renewable fuels used per gallon of gasoline sold. In order to meet the RFS mandate and expand demand for ethanol, management believes higher percentage blends of ethanol must be utilized in conventional automobiles. Such higher percentage blends of ethanol have continued to be a contentious issue. Automobile manufacturers and environmental groups are lobbying against higher percentage ethanol blends. State and federal regulations prohibit the use of higher percentage ethanol blends in conventional automobiles and vehicle manufacturers have indicated that using higher percentage blends of ethanol in conventional automobiles would void the manufacturer’s warranty. Without increases in the allowable percentage blends of ethanol, demand for ethanol may not continue to increase. Our financial condition may be negatively affected by decreases in the selling price of ethanol resulting from ethanol supply exceeding demand. Recently, the EPA has been considering allowing E15 to be used in standard vehicles. However, the EPA has delayed making a decision on E15 until sometime in 2010.
Our distillers grain revenue was approximately $30,300,000 for the fiscal year ended September 30, 2009. We produced approximately 214,039 tons of dried distillers grains and approximately 7,342 tons of wet distillers grains. Our average selling price for our dried distillers grains and our wet distillers grains for our fiscal year ended September 30, 2009 was approximately $140 per ton and $51 per ton, respectively.
Just as we developed the truck market for our ethanol, we developed the local truck market for our distillers grains. At the time we commenced plant operations in October 2008, we were the only facility in the southeastern United States selling distillers grains delivered by truck to poultry and other livestock producers. Developing this market for our distillers grains has been a challenge as many poultry and other livestock producers have not historically incorporated distillers grains into their feed rations. However, the use of distillers grains in feed rations has become widespread in our local market area and we are now shipping approximately 90 percent of our distillers grains to the regional truck market at favorable market prices. Furthermore, the poultry producers using our distillers grains have become accustomed to using our distillers grains in their rations and are developing rations that contain increasingly higher percentages of our distillers grains.
Management believes that the market prices for distillers grains change in relation to the prices of other animal feeds, such as corn and soybean meal. As a result of the current economic situation and its effect on commodities prices, we experienced a significant decrease in the market prices of corn and soybean meal starting in the middle of 2008. This resulted in a significant decrease in distillers grains prices. We believe that the negative effect lower corn and soybean meal prices had on market distillers grains prices was somewhat offset by decreased distillers grains production by the ethanol industry during our 2009 fiscal year. Management believes that several ethanol producers decreased ethanol and distillers grains production or ceased production altogether during 2009 as a result of unfavorable operating conditions. Management believes this resulted in decreased distillers grains production which we believe had a positive impact on the market price of distillers grains which somewhat offset price decreases resulting from lower corn and soybean meal prices.
On November 2, 2009, we reached an Amended Carbon Dioxide Supply Agreement with Airgas Carbonic, Inc. (“Airgas”) with an effective date of May 15, 2009. Pursuant to the agreement, Airgas is constructing a carbon dioxide facility to purify, liquefy, refine and store carbon dioxide produced by FUEL as a co-product of its ethanol production process. The carbon dioxide facility is being constructed on land leased by FUEL to Airgas and is expected to be complete in summer 2010. Once the new carbon dioxide facility is operational, we expect our carbon dioxide to be another source of revenue for our company.
Cost of Goods Sold and Gross Loss
Our cost of goods sold was $178,695,057 or 107.3% of our revenues for the fiscal year ended September 30, 2009. Our two primary costs of producing ethanol and distillers grains are the cost of corn and natural gas. Approximately 74% of our cost of goods sold is attributable to corn costs and approximately 10% is attributable to natural gas costs. Corn prices reached historical highs in June 2008 prior to the date we commenced plant operations, but have come down sharply since that time as stronger than expected corn yields materialized and the global financial crisis brought down the prices of most commodities. We expect continued volatility in the price of corn, which could significantly impact our cost of goods sold. Our average price paid for our corn feedstock for the fiscal year ended September 30, 2009 was approximately $4.48 per bushel.
During our fiscal year ended September 30, 2009 we were able to purchase approximately 7,000,000 bushels of corn from local producers and we expect to purchase approximately 10,000,000 bushels from local producers during our fiscal year ending September 30, 2010. By purchasing corn from local producers we are able to save on freight expense compared to corn delivered to our facility by rail from the Midwest. We expect the local corn producers to respond to the demand for corn created by our facility since we commenced operations in October 2008. Therefore, we also expect to be capable of procuring an increasing percentage of our corn from local producers.
Our other costs of goods sold include denaturant, process chemicals, electricity, transportation, depreciation, hedging activity and direct labor. Together these costs represent approximately 16% of our cost of goods sold. We do not anticipate these costs to be as volatile as our corn and natural gas expenses. However, our transportation, electrical and denaturant costs are directly tied to the price of energy generally and, therefore, may fluctuate along with the price of petroleum based energy products. Cost of goods sold also includes a one time charge of $745,000 related to a lease impairment for tanker railcars not utilized in operations and under contract.
Recently corn prices have increased. Management attributes this increase in corn prices with unfavorable weather conditions that have existed during harvest time in the fall of 2009. Despite the fact that corn yields have been strong, uncertainty continues regarding the total amount and quality of corn that was produced during the 2009 crop year. If the corn harvested in the fall of 2009 is generally of poor quality, it might negatively impact the number of gallons of ethanol that can be produced per bushel of corn. Further, management anticipates that corn demand may increase in the near future should global economic conditions continue to improve. Should corn demand increase, it may result in further increases in the market price of corn.
General and Administrative Expenses
Our general and administrative expenses as a percentage of revenues were 3.1% for the fiscal year ended September 30, 2009. General and administrative expenses consist primarily of payroll, employee benefits, and professional fees. During our first year of operations we incurred significant professional fees in connection with the management of our credit agreement. During our fourth fiscal quarter ended September 30, 2009 we were able to reduce our expenses associated with managing our credit agreement and we expect our operating expenses to be significantly lower during our fiscal year ending September 30, 2010.
Other (Expense)
We had total other expense for the fiscal year ended September 30, 2009 of approximately $11,200,000, resulting primarily from our interest expense for the period. Interest expense for the period was approximately $10,100,000 which was exacerbated by an unrealized loss of approximately $1,100,000 for the change in fair value of our interest rate swap agreement.
Net (Loss)
Our net loss from operations for the fiscal year ended September 30, 2009 was approximately 17.1% of our revenues. This loss is primarily a result of negative operating margins due to the cost of our inputs relative to the revenue generated by the sale of our ethanol and distillers grains during our first fiscal year of operations. The negative operating margins experienced during our first year of operations can, in part, be attributed to our status as the first operating commercial scale ethanol plant in the Southeast and the fact that we had to develop local markets for our ethanol and distillers grains, which took time and aggressive pricing strategies to encourage the use of our products. Since commencing operations in October 2008, we have successfully created robust demand in our local markets and are now selling 95 percent of our ethanol and 90 percent of our distillers grains to the truck market in the southeastern United States. The development of these local markets for our products, our use of an increasing amount of local corn and a rebounding national demand for gasoline and ethanol have created favorable operating margins for our company in the first quarter of our fiscal year ending September 30, 2010.
Additional Information
The following table shows additional data regarding production and price levels for our primary inputs and products for the fiscal year ended September 30, 2009.
Changes in Financial Condition for Fiscal Years Ended September 30, 2009 and 2008
We experienced a decrease in our current assets at September 30, 2009 compared to our fiscal year ended September 30, 2008. We had approximately $7,700,000 less cash on hand at September 30, 2009 compared to September 30, 2008. However, we experienced an increase of approximately $3,100,000 in inventory at September 30, 2009 compared to September 30, 2008, primarily as a result of the commencement of operations at our plant. Additionally, at September 30, 2009 we had accounts receivable of approximately $4,100,000 compared to no accounts receivable at September 30, 2008.
Our net property and equipment was slightly lower at September 30, 2009 compared to September 30, 2008 as a result of additions of property and equipment, offset by our current year depreciation.
We experienced an increase in our total current liabilities at September 30, 2009 compared to September 30, 2008. The majority of the change is related to the fact that we experienced an increase of approximately $1,900,000 in our revolving line of credit at September 30, 2009 compared to September 30, 2008. We also experienced an increase of approximately $7,000,000 in the current portion of our long-term debt at September 30, 2009 compared to September 30, 2008. However, accounts payable and accrued expenses were down by approximately $3,400,000 at September 30, 2009 compared to September 30, 2008, due to our ability to satisfy these accounts from our operating cash flows.
We experienced a significant increase in our long-term liabilities as of September 30, 2009 compared to September 30, 2008, primarily as a result of increases in our long-term notes payable. At September 30, 2009, we had approximately $103,300,000 outstanding in the form of long-term loans, compared to approximately $88,100,000 at September 30, 2008. This increase is attributed to cash we utilized from our long-term loans to complete the construction of our facility and commence operations.
Trends and Uncertainties Impacting the Ethanol Industry and Our Company
We are subject to industry-wide factors, trends and uncertainties that affect our operating and financial performance. These factors include, but are not limited to, the available supply and cost of corn from which our ethanol and distillers grains are processed; the cost of natural gas, which we use in the production process; new technology developments in the industry; dependence on our ethanol marketer and distillers grains marketer to market and distribute our products; the intensely competitive nature of the ethanol industry; and possible changes in legislation/regulations at the federal, state and/or local level. These factors as well as other trends and uncertainties are described in more detail below.
Economic Downturn
The U.S. stock markets crumbled during late fall 2008 and the early winter of 2009 upon the collapse of multiple major financial institutions, the federal government’s takeover of two major mortgage companies, Freddie Mac and Fannie Mae, and the government’s enactment of a $700 billion bailout plan pursuant to which the federal government will directly invest in troubled financial institutions. Financial institutions across the country have lost billions of dollars due to the extension of credit for the purchase and refinance of over-valued real property. The U.S. economy is in the midst of a recession, with increasing unemployment rates and decreasing retail sales. These factors have caused significant economic stress and upheaval in the financial and credit markets in the United States, as well as abroad. Credit markets have tightened and lending requirements have become more stringent. Oil prices and demand for fuel has fluctuated greatly and generally trended downward during our 2009 fiscal year. We believe that these factors have contributed to a decrease in the prices at which we are able to sell our ethanol during fiscal year 2009. This down turn severely impacted the ethanol industry which has started to recover as a profitable industry during the second half of the 2009 calendar year.
Corn Prices
Our cost of goods sold consists primarily of costs relating to the corn and natural gas supplies necessary to produce ethanol and distillers grains for sale. On December 10, 2009, the USDA released its Crop Production report, which estimated the 2009 grain corn crop at approximately 12.9 billion bushels, approximately 7% higher than the USDA’s estimate of the 2008 corn crop of 12.1 billion bushels. Corn prices reached historical highs in June 2008, but have come down sharply since that time as stronger than expected corn yields materialized and the global financial crisis brought down the prices of most commodities generally. We expect continued volatility in the price of corn, which could significantly impact our cost of goods sold. The number of operating ethanol plants nationwide has declined over the past year due to the economic down turn and failed risk taking by some large competitors.
The price at which we will purchase corn depends on prevailing market prices. Southwest Georgia is reestablishing a strong corn industry of which we were able to purchase 7 million bushels of corn, or 22 percent, of our corn requirements. However, we are required to obtain additional corn from other areas of the United States. Our plant site is well situated to receive corn by way of our three dedicated trains from the corn producing regions of the United States and we expect to benefit from our flexibility in sourcing grain in the event of a crop shortfall in one portion of the corn belt. We view our ability to ship corn from any portion of the corn belt as a competitive advantage when compared to some Midwest ethanol plants that are largely dependent on their ability to buy corn in their local truck market. However, any benefit we receive from our flexibility in sourcing grain may be partially offset by the additional transportation costs we expect to incur.
We can mitigate our risk to fluctuations in the corn and ethanol markets by locking in favorable margins through the use of forward contracts. However, we recognize that we are not always presented with opportunities to lock in favorable margins and our plant’s profitability will be negatively impacted during periods of high corn prices. There is no assurance that a corn shortage will not develop, particularly if there is an extended drought or other production problems in the 2010 crop year. We anticipate that our plant’s profitability could be negatively impacted during periods of high corn prices that are not offset by increased ethanol prices. Although we expect the negative impact on profitability resulting from high corn prices to be mitigated, in part, by the increased value of the distillers grains we intend to market (as the price of corn and the price of distillers grains tend to fluctuate in tandem), we still may be unable to operate profitably if high corn prices are sustained for a significant period of time.
Ethanol Industry Competition
We operate in a competitive industry and compete with a number of larger, ethanol producers. The significant economic down turn in the ethanol industry has driven many large and small producers out of the industry. The ethanol industry in starting to emerge from the difficult collapse that has occurred since the commencement of our operations in October 2008.
Distillers Grains Marketing
With the advancement of research into the feeding of distillers grains based rations to poultry, swine and beef, we anticipate these markets will continue to expand, creating additional demand for distillers grains
We have an agreement with Palmetto Grain Brokerage, LLC (“Palmetto”) to market our distillers grains to the rail market. During our first year of operations we have continued to develop our local markets with the support of Palmetto to competitively market our distillers grains. The local and regional market is continuing to grow with the education of the nutritionists and farmers working in the poultry, beef and dairy businesses. In June 2009 we notified Palmetto that our distillers grains marketing agreement expiring in December 2009 needed to be amended to better accommodate our development of the local distillers grains markets. We have reached a tentative understanding with Palmetto for our amended distillers grains marketing agreement, which we expect to finalize in January 2010.
Technology Developments
One current trend in ethanol production research is to develop an efficient method of producing ethanol from cellulose-based biomass, such as agricultural waste, forest residue, municipal solid waste, and energy crops. This trend is driven by the fact that cellulose-based biomass is generally cheaper than corn, and producing ethanol from cellulose-based biomass would create opportunities to produce ethanol in areas which are unable to grow corn. Although current technology is not sufficiently efficient to be competitive, the United States Congress is consistently increasing the availability of incentives to promote the development of commercially viable cellulose based ethanol production technology.
Advances and changes in the technology used to produce ethanol may make the technology we are installing in our plant less desirable or obsolete. As of this date there are no known technologies that would cause our plant to become uncompetitive or completely obsolete.
Government Legislation and Regulations
The ethanol industry and our business are assisted by various federal ethanol supports and tax incentives, including those included in the Energy Policy Act of 2005 and the Energy Independence and Security Act of 2007. Government incentives for ethanol production, including federal tax incentives, may be reduced or eliminated in the future, which could hinder our ability to operate at a profit. Federal ethanol supports, such as the renewable fuels standard (“RFS”), help support a market for ethanol that might disappear without this incentive; as such, a waiver of minimum levels of renewable fuels included in gasoline could have a material adverse effect on our results of operations. The elimination or reduction of tax incentives to the ethanol industry, such as the VEETC available to gasoline refiners and blenders, could reduce the market for ethanol, causing prices, revenues, and profitability to decrease.
Liquidity and Capital Resources
Based on financial forecasts performed by our management and discussions our management has had with our lenders, we anticipate that we will have sufficient cash from our current credit facilities and cash from our operations to continue to operate the ethanol plant for the next 12 months. We have experienced loan covenant compliance issues during our fiscal year ended September 30, 2009, but we expect to either be in compliance with our loan covenants or obtain waivers of noncompliance from our lending syndicate during the next 12 months. Accordingly, we do not anticipate requiring additional equity or debt financing during our 2010 fiscal year. However, should we experience unfavorable operating conditions in the future, we may have to request additional debt or secure additional equity sources for working capital or other purposes.
As a result of current conditions in the ethanol market our 2010 fiscal year appears to offer more favorable operating conditions than we experienced during the beginning of our 2009 fiscal year. We anticipate continuing to make the required payments on our debt facilities and anticipate continuing to improve our liquidity going forward. However, should we experience unfavorable operating conditions in the ethanol industry that prevent us from profitably operating the ethanol plant, we could have difficulty maintaining our liquidity.
In May 2009 we commenced a private placement offering where we sold 5,369 membership units in exchange for an aggregate offering price of $2,032,550. Our private placement offering expired on October 31, 2009; however, no sales were made after our fiscal year ended on September 30, 2009. We used the proceeds for working capital purposes, and for general corporate purposes, including purchases of raw materials.
The following table shows cash flows for the fiscal years ended September 30, 2009 and 2008:
Cash Flow From (Used For) Operations
During our first fiscal year ended September 30, 2009, we transitioned from a development stage company to an operational company. Accordingly, we do not yet have comparable income, production and sales data for the year ended September 30, 2009, from our previous fiscal year. However, we experienced a significant reduction in net cash from operating activities of approximately $25,000,000 during our fiscal year ended September 30, 2009 as compared to the same period of 2008. This change in cash from our operating activities resulted primarily from a increase of $18,200,000 in our net loss for our 2009 fiscal year compared to our 2008 fiscal year. During our 2009 fiscal year, our capital needs were being adequately met primarily through cash from our credit facilities, additional equity from our private placement and, to a lesser extent, through our operating activities.
Cash Flow Used For Investing Activities
We experienced a decrease in the cash we used for investing activities during our 2009 fiscal year compared to our 2008 fiscal year. This decrease was primarily a result of the completion of our ethanol plant during the first quarter of our fiscal year ending September 30, 2009. Our plant was nearly complete by the end of our fiscal year ending September 30, 2008. Accordingly, most of the cash used for construction activities occurred during our fiscal year ended September 30, 2008 and prior years.
Cash Flow From Financing Activities
We received significantly less cash for financing activities during our 2009 fiscal year compared to our 2008 fiscal year primarily as a result of our long-term debt obligations being finalized during our fiscal year ended September 30, 2008. Our cash used for activities during our 2009 fiscal year primarily related to increased borrowing on our long-term debt and the additional equity that we raised through our private placement offering.
Financial Results
As of September 30, 2009, we have total assets of approximately $176,700,000 consisting primarily of inventory and property and equipment. Our current assets for the same period are approximately $11,900,000, consisting primarily of accounts receivable and inventory. As of September 30, 2009, we have current liabilities of approximately $34,800,000 consisting primarily of accounts payable, a revolving line of credit, accrued expenses, and accrued interest. Our long-term debt obligations total approximately $103,000,000, excluding the current portion of our long-term debt. Total members’ equity as of September 30, 2009, was approximately $34,500,000.
During our fiscal year ended September 30, 2009 we incurred a net loss of approximately $28,500,000. This loss consisted of an operating loss of approximately $17,300,000 and interest expense and unrealized loss on interest rate swap expense of approximately $11,200,000. From fiscal year ended September 30, 2008 to the fiscal year ended September 30, 2009, we generated approximately $166,600,000 revenue from operations. Our net loss for the fiscal year ended September 30, 2009 is a consequence of negative margins due to commodities markets and the interest expense associated with our existing debt obligations.
Senior Credit Facility
On November 20, 2007, First United and Southwest Georgia Ethanol, LLC (“SWGE”), our wholly owned subsidiary, entered into a senior credit agreement with WestLB that provides for (1) a construction loan facility in an aggregate amount of up to $100,000,000 which converted to a term loan on February 20, 2009 (the “Conversion Date”) which matures on February 20, 2015 (the “Final Maturity Date”); and (2) a working capital loan in an aggregate amount of up to $15,000,000 which matures on February 20, 2010. The primary purpose of the credit facility is to finance the construction and operation of our ethanol plant.
The principal amount of the term loan facility is payable in quarterly payments ranging from $1,500,000 to $1,600,000 beginning September 30, 2009, and the remaining principal amounts are fully due and payable on the Final Maturity Date. We made the first quarterly term loan payment of $1,500,000 due in September 2009. However, if we are unable to make future quarterly payments our lender may not issue a temporary waiver for non-compliance with the terms of our senior credit agreement and deem us to be in default of our loans. At the time our working capital loan in the amount of $15,000,000 matures on February 20, 2010, management anticipates requesting that WestLB renew this working capital loan and depending on our liquidity needs at that time we may request an increase in the amount of our working capital loan.
The senior credit agreement required SWGE to enter into an accounts agreement among SWGE, Amarillo National Bank, as the Accounts Bank and Securities Intermediary, and WestLB as the collateral agent and administrative agent. Among other things, the accounts agreement establishes certain special, segregated project accounts and establishes procedures for the deposits and withdrawals of funds into these accounts. Substantially all cash of SWGE is required to be deposited into the project accounts subject to security interests to secure obligations in connection with the senior credit. Funds are released from the project accounts in accordance with the terms of the accounts agreement.
Under the terms of our senior credit agreement with WestLB, we are required to repay the amount that our working capital loans outstanding exceed our borrowing base. Our borrowing base is 80% of the value of certain accounts receivable and certain inventory owned by FUEL and is calculated on a monthly basis. As of September 30, 2009 our working capital loans exceeded our borrowing base by $4,426,694 and we were not able to repay that amount to WestLB. Accordingly, we requested a waiver for the covenant contained in the credit agreement requiring us to repay the difference between our working capital loans outstanding and our borrowing base. WestLB granted us a waiver of this covenant through December 15, 2009. As of November 30, 2009 our working capital loans exceeded our borrowing base by approximately $2,500,000 and we expect to be within the terms of our borrowing base by December 31, 2009. WestLB and our lending syndicate has indicated its willingness to work with us; however, at any time WestLB and our lending syndicate could decide not to grant this waiver and we would be out of compliance with our senior credit agreement. If we violate the terms of our loan or fail to obtain a waiver of any such term or covenant, our administrative agent could deem us in default of our line of credit and require us to immediately repay a significant portion or possibly the entire outstanding balance of our loans.
As of September 30, 2009, we had drawn approximately $98,500,000 of the $100,000,000 term loan and had $13,800,000 outstanding on the $15,000,000 working capital loan.
Subordinated Debt
On November 30, 2006, we closed a subordinated debt financing arrangement pursuant to which the Mitchell County Development Authority issued $10,000,000 of revenue bonds that were placed with Wachovia Bank. We signed a promissory note, which is collateralized by our assets and the proceeds were placed in a Bond Trustee account with Regions Bank. The interest rate for this note is 7.5%. We are required to maintain a debt service reserve with the Bond Trustee in the amount of $1,180,000. During the quarter ending December 31, 2007, we drew approximately $8,162,000 from the Bond Trustee account to pay for construction costs. The Bond Trustee made the annual interest and principal payment to the bond holders of approximately $900,000 in December 2008. The funds held in the Bond Trustee account are classified as non-current restricted cash and cash equivalents on our consolidated balance sheet. The subordinated debt is a 15 year note with principal payments to be made to bond holders each December. The $600,000 principal payment due in December 2009 was paid from our debt service reserve.
On June 30, 2009 we agreed on the amount due to Fagen, Inc. for retainage withheld under our design-build contract. Fagen, Inc. was requesting a retainage payment of approximately $6,500,000. The outstanding issues have been resolved and on June 30, 2009 we delivered our certificate of final completion to WestLB. As consideration for Fagen, Inc.’s completion of our facility, we have agreed to pay Fagen, Inc. $2,500,000 in cash and executed a subordinated promissory note dated June 30, 2009 in favor of Fagen, Inc. in the amount of approximately $4,000,000.
Other Notes Payable
We have financed the acquisition of certain equipment through two notes payable to John Deere Credit. The notes amortize over four years with monthly principal and interest payments and are secured by the equipment. The interest rate is 5.3%. The combined outstanding balance on these two notes payable is $202,050 as of September 30, 2009.
Our long-term debt outstanding as of September 30, 2009 is summarized as follows:
Debt Covenants
On September 29, 2009, we requested waivers of certain sections of our senior credit agreement so that we would not be in default of our senior credit agreement as of September 30, 2009. On October 15, 2009, WestLB granted us waivers for non-compliance with certain loan covenants, specifically relating to the following items:
•
Carbon Dioxide Agreement Amendment: Section 7.01(x) of our senior credit agreement requires us to deliver our carbon dioxide agreement with Airgas Carbonic, Inc. to our lender along with any ancillary documents. As of September 30, 2009 the carbon dioxide agreement had been negotiated and was in final form, however, Airgas Carbonic, Inc. had not yet executed the agreement due to concerns about the viability of FUEL. Accordingly, we have requested and obtained a temporary waiver of the section 2(f) of the Waiver and Third Amendment to Accounts Agreement and an additional 180 day waiver of section 7.01(x) of our senior credit agreement. Subsequently, on November 2, 2009, we reached an agreement with Airgas Carbonic, Inc. (“Airgas”) with an effective date of May 15, 2009.
•
Borrowing Base Certificate: As described above, we are required to repay the amount that our working capital loan outstanding exceeds our borrowing base. Our borrowing base is 80% of the value of certain accounts receivable and certain inventory owned by FUEL and is calculated on a monthly basis. In furtherance of these calculations, section 7.03(n) requires us to deliver to our lender a borrowing base certificate setting for the data necessary to make the borrowing base calculations. As a result of our working capital loan outstanding exceeding our borrowing base, we were not able to deliver an acceptable borrowing base certificate. Accordingly, we requested a waiver of any required prepayment arising under section 3.10(d) of the senior credit agreement and a waiver of section 7.03(n), the covenant requiring us to repay the difference between our working capital loan outstanding and our borrowing base. We obtained a waiver of these covenants through December 15, 2009 and our lender has indicated its willingness to work with us; however, at any time our lender could decide not to grant this waiver and we would be in default on our senior credit agreement.
If we violate the terms of our loan or fail to obtain a waiver of any such term or covenant, our primary lender could deem us in default of our loans and require us to immediately repay a significant portion or possibly the entire outstanding balance of our loans. Our lender could also elect to proceed with a foreclosure action.
Critical Accounting Estimates
Our financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and follow general practices within the industries in which we operate. This preparation requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, actual results could differ from the estimates, assumptions, and judgments reflected in the financial statements. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Management believes the following policies are both important to the portrayal of our financial condition and results of operations and require subjective or complex judgments; therefore, management considers the following to be critical accounting policies.
Revenue Recognition
The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when it has persuasive evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable, and collection is reasonably assured.
Revenue from the production of ethanol and related products is recorded at the time title and all risks of ownership transfer to customers, which is typically upon loading and shipping of the product shipment from the facility Commissions are included in cost of goods sold. In addition, shipping and handling costs incurred by the Company for the sale of ethanol and related products are included in cost of goods sold.
Revenue by product is as follows for the years ending September 30, 2009 and 2008:
Interest income is recognized as earned.
Investment in Commodities Contracts, Derivative Instruments and Hedging Activities
The Company adopted new disclosure requirements, which require entities to provide greater transparency in interim and annual financial statements about how and why the entity uses derivative instruments, how the instruments and related hedged items are accounted for, and how the instruments and related hedged items affect the financial position, results of operations, and cash flows of the entity
The Company is exposed to certain risks related to its ongoing business operations. The primary risks that the Company manages by using forward or derivative instruments are price risk on anticipated purchases of corn and natural gas.
The Company is subject to market risk with respect to the price and availability of corn, the principal raw material we use to produce ethanol and ethanol by-products. In general, rising corn prices result in lower profit margins and, therefore, represent unfavorable market conditions. This is especially true when market conditions do not allow the Company to pass along increased corn costs to our customers. The availability and price of corn is subject to wide fluctuations due to unpredictable factors such as weather conditions, farmer planting decisions, governmental policies with respect to agriculture and international trade and global demand and supply.
Certain contracts that literally meet the definition of a derivative may be exempted from derivative accounting 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 such and exempted from the accounting and reporting requirements of derivative accounting.
The Company enters into firm-price purchase commitments every month with its natural gas suppliers under which they agree to buy natural gas at a price set in advance of the actual delivery of that natural gas to us. Under these arrangements, the Company assumes the risk of a price decrease in the market price of natural gas between the time this price is fixed and the time the natural gas is delivered. We account for these transactions as normal purchases, and accordingly, do not mark these transactions to market nor do we record the commitment on the balance sheet.
The Company enters into short-term cash, options and futures contracts as a means of securing corn for the ethanol plant and managing exposure to changes in commodity prices. The Company maintains a risk management strategy that uses derivative instruments to minimize significant, unanticipated earnings fluctuations caused by market fluctuations. The Company’s specific goal is to protect the Company from large moves in commodity costs. All derivatives will be designated as non-hedge derivatives for accounting purposes and the contracts will be accounted for at fair value. Although the contracts will be 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.
To ensure an adequate supply of corn to operate the plant, the Company enters into contracts to purchase corn from local farmers and its major suppliers. At September 30, 2009, the Company had fixed price contracts totaling approximately $300,000 based upon the average per bushel price.
The Company has also managed a portion of its floating interest rate exposure through the use of interest rate derivative contracts. The Company’s forward LIBOR-based contract reduces risk from interest rate movements as gains and losses on the contract offset portions of the interest rate variability of our variable-rate debt. The notional amount of the swap at September 30, 2009 and 2008 was $47,508,877 and $74,512,500, respectively. The effect of the swap is to limit the interest rate exposure on the LIBOR component to a fixed rate of 4.04% compared to a variable interest rate. The swap’s notional amount will decrease quarterly to $0 by the termination date of December 31, 2011. The counterparty to the contracts is a large commercial bank, and the Company does not anticipate their nonperformance. The swap is designated as a non-hedge derivative and is accounted for as market to market. The estimated fair value of this agreement at September 30, 2009 and 2008, was a liability of approximately $1,772,000 and $631,000.
Derivatives not designated as hedging instruments at September 30, 2009 and 2008 were as follows:
Inventories
Ethanol and related products are stated at net realizable value. Raw materials and work-in-process are valued using methods which approximate the lower of cost (first-in, first-out) or market. In the valuation of inventories and purchase and sale commitments, market is based on current replacement values except that it does not exceed net realizable values and is not less than net realizable values reduced by allowances for approximate normal profit margin.
Property and Equipment
Property and equipment is stated at cost. Construction in progress is comprised of costs related to constructing the plant. Depreciation is computed using the straight-line method over the following estimated useful lives:
Maintenance and repairs are charged to expense as incurred; major improvements and betterments are capitalized. The present value of capital lease obligations are classified as long-term debt and the related assets are included in property and equipment/construction in progress. Amortization of assets under capital lease is included in depreciation expense.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows from operations are less than the carrying value of the asset group. An impairment loss would be measured by the amount by which the carrying value of the asset exceeds the fair value of the asset. In accordance with Company policies, management has evaluated the plant for possible impairment based on projected future cash flows from operations. Management has determined that its projected future cash flows from operations exceed the carrying value of the plant and that no impairment exists at September 30, 2009.
Fair Value of Financial Instruments
Financial instruments include cash and cash equivalents, derivative instruments, trade and other receivables, accounts payable, accrued expenses and long-term debt. Management believes the fair value of each of these financial instruments approximates their carrying value in the balance sheet as of the balance sheet date. The fair value of current financial instruments is estimated to approximate carrying value due to the short-term nature of these instruments. The fair value of derivative financial instruments is based on quoted market prices. The fair value of the long-term debt is estimated based on anticipated interest rates which management believes would currently be available to FUEL for similar issues of debt, taking into account the current credit risk of FUEL and the other market factors.
Employees
We currently have 57 full-time employees and five part-time employees. Approximately nine of our employees are involved primarily in management and administration, and the remainder will be involved primarily in plant operations.
Our board officers are Thomas H. Dollar, II, Chairman; Tommy L. Hilliard, Vice Chairman; Steve Collins, Treasurer; Miley Adams, Secretary. Our Chief Executive Officer is Mr. Murray Campbell and our Chief Financial Officer is Lawrence Kamp. The following table represents the full-time personnel within the plant:
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
ITEM 7A.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide information under this item.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
First United Ethanol, LLC
We have audited the consolidated balance sheet of First United Ethanol, LLC and subsidiary as of September 30, 2009 and the related consolidated statements of operations, changes in members’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First United Ethanol, LLC and subsidiary as of September 30, 2009, and the results of their operations and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.
We were not engaged to examine management’s assessment of the effectiveness of First United Ethanol, LLC and subsidiary’s internal control over financial reporting as of September 30, 2009, included in the accompanying controls and procedures in the Form 10-K and accordingly, we do not express an opinion thereon.
/s/ McGladrey & Pullen, LLP
Des Moines, Iowa
December 23, 2009
To the Board of Directors
First United Ethanol, LLC
We have audited the consolidated balance sheet of First United Ethanol, LLC and Southwest Georgia Ethanol, LLC (a wholly owned subsidiary) as of September 30, 2008, and the related consolidated statements of operations, changes in members’ equity, and consolidated statements of cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First United Ethanol, LLC and Southwest Georgia Ethanol, LLC (a wholly owned subsidiary) as of September 30, 2008, and the results of their operations and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.
We were not engaged to examine management’s assessment of the effectiveness of First United Ethanol, LLC and Southwest Georgia Ethanol, LLC’s (a wholly owned subsidiary) internal control over financial reporting as of September 30, 2008, and accordingly, we do not express an opinion thereon.
/s/ Hein & Associates LLP
Denver, Colorado
December 17, 2008
FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
See Notes to Consolidated Financial Statements.
FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
See Notes to Consolidated Financial Statements.
FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
See Notes to Consolidated Financial Statements.
FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
STATEMENT OF CHANGES IN MEMBERS’ EQUITY
See Notes to Consolidated Financial Statements.
FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
First United Ethanol, LLC and subsidiary (the “Company”) is located near Camilla, Georgia. The Company operates a 100 million gallon ethanol plant with distribution within the United States. The Company formally began ethanol operations in October 2008. For the fiscal year ended September 30, 2008 and all prior periods, the Company was in the development stage with its efforts being principally devoted to organizational, financing, construction and start-up activities.
The Company was formally organized as a limited liability company on March 9, 2005 under the name Mitchell County Research Group, LLC. In September 2005, the Company formally changed its name to First United Ethanol, LLC. In November 2007, the Company’s wholly owned subsidiary, Southwest Georgia Ethanol, LLC (“SWGE”) was formed in conjunction with the debt financing agreement with West LB. First United Ethanol, LLC transferred the majority of its assets and liabilities to Southwest Georgia Ethanol, LLC.
Basis of Presentation
The consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its 100% owned subsidiary. All material inter-company accounts and transactions are eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements, in conformity with accounting principals generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosures of contingent assets and liabilities and other items, as well as the reported revenues and expenses. Actual results could differ from those estimates.
Cash and Cash Equivalents and Restricted Cash and Certificates of Deposit
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company’s cash balances are maintained in bank depositories and periodically exceed federally insured limits. The Company has not experienced losses in these accounts. The Company segregates cash held in escrow, cash restricted and certificates of deposit restricted for use by debt agreements as non-current.
Trade Accounts Receivable
Trade accounts receivable are recorded at original invoice amounts less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering customers financial condition, credit history and current economic conditions. Receivables are written off when deemed uncollectible. Recoveries of receivables written off are recorded when received
Inventories
Ethanol and related products, raw materials and work-in-process are valued using methods which approximate the lower of cost (first-in, first-out) or market. In the valuation of inventories and purchase and sale commitments, market is based on current replacement values except that it does not exceed net realizable values and is not less than net realizable values reduced by allowances for approximate normal profit margin.
Financing Costs
Financing costs associated with the construction and revolving loans discussed in Note 7 and are recorded at cost and include expenditures directly related to securing debt financing. The Company is amortizing these costs using the effective interest method over the term of the agreement. The financing costs are included in interest expense in the statement of operations.
FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
Property and Equipment
Property and equipment is stated at cost. Construction in progress is comprised of costs related to constructing the plant. Depreciation is computed using the straight-line method over the following estimated useful lives:
Maintenance and repairs are charged to expense as incurred; major improvements and betterments are capitalized. The present value of capital lease obligations are classified as long-term debt and the related assets are included in property and equipment/construction in progress. Amortization of assets under capital lease is included in depreciation expense.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows from operations are less than the carrying value of the asset group. An impairment loss would be measured by the amount by which the carrying value of the asset exceeds the fair value of the asset. In accordance with Company policies, management has evaluated the plant for possible impairment based on projected future cash flows from operations. Management has determined that its projected future cash flows from operations exceed the carrying value of the plant and that no impairment exists at September 30, 2009.
Investment in Commodities Contracts, Derivative Instruments and Hedging Activities
The Company adopted new disclosure requirements, which require entities to provide greater transparency in interim and annual financial statements about how and why the entity uses derivative instruments, how the instruments and related hedged items are accounted for, and how the instruments and related hedged items affect the financial position, results of operations, and cash flows of the entity
The Company is exposed to certain risks related to its ongoing business operations. The primary risks that the Company manages by using forward or derivative instruments are price risk on anticipated purchases of corn and natural gas.
The Company is subject to market risk with respect to the price and availability of corn, the principal raw material we use to produce ethanol and ethanol by-products. In general, rising corn prices result in lower profit margins and, therefore, represent unfavorable market conditions. This is especially true when market conditions do not allow the Company to pass along increased corn costs to our customers. The availability and price of corn is subject to wide fluctuations due to unpredictable factors such as weather conditions, farmer planting decisions, governmental policies with respect to agriculture and international trade and global demand and supply.
Certain contracts that literally meet the definition of a derivative may be exempted from derivative accounting 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 such and exempted from the accounting and reporting requirements of derivative accounting.
The Company enters into firm-price purchase commitments every month with its natural gas suppliers under which they agree to buy natural gas at a price set in advance of the actual delivery of that natural gas to us. Under these arrangements, the Company assumes the risk of a price decrease in the market price of natural gas between the time this price is fixed and the time the natural gas is delivered. The Company accounts for these transactions as normal purchases, and accordingly, does not mark these transactions to market nor does the Company record the commitment on the balance sheet.
FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
The Company enters into short-term cash, options and futures contracts as a means of securing corn for the ethanol plant and managing exposure to changes in commodity prices. The Company maintains a risk management strategy that uses derivative instruments to minimize significant, unanticipated earnings fluctuations caused by market fluctuations. The Company’s specific goal is to protect the Company from large moves in commodity costs. All derivatives will be designated as non-hedge derivatives for accounting purposes and the contracts will be accounted for at fair value. Although the contracts will be 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.
To ensure an adequate supply of corn to operate the plant, the Company enters into contracts to purchase corn from local farmers and its major suppliers. At September 30, 2009, the Company had fixed price contracts totaling approximately $300,000 based upon the average per bushel price.
The Company has also managed a portion of its floating interest rate exposure through the use of interest rate derivative contracts. The Company’s forward LIBOR-based contract reduces risk from interest rate movements as gains and losses on the contract offset portions of the interest rate variability of our variable-rate debt. The notional amount of the swap at September 30, 2009 and 2008 was $47,508,877 and $74,512,500, respectively. The effect of the swap is to limit the interest rate exposure on the LIBOR component to a fixed rate of 4.04% compared to a variable interest rate. The swap’s notional amount will decrease quarterly to $0 by the termination date of December 31, 2011. The counterparty to the contracts is a large commercial bank, and the Company does not anticipate their nonperformance. The swap is designated as a non-hedge derivative and is accounted for as market to market. The estimated fair value of this agreement at September 30, 2009 and 2008, was a liability of approximately $1,772,000 and $631,000.
Derivatives not designated as hedging instruments at September 30, 2009 and 2008 were as follows:
FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
Revenue Recognition
The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when it has persuasive evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable, and collection is reasonably assured.
Revenue from the production of ethanol and related products is recorded at the time title and all risks of ownership transfer to customers, which is typically upon loading and shipping of the product shipment from the facility Commissions are included in cost of goods sold. In addition, shipping and handling costs incurred by the Company for the sale of ethanol and related products are included in cost of goods sold.
Revenue by product is as follows for the years ending September 30, 2009 and 2008:
Interest income is recognized as earned.
Net Loss per Membership Unit
For purposes of calculating basic and diluted net loss per member unit, units subscribed and issued by the Company are considered outstanding on the effective date of issue and are weighted by days outstanding.
Income taxes
The Company is organized as a partnership for federal and state income tax purposes and generally does not incur income taxes. Instead, the Company’s earnings and losses are included in the income tax returns of the members. Therefore, no provision or liability for federal or state income taxes has been included in these financial statements.
Fair Value of Financial Instruments
Financial instruments include cash and cash equivalents, derivative instruments, trade and other receivables, accounts payable, accrued expenses, notes payable and long-term debt. Management believes the fair value of each of these financial instruments approximates their carrying value on the balance sheet as of the balance sheet date. The fair value of current financial instruments is estimated to approximate carrying value due to the short-term nature of these instruments. The fair value of derivative financial instruments is based on quoted market prices. The fair value of the long-term debt is estimated based on anticipated interest rates which management believes would currently be available to the Company for similar issues of debt, taking into account the current credit risk of the Company and the other market factors.
NOTE 2. INVENTORIES
A summary of inventories at September 30, 2009 and September 30, 2008 is as follows:
FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 3. MEMBERS’ EQUITY
As specified in the Company’s Operating Agreement, voting rights are one vote for each voting unit registered in the name of such Member as shown on the Membership Registration maintained by the Company. Income and losses of the Company shall be allocated among the Members in proportion to each Member’s respective percentage of Units when compared with the total Units issued. The Company’s cash flow shall first be applied to the payment of the Company’s operating expenses (including debt service) and then to maintenance of adequate cash reserves as determined by the Board of Directors in its sole discretion, shall be distributed from time to time to the Members in proportion to their respective percentage Units. No member has the right to demand and receive any distribution from the Company other than in cash. No distribution shall be made if, as a result thereof, the Company would be in violation of any loan agreement, or if the Company’s total assets would be less than the sum of its total liabilities.
Transfer, disposition or encumbrance of membership units are subject to certain significant restrictions, including a restriction that prohibits disposals without approval by the Board of Directors.
Initial investors purchased 600 units at $333.33 per unit in March 2005 and 2,000 units at $500 per unit in September 2005. In conjunction with a filing with the U.S. Securities and Exchange Commission, the Company issued 74,010 units at an offering price of $1,000 per unit closing in June 2007. In May 2009, the Company issued 5,369 units at an offering price of $500 per unit for investments up to $1,000,000 and an offering price of $333 per unit for investments exceeding $1,000,000 in conjunction with a private placement.
NOTE 4. RELATED PARTIES
An entity which has common ownership with Fagen, Inc., the Company’s principal vendor in the construction of the ethanol facility, is also a Member of the Company and holds approximately 1.2% of the outstanding units. In addition, the Company has a subordinated promissory note due Fagen, Inc. in the amount of $3,977,545 as of September 30, 2009.
The Company purchased corn at market prices in the amount of $1,432,101 for the year ending September 30, 2009 from certain Directors in the normal course of business. There were no such purchases in the year ending September 30, 2008.
NOTE 5. UNIT OPTION PLAN
The Company adopted the First United Ethanol, LLC Membership Unit Option Plan (the Plan) during April 2007. The Plan permits the grant of unit options and units to its employees for up to 2% of the units outstanding as of the close of the Company public offering of Membership Units, or 1,532 units. The Company believes that such awards better align the interests of its employees with those of its members. Option awards are generally granted with an exercise price equal to the market price of the Company’s units at the date of grant; those option awards generally vest over three to five years of continuous service and have ten-year contractual terms. Certain option awards provide for accelerated vesting if there is a change in control or termination without cause (as defined in the Plan).
Accounting standards require an entity to measure the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award on the date of grant. The expense is to be recognized over the period during which an employee is required to provide services in exchange for the award.
The Company uses a Black-Scholes option-pricing model in order to calculate the compensation costs of employee stock-based compensation. Such model requires the use of subjective assumptions, including the expected life of the option, the expected volatility of the underlying security, and the expected dividend on the security as discussed below.
FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
Because the Company does not have specific historical or implied volatility information available due to beginning operations in October 2008, expected volatility is based on the historical, or implied volatility of similar entities with publicly available share or option prices. The expected term represents the estimated average period of time that the options remain outstanding using the “simplified” method. The risk-free rate of return reflects the weighted average interest rate offered for zero coupon treasury bonds over the expected term of the options.
Accounting standards require forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Based on historical experience, the Company estimated future non-vested option forfeitures at 0% as of September 30, 2009 and incorporated this rate in estimated fair value of employee option grants. During the year ending September 30, 2008, the largest grant issued by the Company was forfeited, which resulted in a reduction of stock-based compensation cost of approximately $64,000. The Company does not expect any further forfeitures and thus assumed a 0% forfeiture rate for new grants. The fair value of stock options granted for the year ended September 30, 2009 on the grant date was approximately $1,000 per unit.
A summary of option activity under the Plan as of September 30, 2009 and 2008, and changes during the years then ended is presented below:
As of September 30, 2009, there was approximately $367,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a period of 3 years.
NOTE 6. LEASES
The Company leases operating machinery under a lease agreement with De Lage Landen which is accounted for as a capital lease. The lease will expire in 2013. The assets have a capitalized cost of $157,664 included in property and equipment as of September 30, 2009 and construction in progress as of September 30, 2008. Accumulated depreciation totaled $15,766 and none for the years ending September 30, 2009 and 2008, respectively.
FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
The Company entered into an Excess Facilities Charge Agreement with Georgia Power Company in which Georgia Power installed a power substation to augment the Company’s power system. The cost of the substation is charged to the Company over a three year period requiring annual payments of principal and interest totaling $686,309 beginning June 30, 2009. The Company has accounted for this agreement as a capital lease. The present value of future payments due under the lease of $1,834,512 is included in property and equipment as of September 30, 2009 Accumulated depreciation totaled $91,726 for the year ending September 30, 2009. No amounts were recorded for the lease as of September 30, 2008.
The Company also entered into a Natural Gas Facilities Agreement with the City of Camilla for a high pressure gas main to serve the plant and purchase natural gas from the City of Camilla. The City of Camilla owns and operates the gas main and leases its usage to the Company. The agreement calls for a monthly facilities charge, in addition to the normal consumption charges, equal to the cost of the installation of the gas main over an 80 month period beginning June 2009 and requiring principal and interest payments of approximately $43,000 each month. The Company has accounted for the facilities lease charges as a capital lease. The asset present value of future payments under the lease of $2,777,960 is included in property and equipment as of September 30, 2009. Accumulated depreciation totaled $138,898 for the year ending September 30, 2009. No amounts were recorded for the lease as of September 30, 2008.
Future minimum payments, by year, under the capital lease are due as follows:
FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
The Company also entered into two operating leases with Trinity Industries Leasing Company for the use of rail cars and tanker cars. The tanker car lease expires in 2017 and the rail car lease expires in 2012. During the year ending September 30, 2009, the Company determined that a portion of the tanker cars under the non-cancelable lease will not be utilized and have no future benefit. Accordingly, the Company recorded a liability and a charge to income in the amount $745,000 for the future lease payments associated with the unused tanker cars. The total remaining minimum lease commitments under non-cancelable operating leases are as follows:
NOTE 7. DEBT FINANCING ARRANGEMENTS
The Company’s long-term debt outstanding as of September 30, 2009 and 2008 is summarized as follows:
The maturities of long-term debt at September 30, 2009 are as follows:
West LB Credit Arrangement - Senior Debt
SWGE entered into a senior credit agreement that provided for (1) a construction loan facility in an aggregate amount of up to $100,000,000, which converted to a term loan on February 20, 2009 (“Conversion Date”), (2) a term loan facility in an aggregate amount of up to $100,000,000 which matures on February 20, 2015 (the “Final Maturity Date”); and (3) a working capital loan in an aggregate amount of up to $15,000,000 which matures February 20, 2010. The primary purpose of the credit facility was to finance the construction and operation of the Company’s ethanol plant.
During the term of the working capital loan, SWGE may borrow, repay and re-borrow amounts available under the working capital and letter of credit facility. The principal amount of the term loan facility is payable in quarterly payments ranging from $1,500,000 to $1,600,000 beginning September 30, 2009, and the remaining principal amounts are fully due and payable on February 20, 2010. Interest is payable quarterly. SWGE has the option to select between two floating interest rate loans under the terms of the senior credit agreement: Base Rate Loans bear interest at the Administrative Agent’s base rate (which is the higher of the federal funds effective rate plus 0.50% and the Administrative Agent’s prime rate) plus 2.75% per annum. Eurodollar Loans bear interest at LIBOR plus 3.75%. The Company has entered into an interest rate swap with WestLB to effectively convert a portion of the variable rate interest into a fixed rate, with the LIBOR component fixed at 4.04% (See Note 1).
FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
Under the terms of the senior credit agreement, SWGE has agreed to pay a quarterly commitment fee equal to 0.50% per annum on the unused portion of the construction loan/term loan and .20% per annum on the unused portion of the working capital loan. SWGE’s obligations under the senior credit agreement are secured by a first-priority security interest in all of the Company’s assets, including its equity interest in SWGE.
The senior credit agreement also required SWGE to enter into an accounts agreement among SWGE, Amarillo National Bank, as the Accounts Bank and Securities Intermediary, and WestLB as the collateral agent and administrative agent. Among other things, the accounts agreement establishes certain special, segregated project accounts and establishes procedures for the deposits and withdrawals of funds into these accounts. Substantially all cash of SWGE is required to be deposited into the project accounts subject to security interests to secure obligations in connection with the senior credit. Funds are released from the project accounts in accordance with the terms of the accounts agreement.
As of September 30, 2009 and 2008, the Company has drawn $13,784,129 on the $15,000,000 working capital loan.
On September 29, 2009, the Company requested waivers of certain sections of the senior credit agreement so the Company would not be in default of its senior credit agreement as of September 30, 2009. On October 15, 2009, WestLB granted the Company waivers for non-compliance with certain loan covenants, specifically relating to the following items:
•
Carbon Dioxide Agreement Amendment: Section 7.01(x) of the Company’s senior credit agreement requires it to deliver the carbon dioxide agreement with Airgas Carbonic, Inc. to the lender along with any ancillary documents. As of September 30, 2009 the carbon dioxide agreement had been negotiated and was in final form, however, Airgas Carbonic, Inc. had not yet executed the agreement due to concerns about the viability of FUEL. Accordingly, we have requested and obtained a temporary waiver of the section 2(f) of the Waiver and Third Amendment to Accounts Agreement and an additional 180 day waiver of section 7.01(x) of our senior credit agreement. Subsequently, on November 2, 2009, we reached an agreement with Airgas Carbonic, Inc. (“Airgas”) with an effective date of May 15, 2009.
•
Borrowing Base Certificate: As described above, the Company is required to repay the amount that its working capital loan outstanding exceeds its borrowing base. The Company’s borrowing base is 80% of the value of certain accounts receivable and certain inventory owned by FUEL and is calculated on a monthly basis. In furtherance of these calculations, section 7.03(n) requires the Company to deliver to its lender a borrowing base certificate setting for the data necessary to make the borrowing base calculations. As a result of the Company’s working capital loan outstanding exceeding its borrowing base, the Company was not able to deliver an acceptable borrowing base certificate. Accordingly, the Company requested a waiver of any required prepayment arising under section 3.10(d) of the senior credit agreement and a waiver of section 7.03(n), the covenant requiring the Company to repay the difference between its working capital loan outstanding and its borrowing base. The Company obtained a waiver of these covenants through December 15, 2009 and the lender has indicated its willingness to work with the Company; however, at any time the Company’s lender could decide not to grant this waiver and the Company would be in default on its senior credit agreement.
Subordinated Debt Facility
On November 30, 2006, the Company closed its subordinated debt financing arrangement pursuant to which the Mitchell County Development Authority issued $10,000,000 of revenue bonds that were placed with Wachovia Bank. The Company signed a promissory note, which is collateralized by the Company’s assets and the proceeds were placed in a Bond Trustee account with Regions Bank. The interest rate for this note is 7.5%. The Company is required to maintain a debt service reserve with the Bond Trustee in the amount of $1,180,000. During the quarter ending December 31, 2007, the Company drew approximately $8,162,000 from the Bond Trustee account to pay for construction costs. The Bond Trustee made the annual interest and principal payment to the bond holders of approximately $900,000 in December 2008. The funds held in the Bond Trustee account are classified as non-current restricted cash and cash equivalents in the Company’s consolidated balance sheet. The subordinated debt is a 15 year note with annual principal payments each December due to the bond holders in 2009 of $600,000, in 2010 of $635,000, in 2011 of $530,000, in 2012 of $570,000, in 2013 of $615,000 and $6,900,000 thereafter.
FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
Subordinated Fagen Note
On June 30, 2009, SWGE entered into a subordinated promissory note agreement in the amount of $3,977,545 due Fagen, Inc., a related party, for the remaining design-build contract balance. The note bears interest at 4% through June 30, 2010 and 8% thereafter through maturity on June 30, 2011. Interest is payable quarterly. The first principal payment of $500,000 was due as of September 30, 2009 and annual principal payments of $1,738,772 are due June 30, 2010 and June 30, 2011. This note is subordinated to the West LB debt agreement, which currently prohibits the Company from making these principal payments on the schedule described above.
Other Notes Payable
The Company financed the acquisition of certain equipment through two identical notes payable to John Deere Credit. The notes amortize over four years (maturity in August 2012) with monthly principal and interest payments and are secured by the equipment. The interest rate is 5.3%. The combined outstanding balance on these two notes payable is $202,050 and $264,480 as of September 30, 2009 and 2008, respectively.
NOTE 8. FAIR VALUE MEASUREMENTS
Effective October 1, 2008, the Company adopted the fair value measurements and disclosures standard, which defines a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities.
The fair value hierarchy prioritizes the inputs used in valuation techniques into three levels as follows:
•
Level 1 Observable inputs - unadjusted quoted prices in active markets for identical assets and liabilities;
•
Level 2 Observable inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data; and
•
Level 3 Unobservable inputs - includes amounts derived from valuation models where one or more significant inputs are unobservable.
The Company has classified its investments in marketable securities and derivative instruments into these levels depending on the inputs used to determine their fair values. The Company’s investments in marketable securities consist of money market funds restricted by the bond holders which are based on quoted prices and are designated as Level 1. The Company’s derivative instruments consist of commodity positions and an interest rate swap. The fair value of the commodity positions are based on quoted prices on the commodity exchanges and are designated as Level 1 and the fair value of the interest rate swap is based on quoted prices on similar assets or liabilities in active markets and discounts to reflect potential credit risk to lenders and are designated as Level 2.
The following table summarizes fair value measurements by level at September 30, 2009 (in thousands):
FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 9. COMMITMENTS AND CONTINGENCIES
Liquidity
Our liquidity, results of operations and financial performance will be impacted by many variables, including the market price for commodities such as, but not limited to, corn, ethanol and other energy commodities, as well as the market price for any co-products generated by the facility and the cost of labor and other operating costs. Assuming future relative price levels for corn, ethanol and distillers grains remain consistent with the relative price levels as of September 30, 2009, we expect operations to generate adequate cash flows to maintain operations. The assumptions assume that we will be able to sell all the ethanol that is produced at the plant. We expect to be able to satisfy our cash requirements for the next 12 months using only our revolving line of credit, senior credit facility, and earnings from operations.
As mentioned above, we have been involved in discussions with our primary lender, WestLB, regarding certain past and potential future non-compliance with our financial loan covenants that have resulted from the current conditions in the ethanol industry and our financial condition. Under the terms of our senior credit agreement with WestLB, we are required to repay the amount that our working capital loans outstanding exceed our borrowing base. Our borrowing base is 80% of the value of certain accounts receivable and certain inventory owned by the Company and calculated on a monthly basis. As of September 30, 2009 our working capital loans exceeded our borrowing base by $4,426,694 and we were not able to repay that amount to WestLB. Accordingly, we requested a waiver for the covenant contained in the credit agreement requiring us to repay the difference between our working capital loans outstanding and our borrowing base. WestLB granted us a waiver of this covenant through December 15, 2009. WestLB and tbe lending syndicate have indicated their willingness to work with us; however, at any time WestLB and tbe lending syndicate could decide not to grant this waiver and we would be in default on our senior credit agreement. If we violate the terms of our loan or fail to obtain a waiver of any such term or covenant, our Administrative Agent could deem us in default of our loans and require us to immediately repay a significant portion or possibly the entire outstanding balance of our loans.
Commitments and Major Customers
The Company has an agreement with an unrelated entity and major customer for marketing, selling, and distributing all of the ethanol produced by the Company. Under the agreement, the Company will pay the entity $.01 per net gallon for each gallon of ethanol sold via railcar and $.012 per net gallon for ethanol sold via truck. For the years ending September 30, 2009 and 2008, the Company expensed approximately $870,000 and none, respectively under this agreement. Revenues with this customer were approximately $135,876,000 and none for the years ending September 30, 2009 and 2008, respectively. Trade accounts receivable of approximately $2,134,000 and none were due from the customer as of September 30, 2009 and 2008, respectively. This agreement is effective through October 2010, at which time it will automatically renew for an additional two years without written notice.
The Company also has an agreement with an unrelated entity for marketing, selling and distributing the distillers grains with solubles “DDGS” to the rail market and for the supply of grain to the Company. Under the agreement, the Company will pay the entity $.50 per ton for DDGS sold and $.0025 per bushel of grain supplied. In addition, the Company is required to pay the marketer $0.01 per bushel for non-brokered corn purchases. For the years ending September 30, 2009 and 2008, the Company expensed approximately $117,000 and none, respectively under this agreement. There were no revenues with this customer for the years ending September 30, 2009 and 2008 and no trade accounts receivable due from this customer as of September 30, 2009 and 2008 as the marketer acts purely in the broker capacity. In June 2009 we notified Palmetto that our distillers grains marketing agreement expiring in December 2009 needed to be amended to better accommodate our development of the local distillers grains markets. We have reached a tentative understanding with Palmetto for our amended distillers grains marketing agreement, which we expect to finalize in January 2010.
FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 10. CONTINGENCY
In April 2008, Air Liquide Industrial U.S., LP (“Air Liquide”) brought an action against First United Ethanol and Southwest Georgia Ethanol in U.S. District Court for the Middle District of Georgia Albany Division. Air Liquide alleges that it has an agreement to purchase carbon dioxide gas from First United Ethanol and Southwest Georgia Ethanol and is requesting specific performance of the purported contractual obligations or, in the alternative, damages for breach of the purported contract. First United Ethanol and Southwest Georgia Ethanol disagree with Air Liquide’s allegations and intend to defend the suit vigorously.
NOTE 11. SUBSEQUENT EVENTS
Subsequent events have been evaluated through December 23, 2009 and include the WestLB waiver dated October 15, 2009 discussed in Note 7 and the October 31, 2009 official close of the private placement offering commenced in May 2009.
On November 2, 2009, the Company reached an Amended Carbon Dioxide Supply Agreement with Airgas Carbonic, Inc. (“Airgas”) with an effective date of May 15, 2009. Pursuant to the agreement, Airgas is constructing a carbon dioxide facility to purify, liquefy, refine and store carbon dioxide produced by the Company as a co-product of its ethanol production process. The carbon dioxide facility is being constructed on land leased by the Company to Airgas and is expected to be complete in summer 2010. Once the new carbon dioxide facility is operational, we expect our carbon dioxide to be another source of revenue for the Company.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
Disclosure Controls and Procedures
Management of First United Ethanol is responsible for maintaining disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. In addition, the disclosure controls and procedures must ensure that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial and other required disclosures.
Our management, including our Chief Executive Officer, Murray Campbell, along with our Chief Financial Officer, Larry Kamp, have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act of 1934, as amended) as of September 30, 2009. Based upon this review and evaluation, these officers have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods required by the forms and rules of the Securities and Exchange Commission; and to ensure that the information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management including our principal executive and principal financial officers, or person performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Internal Control Over Financial Reporting
Inherent Limitations Over Internal Controls
The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Management, including the Company’s Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management’s Annual Report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation, management has concluded that the Company’s internal control over financial reporting was effective as of September 30, 2009.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
Changes in Internal Control Over Financial Reporting.
There were no changes in our internal control over financial reporting during the fourth quarter of our 2009 fiscal year, which were identified in connection with management’s evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
PART III
Pursuant to General Instruction G(3), we omit Part III, Items 10, 11, 12, 13 and 14 and incorporate such items by reference to an amendment to this Annual Report on Form 10-K or to a definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this Annual Report (September 30, 2009).
ITEM 10.
ITEM 10.
DIRECTORS; EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.
The information required by this Item is incorporated by reference from the definitive proxy statement for our 2010 Annual Meeting of Members to be filed with the Securities and Exchange Commission within 120 days after the end of our 2009 fiscal year.
The information required by this Item is incorporated by reference from the definitive proxy statement for our 2010 Annual Meeting of Members to be filed with the Securities and Exchange Commission within 120 days after the end of our 2009 fiscal year.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information required by this Item is incorporated by reference from the definitive proxy statement for our 2010 Annual Meeting of Members to be filed with the Securities and Exchange Commission within 120 days after the end of our 2009 fiscal year.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information required by this Item is incorporated by reference from the definitive proxy statement for our 2010 Annual Meeting of Members to be filed with the Securities and Exchange Commission within 120 days after the end of our 2009 fiscal year.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this Item is incorporated by reference from the definitive proxy statement for our 2010 Annual Meeting of Members to be filed with the Securities and Exchange Commission within 120 days after the end of our 2009 fiscal year.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
The following exhibits are filed as part of, or are incorporated by reference into, this report:
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
EXHIBIT INDEX