UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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x
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Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
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For the quarterly period ended June 30, 2011
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OR
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
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For the transition period from to .
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COMMISSION FILE NUMBER 000-52033
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RED TRAIL ENERGY, LLC
(Exact name of registrant as specified in its charter)
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North Dakota
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76-0742311
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.)
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3682 Highway 8 South, P.O. Box 11, Richardton, ND 58652
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(Address of principal executive offices)
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(701) 974-3308
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(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x
Yes
o
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
x
Yes
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No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act:
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Large Accelerated Filer
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Accelerated Filer
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Non-Accelerated Filer
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Smaller Reporting Company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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Yes
x
No
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
As of
August 15, 2011
, there were 40,193,973 Class A Membership Units outstanding.
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
RED TRAIL ENERGY, LLC
Condensed Balance Sheets
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ASSETS
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June 30, 2011
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December 31, 2010
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(Unaudited)
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Current Assets
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Cash and equivalents
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$
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2,413,336
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$
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9,803,566
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Restricted cash
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750,000
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1,328,359
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Accounts receivable, primarily related party
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5,921,771
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4,498,101
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Other receivables
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1,155,674
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134,199
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Commodities derivative instruments, at fair value
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70,757
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49,262
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Inventory
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11,066,667
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6,396,524
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Prepaid expenses
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94,659
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82,489
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Total current assets
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21,472,864
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22,292,500
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Property, Plant and Equipment
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Land
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351,280
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351,280
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Land improvements
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3,984,703
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3,984,703
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Buildings
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5,317,814
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5,317,283
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Plant and equipment
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80,669,273
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79,671,534
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Construction in progress
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540,422
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441,897
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90,863,492
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89,766,697
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Less accumulated depreciation
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26,180,868
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23,222,053
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Net property, plant and equipment
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64,682,624
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66,544,644
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Other Assets
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Investment in RPMG
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605,000
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605,000
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Patronage equity
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520,104
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442,809
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Deposits
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40,000
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40,000
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Total other assets
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1,165,104
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1,087,809
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Total Assets
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$
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87,320,592
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$
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89,924,953
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Notes to Unaudited Condensed Financial Statements are an integral part of this Statement.
RED TRAIL ENERGY, LLC
Condensed Balance Sheets
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LIABILITIES AND MEMBERS' EQUITY
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June 30, 2011
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December 31, 2010
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(Unaudited)
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Current Liabilities
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Accounts payable
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$
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6,409,713
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$
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8,026,184
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Accrued expenses
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4,666,917
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2,318,741
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Accrued loss on firm purchase commitments
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34,000
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—
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Current maturities of long-term debt
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31,696,144
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8,924,747
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Current portion of interest rate swaps, at fair value
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1,135,259
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1,181,483
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Total current liabilities
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43,942,033
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20,451,155
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Long-Term Liabilities
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Notes payable
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134,806
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25,770,222
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Long-term portion of interest rate swaps, at fair value
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—
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524,440
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Contracts payable
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275,000
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275,000
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Total long-term liabilities
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409,806
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26,569,662
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Commitments and Contingencies
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—
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—
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Members’ Equity
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42,968,753
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42,904,136
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Total Liabilities and Members’ Equity
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$
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87,320,592
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$
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89,924,953
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Notes to Unaudited Condensed Financial Statements are an integral part of this Statement.
RED TRAIL ENERGY, LLC
Statements of Operations (Unaudited)
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Three Months Ended
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Three Months Ended
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Six Months Ended
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Six Months Ended
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June 30, 2011
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June 30, 2010
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June 30, 2011
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June 30, 2010
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(Unaudited)
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(Unaudited)
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(Unaudited)
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(Unaudited)
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Revenues, primarily related party
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$
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35,142,332
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$
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22,518,058
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$
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67,095,425
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$
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51,404,949
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Cost of Goods Sold
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Cost of goods sold
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34,572,112
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21,980,924
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65,526,561
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47,057,918
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Lower of cost or market inventory adjustment
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259,000
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—
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259,000
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—
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(Gain)/Loss on firm purchase commitments
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34,000
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(42,000
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34,000
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60,000
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Total Cost of Goods Sold
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34,865,112
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21,938,924
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65,819,561
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47,117,918
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Gross Profit
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277,220
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579,134
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1,275,864
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4,287,031
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General and Administrative Expenses
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617,908
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586,172
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1,294,663
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1,226,327
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Operating Income (Loss)
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(340,688
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(7,038
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(18,799
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3,060,704
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Other Income (Expense)
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Interest income
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19,332
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6,605
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30,622
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37,297
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Other income
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1,080,824
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285
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1,155,756
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975,260
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Interest expense
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(545,593
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(773,439
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(1,102,961
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(1,862,357
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Total other income (expense), net
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554,563
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(766,549
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83,417
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(849,800
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)
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Net Income (Loss)
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$
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213,875
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$
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(773,587
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$
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64,618
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$
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2,210,904
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Basic and diluted for each:
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Weighted Average Units Outstanding
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40,193,973
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40,193,973
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40,193,973
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40,193,973
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Net Income (Loss) Per Unit
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$
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—
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$
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(0.02
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$
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—
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$
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0.06
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Notes to Condensed Unaudited Financial Statements are an integral part of this Statement.
RED TRAIL ENERGY, LLC
Condensed Statements of Cash Flows (Unaudited)
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Six Months Ended
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Six Months Ended
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June 30, 2011
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June 30, 2010
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Cash Flows from Operating Activities
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(Unaudited)
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(Unaudited)
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Net income
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$
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64,618
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$
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2,210,904
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Adjustments to reconcile net income to net cash provided by operating activities:
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Depreciation
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2,958,815
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2,903,316
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Change in fair value of derivative instruments
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37,851
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(81,459
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)
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Lower of cost or market inventory adjustment
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259,000
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—
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Unrealized loss on firm purchase commitments
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34,000
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60,000
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Noncash patronage equity
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(77,295
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(117,783
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)
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Change in operating assets and liabilities:
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Restricted cash
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578,359
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1,373,174
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Accounts receivable
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(1,423,670
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)
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(37,177
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)
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Other receivables
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(1,021,475
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)
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—
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Inventory
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(4,929,143
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)
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1,061,248
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Prepaid expenses
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(12,171
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)
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26,241
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Other assets
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—
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33,867
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Accounts payable
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(1,616,471
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)
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(849,615
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)
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Accrued expenses
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2,348,176
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496,066
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Cash settlements on interest rate swap
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(630,010
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)
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(708,657
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Net cash provided by (used in) operating activities
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(3,429,416
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)
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6,370,125
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Cash Flows from Investing Activities
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Capital expenditures
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(626,554
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(336,293
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)
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Net cash used in investing activities
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(626,554
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)
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(336,293
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)
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Cash Flows from Financing Activities
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Debt repayments
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(3,334,260
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)
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(13,791,207
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)
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Net cash used for financing activities
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(3,334,260
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)
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(13,791,207
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)
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Net Decrease in Cash and Equivalents
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(7,390,230
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)
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(7,757,375
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)
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Cash and Equivalents - Beginning of Period
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9,803,566
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13,214,091
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Cash and Equivalents - End of Period
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$
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2,413,336
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$
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5,456,716
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Supplemental Disclosure of Cash Flow Information
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Interest paid
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$
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1,594,670
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$
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2,235,525
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Noncash Investing and Financing Activities
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Assets acquired under capital lease
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$
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470,241
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$
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—
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Notes to Unaudited Condensed Financial Statements are an integral part of this Statement.
RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 2011
The accompanying condensed unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as permitted by such rules and regulations. These financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the Company's audited financial statements for the year ended December 31, 2010, contained in the Company's Annual Report on Form 10-K.
In the opinion of management, the interim condensed unaudited financial statements reflect all adjustments considered necessary for fair presentation. The adjustments made to these statements consist only of normal recurring adjustments. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2011.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Red Trail Energy, LLC, a North Dakota limited liability company (the “Company”), owns and operates a 50 million gallon annual name-plate production ethanol plant near Richardton, North Dakota (the “Plant”).
Accounting Estimates
Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported revenues and expenses. Significant items subject to such estimates and assumptions include the useful lives of property, plant and equipment, valuation of derivatives, inventory, patronage equity and purchase commitments; analysis of intangibles impairment, the analysis of long-lived assets impairment and other contingencies. Actual results could differ from those estimates.
Net Income (Loss) Per Unit
Net income (loss) per unit is calculated on a basic and fully diluted basis using the weighted average units outstanding during the period. There were no member unit equivalents outstanding during the periods presented; accordingly, the Company's basic and diluted net income (loss) per unit are the same.
Reclassifications
The presentation of certain items in the financial statements for the year ended December 31, 2010 for the three and six month periods ended June 30, 2010 have been changed to conform to the classifications used in 2011. The reclassifications had no effect on members' equity, net income (loss) or operating cash flows as previously reported.
2. DERIVATIVE INSTRUMENTS
Commodity Contracts
As part of its hedging strategy, the Company may enter into ethanol and corn commodity-based derivatives in order to protect cash flows from fluctuations caused by volatility in commodity prices in order to protect gross profit margins from potentially adverse effects of market and price volatility on ethanol sales and corn purchase commitments where the prices are set at a future date. These derivatives are not designated as effective hedges for accounting purposes. For derivative instruments that are not accounted for as hedges, or for the ineffective portions of qualifying hedges, the change in fair value is recorded through earnings in the period of change. Ethanol derivative fair market value gains or losses are included in the results of operations and are classified as revenue and corn derivative changes in fair market value are included in cost of goods sold.
RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 2011
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As of:
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June 30, 2011 (unaudited)
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December 31, 2010
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Contract Type
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# of Contracts
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Notional Amount (Qty)
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Fair Value
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# of Contracts
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Notional Amount (Qty)
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Fair Value
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Corn futures
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10
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50,000
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bushels
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$
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70,757
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237
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1,185,000
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bushels
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$
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49,262
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Total fair value
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$
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70,757
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$
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49,262
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Amounts are recorded separately on the balance sheet - negative numbers represent liabilties
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Interest Rate Contracts
The Company had approximately $26.0 million and $27.7 million of notional amount outstanding in interest rate swap agreements, as of June 30, 2011 and December 31, 2010, respectively, that exchange variable interest rates (one-month LIBOR and three-month LIBOR) for fixed interest rates over the terms of the agreements. At June 30, 2011 and December 31, 2010, the fair value of the interest rate swaps totaled approximately $1.1 million and $1.7 million, respectively, and are recorded as a liability on the balance sheets. These agreements are not designated as effective hedges for accounting purposes and the change in fair market value and associated net settlements are recorded in interest expense. The swaps mature in April 2012.
The Company recorded net settlements of approximately $630,000 and $709,000 for the six months ended June 30, 2011 and 2010, respectively. See Note 4 for a description of these agreements.
The following tables provide details regarding the Company's derivative financial instruments at June 30, 2011 and December 31, 2010:
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Derivatives not designated as hedging instruments:
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Balance Sheet - as of June 30, 2011 (unaudited)
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Asset
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Liability
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|
Commodity derivative instruments, at fair value
|
$
|
70,757
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|
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$
|
—
|
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Interest rate swaps, at fair value
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—
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|
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1,135,259
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Total derivatives not designated as hedging instruments for accounting purposes
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$
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—
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$
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1,135,259
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Balance Sheet - as of December 31, 2010
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Asset
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Liability
|
|
Commodity derivative instruments, at fair value
|
$
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49,262
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|
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$
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—
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Interest rate swaps, at fair value
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—
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1,705,923
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Total derivatives not designated as hedging instruments for accounting purposes
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$
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49,262
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$
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1,705,923
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Statement of Operations Income/(expense)
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Location of gain (loss) in fair value recognized in income
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Amount of gain(loss) recognized in income during the three months ended June 30, 2011 (unaudited)
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|
Amount of gain (loss) recognized in income during the three months ended June 30, 2010 (unaudited)
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Amount of gain (loss) recognized in income during the six months ended June 30, 2011
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Amount of gain (loss) recognized in income during the six months ended June 30, 2010
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|
Corn derivative instruments
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Cost of Goods Sold
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$
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690,998
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$
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(296,759
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$
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(1,567,866
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$
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(155,927
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)
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Ethanol derivative instruments
|
Revenue
|
—
|
|
|
513,127
|
|
|
—
|
|
|
2,000,956
|
|
|
Interest rate swaps
|
Interest Expense
|
(36,320
|
)
|
|
163,991
|
|
|
(62,059
|
)
|
|
201,811
|
|
|
Total
|
|
$
|
654,678
|
|
|
$
|
380,359
|
|
|
$
|
(1,629,925
|
)
|
|
$
|
2,046,840
|
|
|
|
|
|
|
|
|
|
|
|
RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 2011
3. INVENTORY
Inventory is valued at lower of cost or market. Inventory values as of June 30, 2011 and December 31, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
June 30, 2011
(unaudited)
|
|
December 31, 2010
|
|
Raw materials, including corn, chemicals and supplies
|
$
|
6,885,179
|
|
|
$
|
3,531,671
|
|
|
Work in process
|
1,155,045
|
|
|
907,967
|
|
|
Finished goods, including ethanol and distillers grains
|
2,100,523
|
|
|
1,180,857
|
|
|
Spare parts
|
925,920
|
|
|
776,029
|
|
|
Total inventory
|
$
|
11,066,667
|
|
|
$
|
6,396,524
|
|
|
|
|
|
|
Lower of cost or market adjustments for the three and six months ended June 30, 2011 and 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, 2011
(unaudited)
|
|
For the three months ended June 30, 2010
(unaudited)
|
For the six months ended June 30, 2011
(unaudited)
|
|
For the six months ended June 30, 2010
(unaudited)
|
|
(Gain)/Loss on firm purchase commitments
|
$
|
34,000
|
|
|
$
|
(42,000
|
)
|
$
|
34,000
|
|
|
$
|
60,000
|
|
|
Loss on lower of cost or market adjustment for inventory on hand
|
259,000
|
|
|
—
|
|
259,000
|
|
|
—
|
|
|
Total loss on lower of cost or market adjustments
|
$
|
293,000
|
|
|
$
|
(42,000
|
)
|
$
|
293,000
|
|
|
$
|
60,000
|
|
The Company has entered into forward corn purchase contracts under which it is required to take delivery at the contract price. At the time the contracts were created, the price of the contract price approximated market price. Subsequent changes in market conditions could cause the contract prices to become higher or lower than market prices. As of June 30, 2011, the average price of corn purchased under fixed price contracts, that had not yet been delivered, was slightly higher than market price. Based on this information, the Company accrued an estimated loss on firm purchase commitments of $34,000 for the three months ended June 30, 2011. The Company recorded a recovery on firm purchase commitments of $42,000 for the three month period ended June 30, 2010. The loss is recorded in “Loss on firm purchase commitments” on the statement of operations. The amount of the loss was determined by applying a methodology similar to that used in the impairment valuation with respect to inventory. Given the uncertainty of future ethanol prices, this loss may or may not be recovered, and further losses on the outstanding purchase commitments could be recorded in future periods.
The Company recorded inventory valuation impairments of $259,000 and $0 for the three months ended June 30, 2011 and 2010, respectively. The impairments, as applicable, were attributable primarily to decreases in market prices of corn and ethanol. The inventory valuation impairment was recorded in “Lower of cost or market adjustment” on the statement of operations.
RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 2011
4. BANK FINANCING
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
June 30, 2011 (unaudited)
|
|
December 31, 2010
|
|
|
Notes payable under loan agreement to bank
|
$
|
25,984,466
|
|
|
$
|
29,160,099
|
|
|
Subordinated notes payable
|
5,525,000
|
|
|
5,525,000
|
|
|
Capital lease obligations (Note 6)
|
321,484
|
|
|
9,870
|
|
|
Total Long-Term Debt
|
31,830,950
|
|
|
34,694,969
|
|
|
Less amounts due within one year
|
31,696,144
|
|
|
8,924,747
|
|
|
Total Long-Term Debt Less Amounts Due Within One Year
|
$
|
134,806
|
|
|
$
|
25,770,222
|
|
|
|
|
|
|
|
Market value of interest rate swaps
|
1,135,259
|
|
|
1,705,923
|
|
|
Less amounts due within one year
|
1,135,259
|
|
|
1,181,483
|
|
|
Total Interest Rate Swaps Less Amounts Due Within One Year
|
$
|
—
|
|
|
$
|
524,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled maturities for the twelve months ending June 30
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Long-term debt
|
|
Totals
|
|
|
|
|
|
|
|
|
2012
|
$
|
1,135,259
|
|
|
$
|
31,696,144
|
|
|
$
|
32,831,403
|
|
|
2013
|
—
|
|
|
131,862
|
|
|
131,862
|
|
|
2014
|
—
|
|
|
2,944
|
|
|
2,944
|
|
|
2015
|
—
|
|
|
—
|
|
|
—
|
|
|
Thereafter
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
1,135,259
|
|
|
$
|
31,830,950
|
|
|
$
|
32,966,209
|
|
As of June 30, 2011, the Company was in compliance with all of its debt covenants.
Interest Rate Swap Agreements
In December 2005, the Company entered into an interest rate swap transaction that effectively fixed the interest rate at 8.08% on the outstanding principal of the Fixed Rate Note, which is included in the total under notes payable under loan agreement to bank above. In December 2007, the Company entered into a second interest rate swap transaction that effectively fixed the interest rate at 7.695% on the outstanding principal of the December 2007 Fixed Rate Note.
The interest rate swaps were not designated as either a cash flow or fair value hedge. Fair value adjustments and net settlements are recorded in interest expense within the statement of operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
For the three months ended June 30, 2011
(unaudited)
|
|
For the three months ended June 30, 2010 (unaudited)
|
For the six months ended June 30, 2011
(unaudited)
|
|
For the six months ended June 30, 2010 (unaudited)
|
|
Interest expense on long-term debt
|
$
|
509,273
|
|
|
$
|
590,197
|
|
$
|
1,040,903
|
|
|
$
|
1,355,511
|
|
|
Change in fair value of interest rate swaps
|
(269,942
|
)
|
|
(163,991
|
)
|
(567,952
|
)
|
|
(201,811
|
)
|
|
Net settlements on interest rate swaps
|
306,262
|
|
|
347,233
|
|
630,010
|
|
|
708,657
|
|
|
Total interest expense
|
$
|
545,593
|
|
|
$
|
773,439
|
|
$
|
1,102,961
|
|
|
$
|
1,862,357
|
|
RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 2011
5. FAIR VALUE MEASUREMENTS
The following table provides information on those assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement Using
|
|
|
Carrying Amount as of June 30, 2011
|
|
Fair Value as of June 30, 2011
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Commodities derivative instruments
|
$
|
70,757
|
|
|
$
|
70,757
|
|
|
$
|
70,757
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
$
|
1,135,259
|
|
|
$
|
1,135,259
|
|
|
$
|
—
|
|
|
$
|
1,135,259
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement Using
|
|
|
Carrying Amount as of December 31, 2010
|
|
Fair Value as of December 31, 2010
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Commodities derivative instruments
|
$
|
49,262
|
|
|
$
|
49,262
|
|
|
$
|
49,262
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
$
|
1,705,923
|
|
|
$
|
1,705,923
|
|
|
$
|
—
|
|
|
$
|
1,705,923
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of the corn and ethanol derivative instruments are based on quoted market prices in an active market. The fair value of the interest rate swap instruments are determined by using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each instrument. The analysis of the interest rate swaps reflect the contractual terms of the derivatives, including the period to maturity and uses observable market-based inputs and uses the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. The variable cash payments are based on an expectation of future interest rates derived from observable market interest rate curves.
Financial Instruments Not Measured at Fair Value
The estimated fair value of the Company's long-term debt, including the short-term portion, at June 30, 2011 and December 31, 2010 approximated the carrying value of approximately $31.8 and $34.7 million, respectively. Fair value was estimated using estimated variable market interest rates as of December 31, 2010. The fair values and carrying values consider the terms of the related debt and exclude the impacts of debt discounts and derivative/hedging activity.
6. LEASES
The Company leases equipment under operating and capital leases through June 2015. The Company is generally responsible for maintenance, taxes, and utilities for leased equipment. Equipment under operating lease includes a locomotive and rail cars. Rent expense for operating leases was approximately $141,000 and $282,000 for the three and six months ended June 30, 2011, respectively and $130,000 and $260,000 for the three and six months ended June 30, 2010, respectively. Equipment under capital leases consists of office equipment and plant equipment.
Equipment under capital leases is as follows at:
RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
June 30, 2011
(unaudited)
|
|
December 31, 2010
|
|
Equipment
|
$
|
483,217
|
|
|
$
|
12,976
|
|
|
Less accumulated amortization
|
(5,190
|
)
|
|
(3,893
|
)
|
|
Net equipment under capital lease
|
$
|
478,027
|
|
|
$
|
9,083
|
|
At June 30, 2011, the Company had the following minimum commitments, which at inception had non-cancelable terms of more than one year. Amounts shown below are for the 12 months period ending June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Capital Leases
|
|
2012
|
$
|
519,154
|
|
|
$
|
201,094
|
|
|
2013
|
277,740
|
|
|
135,181
|
|
|
2014
|
31,200
|
|
|
3,075
|
|
|
2015
|
31,200
|
|
|
—
|
|
|
Thereafter
|
—
|
|
|
—
|
|
|
Total minimum lease commitments
|
$
|
859,294
|
|
|
339,350
|
|
|
Less amount representing interest
|
|
|
(17,866
|
)
|
|
Present value of minimum lease commitments included in liabilities on the balance sheet
|
|
|
$
|
321,484
|
|
7. COMMITMENTS AND CONTINGENCIES
Firm Purchase Commitments for Corn
To ensure an adequate supply of corn to operate the Plant, the Company enters into contracts to purchase corn from local farmers and elevators. At June 30, 2011, the Company had various fixed price contracts for the purchase of approximately 2,791,000 bushels of corn. Using the stated contract price for the fixed price contracts, the Company had commitments of approximately $19.0 million related to the 2,791,000 bushels under contract.
Construction in progress
The Company had construction in progress of approximately $540,000 at June 30, 2011 relating to two capital projects: One being improvements to the plant's water filtration system and the other being replacement of the plant's bin sweeps. The Company anticipates that both of these projects will be completed during the third quarter of 2011 for a total combined cost of approximately $750,000.
8. RELATED-PARTY TRANSACTIONS
The Company has balances and transactions in the normal course of business with various related parties for the purchase of corn, sale of distillers grains and sale of ethanol. The related parties include Unit holders, members of the board of governors of the Company, and RPMG, Inc. (“RPMG”). Significant related party activity affecting the financial statements are as follows:
RED TRAIL ENERGY, LLC
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011
(unaudited)
|
|
December 31, 2010
|
|
Balance Sheet
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
|
$
|
5,156,891
|
|
|
$
|
3,821,873
|
|
|
Accounts payable
|
|
|
|
515,291
|
|
|
725,184
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, 2011
|
|
For the three months ended June 30, 2010
|
For the six months ended June 30, 2011 (unaudited)
|
|
For the six
months ended
June 30, 2010
(unaudited)
|
|
Statement of Operations
|
|
|
|
|
|
|
|
Revenues
|
$
|
30,241,823
|
|
|
$
|
18,584,502
|
|
$
|
57,738,077
|
|
|
$
|
41,548,875
|
|
|
Cost of goods sold
|
925,311
|
|
|
754,815
|
|
1,585,290
|
|
|
1,619,652
|
|
|
General and administrative
|
12,483
|
|
|
64,716
|
|
41,656
|
|
|
114,614
|
|
|
|
|
|
|
|
|
|
|
Inventory Purchases
|
$
|
1,696,336
|
|
|
$
|
1,005,698
|
|
$
|
4,872,155
|
|
|
$
|
2,331,243
|
|
|
|
|
|
|
|
|
|
9. UNCERTAINTIES IMPACTING THE ETHANOL INDUSTRY AND OUR FUTURE OPERATIONS
The Company has certain risks and uncertainties that it experiences during volatile market conditions, which can have a severe impact on operations. The Company's revenues are derived from the sale and distribution of ethanol and distillers grains to customers primarily located in the U.S. Corn for the production process is supplied to the plant primarily from local agricultural producers and from purchases on the open market. The Company's operating and financial performance is largely driven by prices at which the Company sells ethanol and distillers grains and by the cost at which it is able to purchase corn for operations. The price of ethanol is influenced by factors such as prices of supply and demand, weather, government policies and programs, and unleaded gasoline and the petroleum markets, although since 2005 the prices of ethanol and gasoline began a divergence with ethanol selling for less than gasoline at the wholesale level. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol. The Company's largest cost of production is corn. The cost of corn is generally impacted by factors such as supply and demand, weather, government policies and programs. The Company's risk management program is used to protect against the price volatility of these commodities.
The Company anticipates that the results of operations into fiscal 2011 will continue to be affected by volatility in the commodity markets. The volatility is due to various factors, including uncertainty with respect to the availability and supply of corn, increased demand for grain from global and national markets, speculation in the commodity markets, and demand for corn from the ethanol industry.
10. SUBSEQUENT EVENTS
In July 2011 the Company entered into an equity grant agreement with its Chief Financial Officer for the receipt of 100,000 units. The units will be issued based on a five year vesting schedule with the first units awarded on October 1, 2011. Compensation expense related to this award will be recognized over the period of service related to the units. No compensation expense relating to this equity grant agreement was accrued or incurred for the six months ended June 30, 2011.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
We prepared the following discussion and analysis to help you better understand our financial condition, changes in our financial condition, and results of operations for the three and six month periods ended June 30, 2011, compared to the same period of the prior fiscal year. This discussion should be read in conjunction with the condensed financial statements and notes and the information contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
Forward Looking Statements
This report contains forward-looking statements that involve future events, our future performance and our future operations and actions. In some cases you can identify forward-looking statements by the use of words such as “may,” “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 following factors:
|
|
|
|
|
|
|
|
Ÿ
|
Fluctuations in the price and market for ethanol and distillers grains;
|
|
|
Ÿ
|
Availability and costs of products and raw materials, particularly corn and coal;
|
|
|
Ÿ
|
Changes in the environmental regulations that apply to our plant operations and our ability to comply with such regulations;
|
|
|
Ÿ
|
Ethanol supply exceeding demand and corresponding ethanol price reductions impacting our ability to operate profitably and maintain a positive spread between the selling price of our products and our raw material costs;
|
|
|
Ÿ
|
Our ability to generate and maintain sufficient liquidity to fund our operations, meet debt service requirements and necessary capital expenditures;
|
|
|
Ÿ
|
Our ability to continue to meet our loan covenants;
|
|
|
Ÿ
|
Limitations and restrictions contained in the instruments and agreements governing our indebtedness;
|
|
|
Ÿ
|
Results of our hedging transactions and other risk management strategies;
|
|
|
Ÿ
|
Changes in or elimination of governmental laws, tariffs, trade or other controls or enforcement practices that currently benefit the ethanol industry including:
|
|
|
|
Ÿ
national, state or local energy policy - examples include legislation already passed such as the
California low-carbon fuel standard as well as potential legislation in the form of carbon cab and trade;
|
|
|
|
Ÿ
federal and state ethanol tax incentives;
|
|
|
|
Ÿ
legislation mandating the use of ethanol or other oxygenate additives;
|
|
|
|
Ÿ
environmental laws and regulations that apply to our plant operations and their enforcement; or
|
|
|
|
Ÿ
reduction or elimination of tariffs on foreign ethanol.
|
|
|
Ÿ
|
Changes and advances in ethanol production technology; and
|
|
|
Ÿ
|
Competition from alternative fuels and alternative fuel additivies.
|
Available Information
Information about us is also available at our website at
www.redtrailenergyllc.com
, which includes links to reports we have filed with the Securities and Exchange Commission. The contents of our website are not incorporated by reference in this Quarterly Report on Form 10-Q.
Overview
Red Trail Energy, LLC, a North Dakota limited liability company (the “Company,” “Red Trail,” or “we,” “our,” or “us”), owns and operates a 50 million gallon annual name-plate production ethanol plant near Richardton, North Dakota (the “Plant”). Our revenues are derived from the sale and distribution of our ethanol and distillers grains primarily in the continental United States. Corn is our largest cost component and our profitability is highly dependent on the spread between the price of corn and the price of ethanol.
Results of Operations for the Three Months Ended
June 30, 2011
and
2010
The following table shows the results of our operations and the percentages of revenues, cost of goods sold, general and administrative expenses and other items to total sales and revenues in our statements of operations for the three months ended
June 30, 2011
and
2010
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2011 (Unaudited)
|
|
Three Months Ended
June 30, 2010 (Unaudited)
|
|
Statement of Operations Data
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Revenues
|
$
|
35,142,332
|
|
|
100.00
|
|
|
$
|
22,518,058
|
|
|
100.00
|
|
|
Cost of Goods Sold
|
34,865,112
|
|
|
99.21
|
|
|
21,938,924
|
|
|
97.43
|
|
|
Gross Profit
|
277,220
|
|
|
0.79
|
|
|
579,134
|
|
|
2.57
|
|
|
General and Administrative Expenses
|
617,908
|
|
|
1.76
|
|
|
586,172
|
|
|
2.60
|
|
|
Operating Income (Loss)
|
(340,688
|
)
|
|
(0.97
|
)
|
|
(7,038
|
)
|
|
(0.03
|
)
|
|
Other Income (Expense)
|
554,563
|
|
|
1.58
|
|
|
(766,549
|
)
|
|
(3.40
|
)
|
|
Net Income (Loss)
|
$
|
213,875
|
|
|
0.61
|
|
|
$
|
(773,587
|
)
|
|
(3.44
|
)
|
The following table shows additional data regarding production and price levels for our primary inputs and products for the three months ended
June 30, 2011
and 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months ended June 30, 2011
|
Three Months ended
June 30, 2010
|
|
Production:
|
|
|
|
|
Ethanol sold (gallons)
|
|
11,700,138
|
|
12,717,484
|
|
|
Dried distillers grains sold (tons)
|
|
25,120
|
|
32,970
|
|
|
Modified distillers grains sold (tons)
|
|
12,618
|
|
11,274
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
Ethanol average price per gallon
|
|
$
|
2.52
|
|
$
|
1.48
|
|
|
Dried distillers grains average price per ton
|
|
$
|
181.02
|
|
$
|
95.23
|
|
|
Modified distillers grains average price per ton
|
|
$
|
91.60
|
|
$
|
49.23
|
|
|
|
|
|
|
|
Primary Inputs:
|
|
|
|
|
Corn ground (bushels)
|
|
4,245,685
|
|
4,660,800
|
|
|
|
|
|
|
|
Costs of Primary Inputs:
|
|
|
|
|
Corn average price per bushel (net of hedging)
|
|
$
|
6.88
|
|
$
|
3.41
|
|
|
|
|
|
|
|
Other Costs:
|
|
|
|
|
Chemical and additive costs per gallon of ethanol sold
|
|
$
|
0.096
|
|
$
|
0.079
|
|
|
Denaturant cost per gallon of ethanol sold
|
|
$
|
0.057
|
|
$
|
0.048
|
|
|
Electricity cost per gallon of ethanol sold
|
|
$
|
0.055
|
|
$
|
0.048
|
|
|
Direct Labor cost per gallon of ethanol sold
|
|
$
|
0.045
|
|
$
|
0.039
|
|
Revenue
We experienced a decrease in the gallons of ethanol sold in the three month period ended
June 30, 2011
as compared to the same period in
2010
. We sold
11,700,138
gallons of ethanol during the three month period ended
June 30, 2011
compared to
12,717,484
, for the same three month period ending in
2010
. The primary reason for this decrease was due to fewer gallons of ethanol produced in 2011 due to down time associated with bringing the Plant's alternative fuel burning capital project online. This project was completed in late April and early May and the plant has been successfully burning alternative fuel in addition to coal as a fuel source since that time. The average price we sold our ethanol at was $2.52 and $1.48 for the three month period ending
June 30, 2011
and
2010
, respectively.
We experienced a corresponding decrease in the amount of distillers grains sold in the three month period ended
June 30, 2011
as compared to the same period in
2010
. We sold
25,120
and
32,970
tons of dried distillers grains during the three month period ended
June 30, 2011
and
2010
, respectively. The average price per ton of dried distillers grains was $181.02 and $95.23
for the three month period ending
June 30, 2011
and
2010
, respectively. We also sold
12,618
and
11,274
tons of modified distillers grains during the three month period ended
June 30, 2011
and
2010
, respectively. The average price per ton of modified distillers grains was $91.60 and $49.23 for the three month period ending
June 30, 2011
and
2010
, respectively.
We also experienced a 8.9% decrease in the amount of corn ground during the three month period ending
June 30, 2011
as compared to the same period in
2010
. Our average price per bushel of corn ground was
$6.88
for the quarter ended
June 30, 2011
compared to $3.41 for the quarter ended
June 30, 2010
.
In the event that we further decrease our production of ethanol, our production of distillers grains would decrease accordingly. Such a decrease in our volume of production of ethanol and distillers grains would likely result in lower revenues. However, if we decreased production, we would require a corresponding decreased quantity of corn and coal, thereby lowering our costs of good sold. Therefore, the effect of a decrease in our revenue would be largely dependent on the market prices of the products we produce and the inputs we use to produce our products at the time of such a production decrease. We anticipate reducing production only if industry margins become unfavorable or we experience mechanical difficulties in operating the plant.
For the three months ended
June 30, 2011
, we received approximately 84% of our revenue from the sale of fuel ethanol and approximately 16% of our revenue from the sale of distillers grains. Our revenue from ethanol increased during the three months ended
June 30, 2011
compared to the same period in
2010
, as a result of increased ethanol prices. During the three months ended
June 30, 2011
, we experienced a increasing trend in the price we received for our ethanol. Higher ethanol prices have been met with historically high prices of corn which has placed pressure on our operating margins. If the price of ethanol and our revenues are outpaced by rising corn prices, management believes our operating margins will be pressured downward, which could significantly affect our liquidity.
There have been a number of developments in legislation that may impact the ethanol industry and our revenues. One such development concerns the federal Renewable Fuels Standard (RFS). The ethanol industry is benefited by the RFS which requires that a certain amount of renewable fuels must be used in the United States each year. In February 2010, the EPA issued new regulations governing the RFS. These regulations have been called RFS2. The most controversial part of RFS2 involves what is commonly referred to as the life-cycle analysis of greenhouse gas emissions. Specifically, the EPA adopted rules to determine which renewable fuels provided sufficient reductions in greenhouse gases, compared to conventional gasoline, to qualify under the RFS program. The scientific method of calculating these greenhouse gas reductions has been a contentious issue. Many in the ethanol industry were concerned that corn based ethanol would not meet the 20% greenhouse gas reduction requirement based on certain parts of the environmental impact model that many in the ethanol industry believed was scientifically suspect. However, RFS2 as adopted by the EPA provides that corn-based ethanol from modern ethanol production processes does meet the definition of a renewable fuel under the RFS program.
In addition to the RFS, the ethanol industry depends on the Volumetric Ethanol Excise Tax Credit (“VEETC”). VEETC provides a volumetric ethanol excise tax credit of 45 cents per gallon of ethanol blended with gasoline. VEETC was renewed until December 31, 2011. If this tax credit is not renewed before the end of 2011, it likely would have a negative impact on the price of ethanol and demand for ethanol in the market due to reduced discretionary blending of ethanol. Discretionary blending is when gasoline blenders use ethanol to reduce the cost of blended gasoline.
In addition to the tax incentives, United States ethanol production is also benefited by a 54 cent per gallon tariff imposed on ethanol imported into the United States. The 54 cent per gallon tariff was recently extended until December 31, 2011. If this tariff is eliminated, it could lead to the importation of ethanol produced in other countries, especially in areas of the United States that are easily accessible by international shipping ports. Ethanol imported from other countries may be a less expensive alternative to domestically produced ethanol and may affect our ability to sell our ethanol profitably.
Cost of Goods Sold
Our cost of goods sold from the production of ethanol and distillers grains is primarily made up of corn and energy expenses. Our cost of goods sold as a percentage of revenues was
99.2
% for the three months ended
June 30, 2011
as compared to
97.4
% for the same period in
2010
. This increase in cost of goods sold as a percentage of revenues was primarily the result of the increase in corn prices for the three months ended
June 30, 2011
as compared to the same period in
2010
.
Corn Costs
Competition for corn in our area has increased basis levels. Although we believe there is corn available nationally from a supply and demand standpoint, there is uncertainty over the amount, quantity, or quality of local corn for the plant. The cost of corn is the highest cost input to the plant and further increases in corn costs could dramatically affect our expected cost of goods
sold. During the three month period ended
June 30, 2011
, corn prices fluctuated significantly and we expect continued volatility in corn prices for the rest of our fiscal year which could impact our cost of goods sold.
In the ordinary course of business, we entered into forward purchase contracts for our commodity purchases and sales. At
June 30, 2011
we have forward corn purchase contracts for various delivery periods through April 2012 for a total commitment of approximately $18,997,000. Our outstanding corn derivatives are projected to settle by December 2011.
Coal Costs
We purchase the coal needed to power our ethanol plant from a supplier under a long-term contract. This arrangement helps us to mitigate price volatility in the coal market. Our coal costs were down 13.6% during the second quarter of 2011 compared to the second quarter of 2010, primarily due to decreased ethanol production and incorporation of our alternative fuel burning capital project in early May, 2011. Our coal contract is up for renewal in December 2011 and we expect to renew this agreement.
General and Administrative Expenses
Our general and administrative expenses as a percentage of revenues were
1.8
% for the three months ended
June 30, 2011
compared to
2.6
% in the same period of
2010
. General and administrative expenses include salaries and benefits of administrative employees, insurance, taxes, professional fees and other general administrative costs. We experienced an increase in actual general and administrative expenses of approximately $32,000 for the three month period ended
June 30, 2011
as compared to the same period in
2010
. Our efforts to optimize efficiencies and maximize production may result in a decrease in our general and administrative expenses on a per gallon basis. However, because these expenses generally do not vary with the level of production at the plant, we expect our actual operating expenses to remain steady throughout the remainder of the 2011 fiscal year.
Operating Income/(Loss)
Our loss from operations for the three months ended
June 30, 2011
was approximately
(1.0)
% of our revenues compared to an operating loss of
(0.03)
% for the same period in
2010
. The decrease in our operating income for the three month period ended
June 30, 2011
was primarily due to decreased ethanol production due to an extended shutdown period related to bringing our alternative fuel burning capital project on-line and subsequent lost margin.
Other Income/Expense
Our other income for the three months ended
June 30, 2011
was
1.6
% of our revenues compared to other expense of (
3.4
%) of revenues for the same period in
2010
. Our other income for the three month period ended
June 30, 2011
consisted primarily of a refundable alternative fuel tax credit of approximately $1,064,000 which was offset by interest expense. Our other expense for the three month period ended June 30,
2010
consisted primarily of interest expense.
Results of Operations for the Six Months Ended
June 30, 2011
and
2010
The following table shows the results of our operations and the approximate percentage of revenues, costs of sales, operating expenses and other items to total revenues in our unaudited statements of operations for the six months ended
June 30, 2011
and
2010
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, 2011 (Unaudited)
|
|
Six Months Ended
June 30, 2010 (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations Data
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Revenues
|
$
|
67,095,425
|
|
|
100.00
|
|
|
$
|
51,404,949
|
|
|
100.00
|
|
|
Cost of Goods Sold
|
65,819,561
|
|
|
98.10
|
|
|
47,117,918
|
|
|
91.66
|
|
|
Gross Profit
|
1,275,864
|
|
|
1.90
|
|
|
4,287,031
|
|
|
8.34
|
|
|
General and Administrative Expenses
|
1,294,663
|
|
|
1.93
|
|
|
1,226,327
|
|
|
2.39
|
|
|
Operating Income (Loss)
|
(18,799
|
)
|
|
(0.03
|
)
|
|
3,060,704
|
|
|
5.95
|
|
|
Other Income (Expense)
|
83,417
|
|
|
0.12
|
|
|
(849,800
|
)
|
|
(1.65
|
)
|
|
Net Income (Loss)
|
$
|
64,618
|
|
|
0.10
|
|
|
$
|
2,210,904
|
|
|
4.30
|
|
The following table shows additional data regarding production and price levels for our primary inputs and products for the
six months
ended
June 30, 2011
and
2010
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months ended
June 30, 2011
|
Six Months ended
June 30, 2010
|
|
Production:
|
|
|
|
|
Ethanol sold (gallons)
|
|
23,074,749
|
|
26,966,609
|
|
|
Dried distillers grains sold (tons)
|
|
46,569
|
|
67,486
|
|
|
Modified distillers grains sold (tons)
|
|
33,331
|
|
31,489
|
|
|
Revenues:
|
|
|
|
|
Ethanol average price/gallon (net of hedging)
|
|
$
|
2.41
|
|
$
|
1.58
|
|
|
Dried distillers grains price/ton
|
|
$
|
175.84
|
|
$
|
104.85
|
|
|
Modified distillers grains price/ton
|
|
$
|
91.05
|
|
$
|
54.71
|
|
|
Primary Input:
|
|
|
|
|
Corn ground (bushels)
|
|
8,319,244
|
|
9,806,635
|
|
|
Costs of Primary Input:
|
|
|
|
|
Corn avg price/bushel (net of hedging)
|
|
$
|
6.57
|
|
$
|
3.45
|
|
|
Other Costs (per gallon of ethanol sold):
|
|
|
|
|
Chemical and additive costs
|
|
$
|
0.099
|
|
$
|
0.079
|
|
|
Denaturant cost
|
|
$
|
0.052
|
|
$
|
0.046
|
|
|
Electricity cost
|
|
$
|
0.055
|
|
$
|
0.046
|
|
|
Direct Labor cost
|
|
$
|
0.044
|
|
$
|
0.036
|
|
Revenue
In the
six month
period ended
June 30, 2011
ethanol sales comprised approximately 83.0% of our revenues and distillers grains sales comprised approximately 17.0% of our revenues. For the
six month
period ended
June 30, 2010
, ethanol sales comprised approximately 82.9% of our revenues and distillers grains sales comprised approximately 17.1% of our revenue. Our revenues were higher for our first half of fiscal year
2011
compared to the same period of
2010
primarily as a result of an increase in the sales price of our ethanol.
The average ethanol sales price we received for the
six month
period ended
June 30, 2011
was approximately 53% higher than our average ethanol sales price for the comparable
2010
period. Management anticipates that ethanol prices will continue to be subject to influences from the prices of oil and gasoline along with the uncertainties surrounding several pieces of legislation.
The price we received for our dried distillers grains increased by approximately 68% during the
six month
period ended
June 30, 2011
compared to the same period of
2010
. The price of dried distillers grains changes in proportion to the price of corn, which has increased in the
six month
period ended
June 30, 2011
. Accordingly, we anticipate that the market price of distillers grains will continue to be volatile as a result of changes in the price of corn and competing animal feed substitutes such as soybean meal.
Cost of Good Sold
Our costs of goods sold as a percentage of revenues were approximately
98%
for the
six month
period ended
June 30, 2011
compared to approximately
92%
for the same period of
2010
. Our cost of goods sold increased by approximately 40% in the
six months
ended
June 30, 2011
, compared to the
six months
ended
June 30, 2010
, and our revenue for the same period increased by approximately 31%. This increase in the cost of goods sold is primarily a result of an increase in the cost of corn processed at our facility. The increase in our revenues is due primarily to an increase in the price we received for our ethanol.
General and Administrative Expenses
Our general and administrative expenses as a percentage of revenues were lower for the
six month
period ended
June 30, 2011
than they were for the same period ended
June 30, 2010
. These percentages were approximately
1.9%
and approximately
2.4%
for the
six months
ended
June 30, 2011
and
2010
, respectively. We experienced an increase in actual general and administrative expenses of approximately $68,000 for the six month period ended
June 30, 2011
as compared to the same period
in
2010
. Our efforts to optimize efficiencies and maximize production may result in a decrease in our general and administrative expenses on a per gallon basis. However, because these expenses generally do not vary with the level of production at the plant, we expect our operating expenses to remain steady throughout the remainder of the 2011 fiscal year.
Operating Income (Loss)
Our loss from operations for the
six months
ended
June 30, 2011
was approximately
0.0%
of our revenues compared to income of approximately
6.0%
of our revenues for the
six months
ended
June 30, 2010
. This decrease in our profitability is primarily due to our cost of goods sold as a percentage of revenues being higher for the
six months
ended
June 30, 2011
compared to the
six months
ended
June 30, 2010
. During the same period we experienced a $3.47 per bushel increase in our cost of corn (net of hedging).
Other Income/Expense
Other income for the
six months
ended
June 30, 2011
, was approximately
0.1%
of our revenue and totaled
$83,417
. Other expense for the
six months
ended
June 30, 2010
totaled
$849,800
and was approximately
(1.7)%
of our revenues. The increase in net other income/expense is primarily due to a decrease in interest expense of approximately $759,000 and recognition of the alternative fuel tax credit of approximately $1,064,000.
Changes in Financial Condition for the Six Months Ended
June 30, 2011
Current Assets
. Our accounts receivable were higher at
June 30, 2011
compared to
December 31, 2010
due to the majority of our receivables being sales of ethanol which was at a higher price per gallon in 2011 compared to
2010
. We also recorded a receivable related to the refundable alternative fuel burning tax credit in 2011 which we were not eligible for in 2010. The value of our inventory was higher at
June 30, 2011
compared to
December 31, 2010
primarily because corn and ethanol prices were higher at
June 30, 2011
. Our inventory is valued at the lesser of our cost associated with the our inventory or the market value of our inventory. When corn and ethanol prices increase, it results in a larger value being attributed to our inventory, even if the amount of ethanol and corn that we are holding in inventory is comparable. The amount we had in our restricted commodity derivatives margin account was lower at
June 30, 2011
compared to
December 31, 2010
because we were required to hold less cash to offset unrealized losses on our risk management positions. Our prepaid expenses were slightly higher at
June 30, 2011
compared to
December 31, 2010
because of the timing of an insurance premium payment.
Property, Plant and Equipment
. The gross value of our property, plant and equipment was higher at
June 30, 2011
compared to
December 31, 2010
primarily due to placing our alternative fuel burning capital project in service May 2011. The net value of our property and equipment was lower at
June 30, 2011
compared to
December 31, 2010
primarily as a result of increases in our accumulated depreciation. The increase in our construction in progress at
June 30, 2011
compared to
December 31, 2010
was primarily due to a water treatment capital project.
Other Assets
. Our other assets were higher at
June 30, 2011
compared to
December 31, 2010
due to patronage equity we received during the first
six months
of our
2011 fiscal year
.
Current Liabilities
. Our current liabilities were significantly higher at
June 30, 2011
compared to
December 31, 2010
, primarily due to our primary bank debt with First National Bank of Omaha (the "Bank") being fully current as it matures in April 2012. Loss on firm purchase commitments is also higher at
June 30, 2011
compared to
December 31, 2010
due to certain contract prices entered into being higher than market prices as of June 30, 2011.
Long-term Liabilities
. Our long-term liabilities were significantly lower at
June 30, 2011
compared to
December 31, 2010
, primarily due to our primary bank debt with the Bank being classified as a current liability as of June 30, 2011.
Liquidity and Capital Resources
Based on financial forecasts performed by our management, we do not anticipate seeking additional equity or debt financing during our 2011 fiscal year, which ends September 30, 2011 and 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 also anticipate that the term debt maturing in April 2012 will be renegotiated with the Bank. Should we experience unfavorable operating conditions in the future, we may have to secure additional debt or equity sources for working capital or other purposes.
The following table shows cash flows for the
six months
ended
June 30, 2011
and
2010
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
2010
|
|
Net cash provided by (used for) operating activities
|
|
$
|
(3,429,416
|
)
|
$
|
6,370,125
|
|
|
Net cash used in investing activities
|
|
(626,554
|
)
|
(336,293
|
)
|
|
Net cash used for financing activities
|
|
(3,334,260
|
)
|
(13,791,207
|
)
|
|
Net decrease in cash
|
|
$
|
(7,390,230
|
)
|
$
|
(7,757,375
|
)
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
2,413,336
|
|
$
|
5,456,716
|
|
Cash Flow from Operations
Cash used for operating activities was $
3,429,416
for the
six months
ended
June 30, 2011
as compared to $
6,370,125
cash provided by operating activities for the
six months
ended
June 30, 2010
. Our net loss from operations for the
six months
ended
June 30, 2011
was
$64,618
as compared to net income of
$2,210,904
for the same period in
2010
. In addition to the change in net income, higher ethanol and corn prices both contributed to significantly higher accounts receivable and inventory balances as of June 30, 2011.
Cash Flow From Investing Activities
We experienced an increase in cash used in investing activities for the
six month
period ended
June 30, 2011
compared to the same period in
2010
. Cash used in investing activities was $
626,554
for the
six months
ended
June 30, 2011
as compared to $
336,293
for the same period in
2010
. All of the cash used in investing activities in both 2011 and 2010 was for capital expenditures.
Cash Flow from Financing Activities
We had a decrease in cash used for financing activities for the
six month
period ended
June 30, 2011
as compared to the same period in
2010
. Cash used for financing activities was $
3,334,260
for the
six months
ended
June 30, 2011
. This cash flow is payment on our long term debt.
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 we expect operations to generate adequate cash flows to maintain operations.
Capital Expenditures
The Company currently has two capital projects in progress with approximately $540,000 incurred as of June 30, 2011. One of these projects is improvements to the plant's water treatment system and the other is installation of new bin sweeps in the plant's corn silos. We anticipate the completion of the water treatment project to be in the third quarter of 2011 and the bin sweeps to be installed in the first quarter of fiscal 2012. The estimated total cost of these two projects is $750,000 and we anticipate being able to fund the balance of these capital projects from our operating cash flows. During the six months ended June 30, 2011, the Company placed in service approximately $900,000 for capital projects with the majority of these costs related to the Company's alternative fuel burning capital project. The alternative fuel burning project was placed in service in early May 2011 and allows the Plant to burn alternative fuel along with its primary fuel source of coal, thereby reducing the Plant's coal usage.
Capital Resources
Short-Term Debt Sources
The Company has a revolving line-of-credit of $7,000,000 available with a maturity date of April 2012. There were no amounts drawn on this line-of-credit as of June 30, 2011.
Long-Term Debt Sources
Our primary debt instruments are with First National Bank of Omaha (the “Bank”) and have a scheduled maturity date of April 2012. These debt instruments include fixed and variable rate notes and the Company has had preliminary
conversations with the Bank about refinancing this debt but has not entered into a refinancing arrangement as of June 30, 2011.
The following table summarizes our long-term debt instruments with the Bank.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Balance
(Millions)
|
Interest Rate
|
|
Range of
Estimated
|
|
|
Term Note
|
|
June 30, 2011
|
|
|
December 31,
2010
|
June 30, 2011
|
|
December 31,
2010
|
|
Quarterly
Principal
Payment Amounts
|
Notes
|
|
Fixed Rate Note
|
|
$
|
18.9
|
|
|
|
$
|
21.3
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
$633,000 - $654,000
|
1, 2, 4
|
|
2007 Fixed Rate Note
|
|
|
7.0
|
|
|
|
|
7.9
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
$234,000 - $242,000
|
1, 2, 5
|
|
Variable Rate Note
|
|
|
—
|
|
|
|
|
—
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
1, 2, 3, 5
|
|
Long-Term Revolving Note
|
|
|
—
|
|
|
|
|
—
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
1, 2, 6, 7
|
Notes
1 - The scheduled maturity date is April 2012
2 - Range of estimated quarterly principal payments is based on principal balances and interest rates as of June 30, 2011.
3 - The Variable Rate Note was paid off in April 2010 as the Excess Cash Flow payment was applied to the Variable Rate Note.
4 - Interest rate based on 5.0% over three-month LIBOR with a 6% minimum, reset quarterly.
5 - Interest rate based on 5.0% over three-month LIBOR with a 6% minimum, reset quarterly.
6 - Interest rate based on 5.0% over one-month LIBOR with a 6% minimum, reset monthly.
7 - Funds withheld from the plant's design builder (approx $4,100,000) which were previously set aside in a money market account were applied to the Long-Term Revolving Note in March 2010 pursuant to the terms of the 7th Amendment to our loan agreement with Bank. Accordingly, those funds may ultimately be paid to the design builder depending upon the terms of any resolution of the dispute.
Interest Rate Swap Agreements
In December 2005, we entered into an interest rate swap transaction that effectively fixed the interest rate at 8.08% on the outstanding principal of the Fixed Rate Note. In December 2007, we entered into a second interest rate swap transaction that effectively fixed the interest rate at 7.695% on the outstanding principal of the December 2007 Fixed Rate Note.
Subordinated Debt
As part of our construction loan agreement, we entered into three separate subordinated debt agreements totaling $5,525,000 and received funds from these debt agreements during 2006. Interest is charged at a rate of 2.0% over the Variable Rate Note interest rate (a total of 8% at June 30, 2011 and 2010). Per the terms of the Mediated Settlement Agreement (the Agreement) the Company entered into in November 2010 with two parties holding subordinated debt agreements with the Company, interest on $4,000,000 of the subordinated debt continues to accrue subsequent to the date of the Agreement but is only due and payable if we fail to pass the Qualified Emissions Test as defined in the Agreement. The Company anticipates the Qualified Emissions Testing period to take place in the current fiscal year. Interest on the remaining $1,525,000 of subordinated debt is due and payable on a quarterly basis with a principal maturity date of April 16, 2012. The balance outstanding on all subordinated debt was $5,525,000 as of June 30, 2011 and December 31, 2010.
Letters of Credit
We issued two letters of credit in 2009 in conjunction with the issuance of certain grain warehouse and distilled spirits bonds. The letters of credit were issued in the amount of $500,000 and $250,000, respectively. The letters of credit are subject to a 2.0% quarterly commitment fee. The letters of credit remain outstanding at June 30, 2011.
Restrictive Covenants
We are subject to a number of covenants and restrictions in connection with our credit facilities, including:
|
|
|
|
•
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Providing the Bank with current and accurate financial statements;
|
|
|
|
|
•
|
Maintaining certain financial ratios including minimum net worth, working capital and fixed charge coverage ratio;
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|
|
|
|
•
|
Maintaining adequate insurance;
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|
|
|
|
•
|
Making, or allowing to be made, any significant change in our business or tax structure; and
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|
|
|
|
•
|
Limiting our ability to make distributions to members.
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|
|
|
|
•
|
Maintain a threshold of capital expenditures
|
As of June 30, 2011 we are in compliance with our loan covenants.
Industry Support
North Dakota Grant
In 2006, we entered into a contract with the State of North Dakota through the Industrial Commission for a lignite coal grant not to exceed $350,000. We received $275,000 from this grant during 2006 with this amount currently shown in the long-term liability section of our Balance Sheet as Contracts Payable. Because we have not met the minimum lignite usage requirements specified in the grant for any year in which the plant has operated, we expect to have to repay the grant and are awaiting instructions from the Industrial Commission as to the terms of the repayment schedule. This repayment could begin at some point in 2011, but as of June 30, 2011 we have not received any instructions from the Industrial Commission.
Critical Accounting Estimates
Our most critical accounting policies, which are those that require significant judgment, include policies related to the carrying amount of property, plant and equipment; valuation of derivatives, inventory and purchase commitments of inventory; and analysis of intangibles impairment. An in-depth description of these can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010. For valuation allowances related to firm purchase commitments of inventory, please refer to the disclosures in Note 3 of the Notes to the Unaudited Condensed Financial Statements in this Quarterly Report. Management has not changed the method of calculating and using estimates and assumptions in preparing our condensed financial statements in accordance with generally accepted accounting principles. There have been no changes in the policies for our accounting estimates for the quarter ended June 30, 2011.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to the impact of market fluctuations associated with interest rates and commodity prices as discussed below. We have no exposure to foreign currency risk as all of our business is conducted in U.S. Dollars. We use derivative financial instruments as part of an overall strategy to manage market risk. We use cash, futures and option contracts to hedge changes to the commodity prices of corn, ethanol and natural gas. We do not enter into these derivative financial instruments for trading or speculative purposes, nor do we designate these contracts as hedges for accounting purposes pursuant to the requirements of Generally Accepted Accounting Principles (“GAAP”).
Commodity Price Risk
We expect to be exposed to market risk from changes in commodity prices. Exposure to commodity price risk results from our dependence on corn in the ethanol production process and the sale of ethanol.
We enter in to fixed price contracts for corn purchases on a regular basis. It is our intent that, as we enter in to these contracts, we will use various hedging instruments (puts, calls and futures) to maintain a near even market position. For example, if we have 1 million bushels of corn under fixed price contracts we would generally expect to enter into a short hedge position to offset our price risk relative to those bushels we have under fixed price contracts. Because our ethanol marketing company (RPMG) is selling substantially all of the gallons it markets on a spot basis we also include the corn bushel equivalent of the ethanol we have produced that is inventory but not yet priced as bushels that need to be hedged.
Although we believe our hedge positions will accomplish an economic hedge against our future purchases, they are not designated as hedges for accounting purposes, which would match the gain or loss on our hedge positions to the specific commodity purchase being hedged. We use fair value accounting for our hedge positions, which means as the current market price of our hedge positions changes, the gains and losses are immediately recognized in our cost of sales. The immediate recognition of hedging gains and losses under fair value accounting can cause net income to be volatile from quarter to quarter and year to year due to the timing of the change in value of derivative instruments relative to the cost of the commodity being hedged. However, it is likely that commodity cash prices will have the greatest impact on the derivatives instruments with delivery dates nearest the current cash price.
As of June 30, 2011 we had approximately 2,791,000 bushels of corn under fixed price contracts. Some of these contracts were priced above current market prices so an accrual for a loss on firm purchase commitments of $34,000 was recorded.
It is the current position of our ethanol marketing company, RPMG, that under current market conditions selling ethanol in the spot market will yield the best price for our ethanol. RPMG will, from time to time, contract a portion of the gallons they market with fixed price contracts.
We estimate that our expected corn usage will be between 18 million and 20 million bushels per calendar year for the production of approximately 50 million to 54 million gallons of ethanol. As corn prices move in reaction to market trends and information, our income statements will be affected depending on the impact such market movements have on the value of our derivative instruments.
To manage our coal price risk, we entered into a coal purchase agreement with our supplier to supply us with coal, fixing the price at which we purchase coal. If we are unable to continue buying coal under this agreement, we may have to buy coal in the open market.
Interest Rate Risk
We are exposed to market risk from changes in interest rates from holding revolving lines of credit and subordinated debt which bear variable interest rates. The interest rate on our senior debt has effectively been set at a fixed rate with the use of underlying interest rate swap agreements. As of June 30, 2011, we did not have any amounts drawn on our revolving lines of credit that exposes us to interest rate risk. Our subordinated debt bears variable interest rates and we had $5,525,000 outstanding in variable rate subordinated debt as of June 30, 2011. We anticipate that a hypothetical 1% change in the interest rate on our subordinated debt, from the rate in effect on June 30, 2011, would cause an adverse change to our income in the amount of approximately $44,200.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d - 15(e) under the Securities Exchange Act of 1934 (“Exchange Act”), as amended, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's (“SEC”) rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and
procedures as of June 30, 2011, have concluded that our disclosure controls and procedures are effective in ensuring that material information required to be disclosed is included in the reports that we file with the SEC.
Changes in Internal Controls
There have been no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the fiscal quarter ended June 30, 2011, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Inherent Limitations on the Effectiveness of Controls
Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that objectives of the control systems 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 a cost-effective control system, no evaluation of internal controls over financial reporting can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected or will be detected.
These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies and procedures.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time in the ordinary course of business, we may be named as a defendant in legal proceedings related to various issues, including without limitation, workers’ compensation claims, tort claims, or contractual disputes. We are not currently involved in any material legal proceedings.
ITEM 1A. RISK FACTORS
You should carefully read and consider the risks and uncertainties below and the other information contained in this report. The risks and uncertainties described below are not the only ones we may face. The following risks, together with additional risks and uncertainties not currently known to us or that we currently deem immaterial could impair our financial condition and results of operation.
Risks Relating to Our Business
If the Federal Volumetric Ethanol Excise Tax Credit (“VEETC”) expires on December 31, 2011, it could negatively impact our profitability
. The ethanol industry is benefited by VEETC which is a federal excise tax credit of 45 cents per gallon of ethanol blended with gasoline. This excise tax credit is set to expire on December 31, 2011. We believe that VEETC positively impacts the price of ethanol. If VEETC is allowed to expire, it could negatively impact the price we receive for our ethanol and could negatively impact our profitability.
The price of distillers grains may decline as a result of China's antidumping investigation of distillers grains originating in the United Sates.
Estimates indicate that as much as 10 to 15 percent of the distillers grains produced in the United States will be exported to China in the coming year. However, this export market may be jeopardized if the Chinese government imposes trade barriers in response to the outcome of an antidumping investigation currently being conducted by the Chinese Ministry of Commerce. If producers and exporters of distillers grains are subjected to trade barriers when selling distillers grains to Chinese customers there may be a reduction in the price of distillers grains in the United States. Declines in the price we receive for our distillers grains will lead to decreased revenues and may result in our inability to operate the ethanol plant profitably.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4.
(REMOVED AND RESERVED)
Item 5.
Other Information
In July 2011 the Company entered into an equity grant agreement with its Chief Financial Officer for the receipt of 100,000 units. The units will be issued based on a five year vesting schedule with the first units awarded on October 1, 2011. Compensation expense related to this award will be recognized over the period of service related to the units. No compensation expense relating to this equity grant agreement was accrued or incurred for the six months ended June 30, 2011.
Item 6. Exhibits.
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|
(a)
|
The following exhibits are filed as part of this report.
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Exhibit No.
|
|
Exhibits
|
|
10.1
|
|
|
Equity Grant Agreement between Kent Anderson and Red Trail Energy, LLC dated July 1, 2011.*
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|
31.1
|
|
|
Certificate Pursuant to 17 CFR 240.13a-14(a)*
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|
31.2
|
|
|
Certificate Pursuant to 17 CFR 240.13a-14(a)*
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32.1
|
|
|
Certificate Pursuant to 18 U.S.C. Section 1350*
|
|
32.2
|
|
|
Certificate Pursuant to 18 U.S.C. Section 1350*
|
|
101
|
|
|
The following financial information from Red Trail Energy, LLC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Balance Sheets as of June 30, 2011 and December 31, 2010, (ii) Statements of Operations for the three and six months ended June 30, 2011 and 2010, (iii) Statements of Cash Flows for the six months ended June 30, 2011 and 2010, and (iv) the Notes to Condensed Financial Statements.**
|
(*) Filed herewith.
(**) Furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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RED TRAIL ENERGY, LLC
|
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Date:
|
August 15, 2011
|
|
/s/ Gerald Bachmeier
|
|
|
|
|
Gerald Bachmeier
|
|
|
|
|
President and Chief Executive Officer
|
|
|
|
|
(Principal Executive Officer)
|
|
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|
|
|
|
Date:
|
August 15, 2011
|
|
/s/ Kent Anderson
|
|
|
|
|
Kent Anderson
|
|
|
|
|
Chief Financial Officer
|
|
|
|
|
(Principal Financial and Accounting Officer)
|
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