SOUTHWEST IOWA RENEWABLE ENERGY, LLC General
The following management discussion and analysis provides information which management believes is relevant to an assessment and understanding of our financial condition and results of operations for the first three months of our fiscal year endingSeptember 30, 2023 ("Fiscal 2023"). This discussion should be read in conjunction with the financial statements included herewith and notes to the financial statements and our Annual Report on Form 10-K for the year endedSeptember 30, 2022 ("Fiscal 2022"), including the financial statements, accompanying notes and the risk factors contained herein. CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS This quarterly report on Form 10-Q ofSouthwest Iowa Renewable Energy, LLC (the "Company," "SIRE," "we," or "us") contains historical information, as well as forward-looking statements that involve known and unknown risks and relate to future events, our future financial performance, or our expected future operations and actions. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "future," "intend," "could," "hope," "predict," "target," "potential," or "continue" or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions based on current information and involve numerous assumptions, risks and uncertainties. Our actual results or actions may differ materially from these forward-looking statements for many reasons, including the reasons described in this report. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include, without limitation:
• Changes in the availability and price of corn, natural gas, and steam;
• Negative impacts resulting from reductions in, or other modifications to, the
renewable fuel volume requirements under the Renewable Fuel Standard;
• Our inability to comply with our credit agreements required to continue our
operations;
• Negative impacts that our hedging activities may have on our operations;
• Decreases in the market prices of ethanol, distillers grains;
• Ethanol supply exceeding demand and corresponding ethanol price reductions;
• Changes in the environmental regulations that apply to our plant operations;
• Changes in plant production capacity or technical difficulties in operating
the plant;
• Changes in general economic conditions or the occurrence of certain events
causing an economic impact in the agriculture, oil or automobile industries;
• Changes in other federal or state laws and regulations relating to the
production and use of ethanol;
• Changes and advances in ethanol production technology;
• Competition from larger producers as well as competition from alternative fuel
additives;
• Changes in interest rates and lending conditions of our loan covenants;
• Volatile commodity and financial markets;
• Decreases in export demand due to the imposition of duties and tariffs by
foreign governments on ethanol and distiller grains produced in the United
States;
• Disruptions, failures or security breaches relating to our information
technology infrastructure;
Adverse impacts to our operations, operating results and the availability,
• quality and price of raw materials due to adverse weather conditions,
including as a result of climate change;
• Trade actions by the
biofuels and agricultural sectors and related industries; and
• Disruption caused by health epidemics, such as the COVID-19 pandemic, and the
adverse impact of such epidemics on global economic and business conditions.
These forward-looking statements are based on management's estimates, projections and assumptions as of the date hereof and include various assumptions that underlie such statements. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the management discussion and analysis, in our Annual Report on Form 10-K for Fiscal 2022 under the section entitled "Risk Factors" and in our other priorSecurities and Exchange Commission filings. These and many other factors could affect our future financial condition and operating results and could cause actual results to differ materially from expectations set forth in the forward-looking statements made in this document or elsewhere by the Company or on its behalf. We undertake no obligation to revise or update any forward-looking statements. The forward-looking statements contained in this quarterly report on Form 10-Q are included in the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 16
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Table of Contents
General Overview and Recent Developments
The Company is anIowa limited liability company, located inCouncil Bluffs, Iowa , formed inMarch 2005 . The Company is permitted to produce 147 million gallons of ethanol annually. We began producing ethanol inFebruary 2009 and sell our ethanol, distillers grains, distillers corn oil, corn condensed distillers solubles ("syrup") and carbon dioxide, in the continentalUnited States ,Mexico , and thePacific Rim . OnNovember 26, 2019 , theEnvironmental Protection Agency (the "EPA ") approved the Company's petition as an "Efficient Producer" to increase the D-6 RINs generated by our facility to 147 million gallons of ethanol produced annually, provided the non-grandfathered ethanol produced satisfies the 20% lifecycle GHG, or greenhouse gas impacts reduction requirements specified in the Clean Air Act for renewable fuel. The Company must comply with all registration provisions in order to register for the production of non-grandfathered ethanol, and the registration application must be accepted by theEPA before the facility is eligible to generate RIN's for non-grandfathered ethanol produced. The Company completed the registration process before the end of the second quarter in Fiscal 2022. OnDecember 6, 2022 , our Board of Directors declared a distribution of$2,500 per unit to its members. The distribution was paid onDecember 23, 2022 to members of record onDecember 6, 2022 . With 8,975 shares outstanding at the time of the distribution declaration, the total cash paid for the distribution was$22.4 million . .
Market Factors Impacting Operations
For the three months endedDecember 31, 2022 compared to the three months endedDecember 31, 2021 the average price per gallon of denatured ethanol sold decreased by 7.5% due to increased stocks and the threat of a rail strike being eliminated. There have also been decreased prices for crude oil and gasoline in the first three months of Fiscal 2023 compared to the first three months of Fiscal 2022 due to increased supply world-wide. Corn prices increased 30.9% when comparing the first three months of Fiscal 2023 to the first three months of Fiscal 2022 which is a continuation of high prices that has been experienced throughout the past year. The price of corn is higher than the five year average price. Weather, world supply and demand, current and anticipated stocks, agricultural policy and other factors can contribute to volatility in corn prices. Such changes have a material effect on our cost of goods sold with corn being one of our primary inputs. Management anticipates that ethanol prices will continue to change in relation to changes in corn and energy prices. During the first quarter of Fiscal 2023, we experienced the situation where the ethanol prices decreased and while the inputs also did slightly, it was not to the same level of decrease that ethanol prices experienced. If these factors continue, margins will be minimal on ethanol sales and potentially negative. During Fiscal 2022, the Company faced significant challenges with respect to transportation and logistics. Like many companies, the lingering impacts of the COVID-19 pandemic on coastal ports, the trucking industry and more recently, rail transportation, had a material effect on our ability to timely, economically, and consistently ship products both domestically and abroad. Management continues to explore various options to mitigate these challenges, but expects them to continue to be a factor through Fiscal 2023. Management does not know when these logistics challenges will dissipate. The average market price per ton of distillers grains sold in the first three months of Fiscal 2023 increased by 30% compared to the average price per ton of distillers grains sold for the same period in Fiscal 2022. This increase in the market price of distillers grains is primarily due to supply issues during the first quarter of Fiscal 2023. A number of ethanol production facilities, including us, encountered operational challenges due to extremely cold weather during December in the mid-west, which resulted in a reduced supply and resulting increase in price. An increase in supply as ethanol plants return to higher production levels as operating conditions improve could have a negative effect on distillers grains prices. 17
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Table of Contents Key Operating Measures The following table provides comparative data relating to certain operating measures during the three months endedDecember 31, 2022 , andDecember 31, 2021 . Three Months Three Months Ended December Ended December Description 31, 2022 31, 2021 Production (unden gal) (in millions) 29.240 32.310 Ethanol Yield (unden gal/bu) 2.920 2.930 Denatured Ethanol Price (per gal) 2.230 2.160 Corn Price (per bu) 6.900 5.270 Corn Oil Yield (lbs/bu) 1.072 1.060 BTU's/gallon 22,286 21,356 Steam/Nat Gas cost per MMBTU $ 4.069 $ 3.610 kWh/gallon $ 0.849 $ 0.660 Chemical Cost ($/gal) $ 0.148 $ 0.090 As the table above indicates, during the three months endedDecember 31, 2022 our performance against the operating measures improved in some categories, but was met with challenges in other categories. The price per gallon of denatured ethanol decreased over the same period last year due to the alleviation of concerns about potential rail strikes and the decreased demand for gasoline as drivers spent less time on the roads and due to operational challenges, We produced 9.5% less ethanol during the three months endedDecember 31, 2022 compared to the three months endedDecember 31, 2021 . We experienced an increase in corn oil yield by 1.1% when comparing the three months endedDecember 31, 2022 and the three months endedDecember 31, 2021 due to changes in the chemicals we started using in Fiscal 2022 and our ability to identify an efficient dosing process. Chemical costs per gallon were up 64% when comparing the three months endedDecember 31, 2022 with the same three month period in Fiscal 2022 due to the continued rising costs of chemicals that we utilize. In addition, while our natural gas cost increased 12.7% period over period, the average spot price for natural gas increased 16% when comparing the quarter endedDecember 31, 2022 to the quarter endedDecember 31, 2021 . . Cost Per Gallon YTD 2023 FY 2022 FY 2021 FY 2020 Variable 0.279 0.276 0.217 0.207 Fixed 0.138 0.146 0.107 0.129 G&A 0.068 0.059 0.044 0.043 Total 0.484 0.482 0.368 0.379 18
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Table of Contents Regulatory Developments Renewable Fuel Standard The ethanol industry receives support through theFederal Renewable Fuels Standard (the "RFS") which has been, and continues to be, a driving factor in the growth of ethanol usage. The RFS requires that each year a certain amount of renewable fuels must be used inthe United States . The RFS is a national program that allows refiners to use renewable fuel blends in those areas of the country where it is most cost-effective. TheEPA is responsible for revising and implementing regulations to ensure that transportation fuel sold inthe United States contains a minimum volume of renewable fuel. The RFS statutory volume requirement increases incrementally each year untilthe United States is statutorily required to use 36 billion gallons of renewable fuels by calendar year 2022. TheEPA has the authority, however, to waive the RFS statutory volume requirements, in whole or in part, provided that there is either inadequate domestic renewable fuel supply or the implementation of the requirement would severely harm the economy or environment of a state, region orthe United States . Annually, theEPA is required by statute to pass a rule that establishes the number of gallons of different types of renewable fuels that must be used inthe United States which is called the renewable volume obligation. For 2020, 2021, and 2022 the statutory volume requirements for renewable fuels were 30 billion gallons, 33 billion gallons, and 36 billion gallons, respectively. OnJune 3, 2022 , theEPA released the final rules for the renewable volume obligations ("RVOs") for 2020, 2021 and 2022 and set the RVOs at 17.13 billion gallons for 2020, 18.84 billion gallons for 2021 and 20.63 billion gallons for 2022. An additional 250 million supplemental gallons were added to the RVOs for 2022 in order to address the court-ordered remand of previously lowered RVOs for 2014-2016. OnDecember 1, 2022 , theEPA released a proposed rule to set the RVOs for 2023, 2024 and 2025 which set the annual volume requirement for renewable fuel at 20.82 billion gallons for 2023, 21.87 billion gallons for 2024 and 22.68 billion gallons for 2025 (the "Proposed Rule"). This is the first time that theEPA has set RVOs without using the volume requirements set out in the Energy Independent and Security Act of 2002 (the "EISA") which provided statutory volume requirements through 2022. When setting the volume requirements beyond the statutory mandates within the EISA, theEPA has more discretion and takes into consideration various factors including, without limitation, costs, air quality, climate change, energy security and infrastructure issues. Under the Proposed Rule, the number of gallons which may be met by conventional renewable fuels such as corn-based ethanol is set at 15.0 billion gallons for 2023 and increases to 15.25 billion gallons in 2024 and 2025. The Proposed Rule also provides for an additional 250 million gallon supplemental volume requirement in 2023 to continue to address the court-ordered remand of previously lowered RVOs as a result of denied small refinery waivers. TheEPA is currently soliciting comments on the Proposed Rule and a public hearing on the Proposed Rule was held onJanuary 10, 2023 . As of the date of this filing, a final rule has not yet been issued. Federal regulations supporting the use of renewable fuels like the RFS are a significant driver of ethanol demand in theU.S. Under the RFS, theEPA assigns individual refiners, blenders, and importers the volume of renewable fuels they are obligated to use based on their percentage of total domestic transportation fuel sales. The mechanism that provides accountability in RFS compliance is the Renewable Identification Number ("RIN"). RINs are a tradeable commodity given that if refiners (obligated parties) need additional RINs to be compliant, they have to purchase them from those that have excess. Thus, there is an economic incentive to use renewable fuels like ethanol, or in the alternative, buy RINs. Obligated parties use RINs to show compliance with RFS-regulated volumes. RINs are attached to renewable fuels by ethanol producers and detached when the renewable fuel is blended with transportation fuel or traded in the open market. The market price of detached RINs affects the price of ethanol in certain markets and influences the purchasing decisions by obligated parties. The Proposed Rule also sets out proposed regulations relating to the generation of RINS for renewable electricity used to fuel vehicles ("eRINS"). Under the Proposed Rule, car manufacturers would be able to register with theEPA and generate eRINs for power produced from qualifying renewable biomass, including biogas from methane digesters and anaerobic digestion facilities. The Proposed Rule specifies that qualifying renewable electricity must be generated from a feedstock that qualifies as renewable biomass under Section 211(o)(1)(I) of the Clean Air Act and that other forms of renewable electricity, such as solar, wind and hydropower, will not qualify for eRINs. Manufacturers could start earning eRINs in 2024. As noted above, the Proposed Rule is currently open for public comment and in the Proposed Rule, theEPA notes that it is open to comments on alternative approaches to eRINs, including allowing renewable electricity producers, public access charging stations, independent third parties, or a combination of entities to generate credits. We cannot predict at this time the impact, if any, that the generation of eRINs will have on the traditional RIN market. Although renewable volume obligations establish the number of gallons of renewable fuel that must be blended into the nation's fuel supply, these obligations do not take into account waivers granted by theEPA to small refiners for "hardship." TheEPA can, in consultation with theDepartment of Energy , waive the obligation for individual smaller refineries that are suffering "disproportionate economic hardship" due to compliance with the RFS. To qualify for this "small refinery waiver," the refineries must be under total throughput of 75,000 barrels per day and state their case for an exemption in an application to theEPA each year. OnJune 3, 2022 , theEPA announced the denial of 69 petitions from small refineries seeking small refinery exemptions (SREs) from the RFS program for one or more of the compliance years between 2016 and 2021. Having a final conclusion to this issue that has been ongoing for many years will help provide more stability within the RIN's market; however, there are multiple legal challenges to how theEPA has handled SREs and RFS rulemakings. 19
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Table of Contents
Inflation Reduction Act of 2022
Among its other provisions, the Inflation Reduction Act of 2022 ("IRA"), which
was signed into law on August 16, 2022 , significantly expands clean energy
incentives by providing an estimated $370 billion of new energy related tax
credits over the next ten years. It also permits more flexibility for taxpayers
to use the credits with direct-pay and transferable credit options.
More specifically, the IRA legislation (a) created a new Clean Fuel Production
Credit, section 45Z of the Internal Revenue Code, which runs from 2025 to 2027
of up to $1.00 per gallon, which could apply to our fuel ethanol, depending on
the level of GHG reduction for each gallon; (b) created a new tax credit for
sustainable aviation fuel of $1.25 to $1.75 per gallon, depending on the GHG
reduction for each gallon, that could possibly involve some of our low carbon
ethanol through an alcohol to jet pathway, depending on the life cycle analysis
model being used (this credit expires after 2024 and shifts to the Clean Fuel
Production Credit, where it qualifies for up to $1.75 per gallon); (c) expanded
the carbon capture and sequestration credit, section45Q, to $85 for each metric
ton of carbon sequestered, which could impact potential carbon capture
investments; (d) extended the biodiesel tax credit which could impact our
distillers corn oil values, as this co-product serves as a low-carbon feedstock
for renewable diesel and biomass based diesel production; (e) funded biofuel
refueling infrastructure, which could impact the availability of higher level
ethanol blended fuel; (f) increased funding for working lands conservation
programs for farmers by$20 billion; and (g) provided credits for the production
and purchase of electric vehicles, which could impact the amount of internal
combustion engines built and sold longer term, and by extension impact the
demand for liquid fuels including ethanol.
The IRA is a sweeping policy that could have many potential impacts on our business and the Company continues to evaluate the provisions of the IRA and its potential benefits.
State Initiatives In 2006,Iowa passed legislation promoting the use of renewable fuels inIowa . One of the most significant provisions of theIowa renewable fuels legislation was a renewable fuels targeted set of tax credits encouraging an escalating percentage of the gasoline sold inIowa to consist of, be blended with, or be replaced by, renewable fuels. To receive the tax credit, retailers of gasoline are required to reach escalating annual targets of the percentage of their gasoline sales that consist of, are blended with, or are replaced by, renewable fuels. This renewable fuel tax credit originally required 10% of the gasoline that retailers sold to fall within the renewable fuels definitions to receive the credit and has increased incrementally to 25% as ofJanuary 1, 2020 . This tax credit automatically repealed itself onJanuary 1, 2021 for tax years beginning on or after that date.
Industry Factors Affecting our Results of Operations
Ethanol prices decreased 7.5% during the three months endedDecember 31, 2022 , as compared to the same period in the previous fiscal year. This decrease was coupled with a decrease of 5.49% in ethanol shipments during the three months endedDecember 31, 2022 , as compared to the prior year. The reduction in shipments was due to operational challenges we encountered in the month of December due to the unusually cold weather in the mid-west. The latest outlook of supply and demand provided by theUnited States Department of Agriculture (the "USDA") estimate forUnited States 2021/22 corn production is 15.074 billion bushels. The yield projection is 176.7 bushels per acre. Both projections were down slightly from the previous report. The projection for the 2022/23 crop year is 13.93 billion bushels and a 172.3 yield projection. TheUSDA did lower its estimate for corn used for ethanol for the 2021/2022 crop year slightly to 5.326 billion bushels. Their previous estimate was 5.375 billion bushels. For the 2022/23 crop year, the estimated usage for ethanol is 5.275 billion bushels. TheUSDA increased their corn price estimates for fiscal 2022 to$6.00 per bushel, up from the previous estimate of$5.95 . For the 2022/23 crop year, theUSDA is anticipating the average corn price to be$6.70 , down slightly from$6.75 on the previous report. TheUSDA estimated in their July World Agricultural Supply and Demand Estimates (WASDE) report that in 2021/22 there were 93.3 million acres of corn planted which is down slightly from their previous projection of 93.4 million acres. TheUSDA is estimating for 2022/23 there will be 88.6 million corn acres planted which is down slightly from their previous report. Export projections have increased slightly from 2.45 million bushels to 2.471 million bushels for the 2021/22 crop year and is estimated to be 2.075 million bushels for the 2022/23 crop year.The US Energy Information Administration ("EIA") released its Short-Term Energy Outlook report in January of 2023 and indicated that US ethanol production increased during the months of October - December compared to the previous quarter in 2022, but projected a 2% decline in production during the first three months of calendar year 2023. The decline in production is projected to last through September of 2023 and then start to pick up at the end of calendar year 2023. The consumption of fuel ethanol is projected to also decline in the first three calendar months of 2023, but then start to increase in spring of 2023 and maintain the increase through the beginning of calendar year 2024. We currently believe that our margins will continue to be low through the second quarter of Fiscal 2023 and will start to rebound slightly as the weather warms up and driving demand increases. Our distiller grain margins have been impacted positively in the short term due to a supply shortage for distiller grains ("DDG") and wet distiller grains ("WDG"). We experienced a price increase of 30% for the three months endedDecember 31, 2022 , as compared to the three months endedDecember 31, 2021 on a 9% decrease in tons sold for those same periods. OnDecember 18, 2019 ,Congress extended the biodiesel tax credit through 2022 with retroactive application toJanuary 1, 2018 . The extension of the tax credit has increased demand for distillers corn oil, which is a feedstock for renewable diesel, and could continue to have a positive impact on distillers corn oil prices for the remainder of Fiscal 2022. The Inflation Reduction Act of 2022 (the "IRA") provided for the further extension of the biodiesel tax credit untilDecember 31, 2024 which could result in continued positive impact on the value of our distillers corn oil. 20
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Table of Contents Results of Operations
The following table shows our results of operations, stated as a percentage of
revenue for the three months ended
Three Months Ended December 31, 2022 Three Months Ended December 31, 2021
Amounts % of Revenues Amounts % of Revenues
in 000's in 000's
Income Statement Data
Revenues $ 95,219 100.0 % $ 101,651 100.0 %
Cost of Goods Sold
Material Costs 80,301 84.3 % 59,427 58.4 %
Variable Production Expense 8,147 8.6 % 7,101 7.0 %
Fixed Production Expense 4,018 4.2 % 6,352 6.3 %
Gross Margin 2,753 2.9 % 28,771 28.3 %
General and Administrative Expenses 1,975 2.1 % 1,721 1.7 %
Interest and other (income) expense, net 116 0.1 % (1,778 ) (1.8 )%
Net Income (Loss) $ 662 0.7 % $ 28,828 28.3 %
Revenues
Our revenue from operations is derived from three primary sources: sales of
ethanol, distillers grains, and distillers corn oil. The chart below displays
statistical information regarding our revenues. During the three months ended
December 31, 2022 , the average price per gallon of ethanol decreased by 7.5% as
compared to the same period in Fiscal 2022, coupled by a 5% decrease in gallons
of ethanol sold, primarily due to the unusually cold weather we experienced in
December which led to an unanticipated shut down of approximately five days. The
net effect was an 11% decrease in ethanol revenue for the three months ended
December 31, 2022 .
An increase in the average price per ton of distillers grains of approximately
30% which was partially offset by a 9% decrease in volume sold resulted in an
increase of 14% in revenue for this category in the three months ended December
31, 2022 as compared to the same three month period in Fiscal 2022.
Distillers corn oil revenue increased 6.7% in the three months ended December
31, 2022 , compared to the three months ended December 31, 2021 with an 18.8%
increase in price, offset by a lower volume of 11.6%. Distillers corn oil prices
increased principally as a result of increased biodiesel production. Our market
for distillers corn oil is primarily local middlemen that compete for our
available supply.
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Three Months Ended December 31, Three Months Ended December 31,
2022 2021
Amounts in Amounts in
000's % of Revenues 000's % of Revenues
Product Revenue Information
Denatured and Undenatured Ethanol $ 69,515 73.0 % $ 77,910 76.7 %
Distillers Grains 17,021 17.9 % 14,937 14.7 %
Corn Oil 8,284 8.7 % 7,762 7.6 %
Other 399 0.4 % 1,042 1.0 %
Cost of Goods Sold
Our cost of goods sold as a percentage of our revenues was 97.1% and 71.7% for
the three months ended December 31, 2022 , and 2021, respectively. Our two
primary costs of producing ethanol and distillers grains are corn and energy,
with steam and natural gas as our primary energy sources. Cost of goods sold
also includes net (gains) or losses from derivatives and hedging relating to
corn. The average price of corn used in ethanol production per bushel increased
30.9% in the three months ended December 31, 2022 compared to the three months
ended December 31, 2021 .
Realized and unrealized gains (losses) related to our derivatives and hedging
related to corn resulted in a $2.69 million increase to our cost of goods sold
for the three months ended December 31, 2022 , compared to an increase of
$0.3 million for the three months ended December 31, 2021 . We recognize the
gains or losses that result from the changes in the value of our derivative
instruments related to corn in cost of goods sold as the changes occur. As corn
prices fluctuate, the value of our derivative instruments is impacted, which
affects our financial performance. We anticipate continued volatility in our
cost of goods sold due to the timing of the changes in value of the derivative
instruments relative to the cost and use of the commodity being hedged.
Variable production expenses increased 14.7% when comparing the three months
ended December 31, 2022 , to the three months ended December 31, 2021 due to an
increase in the cost of utilities.
Fixed production expenses decreased 36.7% for the three months ended
General and administrative expenses include salaries and benefits of administrative employees, professional fees and other general administrative costs. Our general and administrative expenses for the three months endedDecember 31, 2022 , increased 14.8% compared to the three months endedDecember 31 , 2021,primarily due to increased payroll expenses, insurance expenses and legal and accounting fees associated with being registered with theSecurities and Exchange Commission .
Interest and Other (Income) Expense, Net
Our interest and other (income) expenses, net, were$ 0.1 million for the three months endedDecember 31, 2022 , and$(1.8) million for the three months endedDecember 31, 2021 . The difference was the receipt of the PPP loan forgiveness in December of 2021, where we recognized one-time income of$2.2 million during the three months endedDecember 31, 2021 . 22
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Table of Contents Selected Financial Data EBITDA is defined as net income plus interest expense net of interest income, plus depreciation and amortization. EBITDA is not required by or presented in accordance with generally accepted accounting principles inthe United States of America ("GAAP") and should not be considered as an alternative to net income, operating income or any other performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities or as a measure of our liquidity. We present EBITDA because we consider it to be an important supplemental measure of our operating performance and it is considered by our management and Board of Directors as an important operating metric in their assessment of our performance. We believe EBITDA allows us to better compare our current operating results with corresponding historical periods and with the operational performance of other companies in our industry because it does not give effect to potential differences caused by variations in capital structures (affecting relative interest expense, including the impact of write-offs of deferred financing costs when companies refinance their indebtedness), the amortization of intangibles (affecting relative amortization expense), and other items that are unrelated to underlying operating performance. We also present EBITDA because we believe it is frequently used by securities analysts and investors as a measure of performance. There are a number of material limitations to the use of EBITDA as an analytical tool, including the following:
• EBITDA does not reflect our interest expense or the cash requirements to pay
our principal and interest. Because we have borrowed money to finance our
operations, interest expense is a necessary element of our costs and our
ability to generate profits and cash flows. Therefore, any measure that
excludes interest expense may have limitations.
• Although depreciation and amortization are non-cash expenses in the period
recorded, the assets being depreciated and amortized may have to be replaced
in the future, and EBITDA does not reflect the cash requirements for such
replacement. Because we use capital assets, depreciation and amortization
expense is a necessary element of our costs and ability to generate
profits. Therefore, any measure that excludes depreciation and amortization
expense may have limitations.
We compensate for these limitations by relying heavily on our GAAP financial
measures and by using EBITDA as supplemental information. We believe that
consideration of EBITDA, together with a careful review of our GAAP financial
measures, is the most informed method of analyzing our operations. Because
EBITDA is not a measurement determined in accordance with GAAP and is
susceptible to varying calculations, EBITDA, as presented, may not be comparable
to other similarly titled measures of other companies. The following table
provides a reconciliation of EBITDA to net income (in thousands except per unit
data):
Three Months Ended Three Months Ended
December 31, 2022 December 31, 2021
EBITDA
Net Income (Loss) $ 662 $ 28,828
Interest Expense 325 405
Depreciation 3,032 2,836
EBITDA 4,019 32,069
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Table of Contents
Liquidity and Capital Resources
The Company has certain loan agreements withFarm Credit Services of America , FLCA, ("FLCA"),Farm Credit Services of America , PCA ("PCA") and CoBank, ACB ("CoBank") (collectively, the "FCSA Credit Facility"), which provide the Company with a term loan in the amount of$18.75 million (the "Term Loan"), a revolving term loan in the amount of$40 million (the "Revolving Term Loan") and a$10 million revolving line of credit (the "Revolving Credit Loan"). The FCSA Credit Facility is secured by a security interest on all of the Company's assets. The Term Loan provides for semi-annual payments by the Company to FCSA of$3.75 million , onMarch 1 andSeptember 1 , beginningSeptember 1, 2020 . The Term Loan was amended inFebruary 2021 to only require a single principal payment of$3.75 during 2021. All remaining amounts due under the Term Note are due and payable on the maturity date ofNovember 15, 2024 . As ofDecember 31, 2022 , there was an outstanding balance of$15 million on the Term Loan. As ofDecember 31, 2022 , there was an outstanding balance of$0.1 million on the Revolving Term Loan. Any outstanding amounts due under the Revolving Term Loan are due and payable on the maturity date ofNovember 1, 2027 . As ofDecember 31, 2022 , there was no outstanding balance under the Revolving Credit Loan. Any outstanding amounts due under the Revolving Term Loan are due payable on the maturity date ofApril 1, 2023 . This date was extended fromFebruary 1, 2023 in an agreement datedJanuary 30, 2023 . Under the FCSA Credit Facility, the interest rates utilize the
Daily
Simple SOFR Rate with a Daily Simple SOFR Rate Spread of 3.25% per annum. The interest rate atDecember 31, 2022 applicable to each of the loans under the FSCA Credit Facility was 7.55%. Primary Working Capital Needs During the second quarter of Fiscal 2023, we estimate that we will require cash of approximately$68 million for our primary input of corn and$4 million for our energy sources of electricity, steam, and natural gas. Capital expenditure requirements for the second quarter are expected to be$2 million . Although there is uncertainty related to political decisions and the impacts on our economy, management believes that the Company has sufficient cash available to fund operations for the next twelve months generated by cash from our continuing operations and available cash under our Revolving Term Loan. We cannot estimate the availability of funds for hedging in the future. Commodity Price Risk Our operations are highly dependent on commodity prices, especially prices for corn, ethanol and distillers grains and the spread between them (the "crush margin"). As a result of price volatility for these commodities, our operating results may fluctuate substantially. The price and availability of corn are subject to significant fluctuations depending upon a number of factors that affect commodity prices in general, including crop conditions, weather, governmental programs and foreign purchases. We may experience increasing costs for corn and natural gas and decreasing prices for ethanol and distillers grains which could significantly impact our operating results. Because the market price of ethanol is not directly related to corn prices, ethanol producers are generally not able to compensate for increases in the cost of corn through adjustments in prices for ethanol. We continue to monitor corn and ethanol prices and manage the "crush margin" to affect our longer-term profitability. We enter into various derivative contracts with the primary objective of managing our exposure to adverse price movements in the commodities used for, and produced in, our business operations and, to the extent we have working capital available and available market conditions are appropriate, we engage in hedging transactions which involve risks that could harm our business. We measure and review our net commodity positions on a daily basis. Our daily net agricultural commodity position consists of inventory, forward purchase and sale contracts, over-the-counter and exchange traded derivative instruments. The effectiveness of our hedging strategies is dependent upon the cost of commodities and our ability to sell sufficient products to use all of the commodities for which we have futures contracts. Although we actively manage our risk and adjust hedging strategies as appropriate, there is no assurance that our hedging activities will successfully reduce the risk caused by market volatility which may leave us vulnerable to high commodity prices. Alternatively, we may choose not to engage in hedging transactions in the future. As a result, our future results of operations and financial conditions may also be adversely affected during periods in which price changes in corn, ethanol and distillers grain do not work in our favor. In addition, as described above, hedging transactions expose us to the risk of counterparty non-performance where the counterparty to the hedging contract defaults on its contract or, in the case of over-the-counter or exchange-traded contracts, where there is a change in the expected differential between the price of the commodity underlying the hedging agreement and the actual prices paid or received by us for the physical commodity bought or sold. We have, from time to time, experienced instances of counterparty non-performance but losses incurred in these situations were not significant. 24
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Although we believe our hedge positions accomplish an economic hedge against our future purchases and sales, management has chosen not to use hedge accounting, which would match any gain or loss on our hedge positions to the specific commodity purchase being hedged. We are using fair value accounting for our hedge positions, which means as the current market price of our hedge positions changes, the realized or unrealized gains and losses are immediately recognized in the current period (commonly referred to as the "mark to market" method). The immediate recognition of hedging gains and losses under fair value accounting can cause net income to be volatile from quarter to quarter due to the timing of the change in the value of the derivative instruments relative to the cost and use of the commodity being hedged. As corn prices move in reaction to market trends and information, our income statement will be affected depending on the impact such market movements have on the value of our derivative instruments. Depending on market movements, crop prospects and weather, our hedging strategies may cause immediate adverse effects, but are expected to produce long-term positive impact. In the event we do not have sufficient working capital to enter into hedging strategies to manage our commodities price risk, we may be forced to purchase our corn and market our ethanol at spot prices and as a result, we could be further exposed to market volatility and risk. However, during the past year, the spot market has been advantageous. Credit and Counterparty Risks Through our normal business activities, we are subject to significant credit and counterparty risks that arise through normal commercial sales and purchases, including forward commitments to buy and sell, and through various other over-the-counter (OTC) derivative instruments that we utilize to manage risks inherent in our business activities. We define credit and counterparty risk as a potential financial loss due to the failure of a counterparty to honor its obligations. The exposure is measured based upon several factors, including unpaid accounts receivable from counterparties and unrealized gains (losses) from OTC derivative instruments (including forward purchase and sale contracts). We actively monitor credit and counterparty risk through credit analysis (by our marketing agent).
Impact of Hedging Transactions on Liquidity
Our operations and cash flows are highly impacted by commodity prices, including prices for corn, ethanol, distillers grains and natural gas. We attempt to reduce the market risk associated with fluctuations in commodity prices through the use of derivative instruments, including forward corn contracts and over-the-counter exchange-traded futures and option contracts. Our liquidity position may be positively or negatively affected by changes in the underlying value of our derivative instruments. When the value of our open derivative positions decrease, we may be required to post margin deposits with our brokers to cover a portion of the decrease or we may require significant liquidity with little advanced notice to meet margin calls. Conversely, when the value of our open derivative positions increase, our brokers may be required to deliver margin deposits to us for a portion of the increase. We continuously monitor and manage our derivative instruments portfolio and our exposure to margin calls and while we believe we will continue to maintain adequate liquidity to cover such margin calls from operating results and borrowings, we cannot estimate the actual availability of funds from operations or borrowings for hedging transactions in the future. The effects, positive or negative, on liquidity resulting from our hedging activities tend to be mitigated by offsetting changes in cash prices in our business. For example, in a period of rising corn prices, gains resulting from long grain derivative positions would generally be offset by higher cash prices paid to farmers and other suppliers in local corn markets. These offsetting changes do not always occur, however, in the same amounts or in the same period. We expect that a$1.00 per bushel fluctuation in market prices for corn would impact our cost of goods sold by approximately$45 million , or$0.34 per gallon, assuming our plant operates at 100% of our capacity. We expect the annual impact to our results of operations due to a$0.50 decrease in ethanol prices will result in approximately a$65 million decrease in revenue.
Critical Accounting Estimates
For a discussion of the Critical Accounting Estimates material to an understanding of our business and financial results, members should carefully review the discussion of such estimates in our annual report on Form 10-K for the year endedSeptember 30, 2022 , in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under "Summary of Critical Accounting Policies and Estimates." At this time, there have been no material changes to the estimates disclosed in our annual report on Form 10-K for the year endedSeptember 30, 2022 , nor have the material facts underlying those estimates changed in any manner.
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