UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark one)
ý
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the quarterly period ending December 31, 2013
 
 
 
 
 
o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to __________

Commission file number 000-53041

SOUTHWEST IOWA RENEWABLE ENERGY, LLC
(Exact name of registrant as specified in its charter)
 
 
Iowa
20-2735046
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
10868 189th Street, Council Bluffs, Iowa
51503
(Address of principal executive offices)
(Zip Code)
 
 
Registrant’s telephone number (712) 366-0392
 
 
Securities registered under Section 12(b) of the Exchange Act:
None.
 
 
Title of each class
Name of each exchange on which registered
 
 
Securities registered under Section 12(g) of the Exchange Act:
Series A Membership Units
(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o      No x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o      No x
 
Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x      No o
 
Indicate by check mark whether the registrant has submitted electronically on its corporate Website, 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). Yes x    No o





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.
 
Large accelerated filer   o        Accelerated filer o        Non-accelerated filer o        Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o      No x
As of December 31, 2013 , the aggregate market value of the Membership Units held by non-affiliates (computed by reference to the most recent offering price of such Membership Units) was $52,134,000 .

As of December 31, 2013 , the Company had 8,810 Series A, 3,334 Series B and 1,000 Series C Membership Units outstanding.

DOCUMENTS INCORPORATED BY REFERENCE—None



TABLE OF CONTENTS
 



PART I – FINANCIAL STATEMENTS
 
Item 1. Financial Statements
SOUTHWEST IOWA RENEWABLE ENERGY, LLC
Balance Sheets
(Dollars in thousands)
ASSETS
December 31, 2013
 
September 30, 2013
 
(Unaudited)
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
15,424

 
$
12,437

Restricted cash
303

 
303

Accounts receivable
677

 
722

Accounts receivable, related party
8,471

 
10,441

Derivative financial instruments
562

 
767

Inventory
9,700

 
8,445

Prepaid expenses and other
843

 
438

Total current assets
35,980

 
33,553

 
 
 
 
Property, Plant and Equipment
 
 
 
Land
2,064

 
2,064

Plant, building and equipment
205,495

 
205,356

Office and other equipment
751

 
751

 
208,310

 
208,171

Accumulated depreciation
(67,844
)
 
(64,987
)
Net property and equipment
140,466

 
143,184

 
 
 
 
Other Assets
 
 
 
Financing costs, net of amortization of $3,889 and  $3,772, respectively
314

 
431

Other assets
1,258

 
1,258

 
1,572

 
1,689

Total Assets
$
178,018

 
$
178,426

 
 
 
 
Notes to Unaudited Financial Statements are an integral part of this statement

1


SOUTHWEST IOWA RENEWABLE ENERGY, LLC
Balance Sheets
(Dollars in thousands)
LIABILITIES AND MEMBERS' EQUITY
December 31, 2013
 
September 30, 2013
 
(Unaudited)
 
 
Current Liabilities
 
 
 
Accounts payable
$
1,713

 
$
1,130

Accounts payable, related parties
4,044

 
6,457

Derivative financial instruments, related party
1,122

 
493

Accrued expenses
3,302

 
3,318

Accrued expenses, related parties
3,541

 
932

Current maturities of notes payable
111,260

 
123,887

Total current liabilities
124,982

 
136,217

 
 
 
 
Long Term Liabilities
 
 
 
Notes payable, less current maturities
204

 
212

Other long-term  liabilities
375

 
400

Total long term liabilities
579

 
612

 
 
 
 
Members' Equity
 
 
 
Members' capital
 
 
 
13,144 Units issued and outstanding
76,488

 
76,488

Accumulated (deficit)
(24,031
)
 
(34,891
)
Total members' equity
52,457

 
41,597

 
 
 
 
Total Liabilities and Members' Equity
$
178,018

 
$
178,426

 
 
 
 
Notes to Condensed Unaudited Financial Statements are an integral part of this statement

2


SOUTHWEST IOWA RENEWABLE ENERGY, LLC
Statements of Operations
(Dollars in thousands except for net income (loss) per unit)
(Unaudited)
 
Three Months Ended
 
Three Months Ended
 
December 31, 2013
 
December 31, 2012
 
 
 
 
Revenues
$
80,186

 
$
74,327

Cost of Goods Sold
 
 
 
Cost of goods sold-non hedging
63,861

 
78,287

Realized & unrealized hedging (gains) losses
2,211

 
1,293

 
66,072

 
79,580

 
 
 
 
Gross Margin (Loss)
14,114

 
(5,253
)
 
 
 
 
General and administrative expenses
1,206

 
1,057

 
 
 
 
Operating Income (Loss)
12,908

 
(6,310
)
 
 
 
 
 Interest expense and other income, net
2,048

 
2,373

 
 
 
 
Net Income (Loss)
$
10,860

 
$
(8,683
)
 
 
 
 
Weighted average units outstanding - basic
13,144

 
13,139

Weighted average units outstanding - diluted
25,516

 
13,139

Income (loss) per unit - basic
$
826.23

 
$
(660.82
)
Income (loss) per unit - diluted
$
454.34

 
$
(660.82
)
 
 
 
 
Notes to Unaudited Financial Statements are an integral part of this statement

3


SOUTHWEST IOWA RENEWABLE ENERGY, LLC
Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
 
Three Months Ended
 
Three Months Ended
 
December 31, 2013
 
December 31, 2012
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income (loss)
$
10,860

 
$
(8,683
)
Adjustments to reconcile to net cash provided by operating activities:
 
 
 
Depreciation
2,857

 
2,849

Amortization
117

 
135

Loss on disposal of property
—

 
64

(Increase) decrease in current assets:
 
 
 
Accounts receivable
2,015

 
4,103

Inventories
(1,255
)
 
203

Prepaid expenses and other
(405
)
 
(481
)
Derivative financial instruments, related party
629

 
3,339

Derivative financial instruments
205

 
(306
)
Decrease in other long-term liabilities
(25
)
 
(25
)
Increase (decrease) in current liabilities:
 
 
 
Accounts payable
(1,829
)
 
(452
)
Accrued expenses
2,592

 
351

Net cash provided by operating activities
15,761

 
1,097

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Purchase of property and equipment
(139
)
 
(40
)
Increase in restricted cash
—

 
1

Net cash (used in) investing activities
(139
)
 
(39
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds from notes payable
32,000

 
15,011

Payments on borrowings
(44,635
)
 
(9,963
)
Net cash provided by (used in) financing activities
(12,635
)
 
5,048

 
 
 
 
Net increase in cash and cash equivalents
2,987

 
6,106

 
 
 
 
CASH AND CASH EQUIVALENTS
 
 
 
Beginning
12,437

 
6,285

Ending
$
15,424

 
$
12,391

 
 
 
 
SUPPLEMENTAL CASH FLOW INFORMATION
 
 
 
Cash paid for interest
$
969

 
$
1,701

Notes to Unaudited Financial Statements are an integral part of this Statement.
 
 

4


SOUTHWEST IOWA RENEWABLE ENERGY, LLC
Notes to Financial Statements
Note 1:  Nature of Business
Southwest Iowa Renewable Energy, LLC (the “ Company ”), located in Council Bluffs, Iowa, was formed in March, 2005 and began producing ethanol in February, 2009.   The Company sold 31.51 million gallons and 24.58 million gallons of ethanol in the three months ended December 31, 2013 and December 31, 2012 , respectively. The Company sells its ethanol, modified wet distillers grains with solubles, corn syrup, and corn oil in the continental United States.  The Company sells its dried distillers grains with solubles in the continental United States, Mexico, and the Pacific Rim.

Note 2:  Summary of Significant Accounting Policies
Basis of Presentation and Other Information
The accompanying financial statements as of and for the three month periods ended  December 31, 2013 and 2012 are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. These unaudited financial statements and notes should be read in conjunction with the audited financial statements and notes thereto, for the fiscal year ended September 30, 2013 contained in the Company’s Annual Report on Form 10-K. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire year.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (" GAAP ") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from these estimates.
Revenue Recognition
The Company sells ethanol and related products pursuant to marketing agreements.  Revenues are recognized when the marketing company (the “ customer ”) has taken title to the product, prices are fixed or determinable and collectability is reasonably assured. 
The Company’s products are generally shipped FOB loading point.  The Company’s ethanol sales are handled through an ethanol purchase agreement (the “ Ethanol Agreement ”) with Bunge North America, Inc. (“ Bunge ”).  Syrup, dried distillers grains, and modified wet distillers grains with solubles (co-products) are sold through a distillers grains agreement (the “ DG Agreement ”) with Bunge, based on market prices. Corn oil is sold through a corn oil agreement (the “ Corn Oil Agency Agreement ”) with Bunge based on market prices.   Marketing fees, agency fees, and commissions due to the marketers are paid separately from the settlement for the sale of the ethanol products and co-products and are included as a component of cost of goods sold.  Shipping and handling costs incurred by the Company for the sale of ethanol and co-products are included in cost of goods sold.
Accounts Receivable
Trade accounts receivable are recorded at original invoice amounts less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis.  Most of the trade accounts are with Bunge. Management determines the allowance for doubtful accounts by regularly evaluating customer receivables and considering customer’s financial condition, credit history and current economic conditions.  As of December 31, 2013 and September 30, 2013 , management had determined no allowance was necessary.  Receivables are written off when deemed uncollectable and recoveries of receivables written off are recorded when received.
Investment in Commodities Contracts, Derivative Instruments and Hedging Activities
The Company’s operations and cash flows are subject to fluctuations due to changes in commodity prices.  The Company is subject to market risk with respect to the price and availability of corn, the principal raw material used to produce ethanol and ethanol by-products.  Exposure to commodity price risk results from the Company’s dependence on corn in the ethanol production process.  In general, rising corn prices can result in lower profit margins and, therefore, represent unfavorable market conditions.  This is especially true when market conditions do not allow the Company to pass along increased corn costs to

5


customers.  The availability and price of corn is subject to wide fluctuations due to unpredictable factors such as weather conditions, farmer planting decisions, governmental policies with respect to agriculture and international trade and global demand and supply.
To minimize the risk and the volatility of commodity prices, primarily related to corn and ethanol, the Company uses various derivative instruments, including forward corn, ethanol and distillers grains purchase and sales contracts, over-the-counter and exchange-trade futures and option contracts.  From time to time, when market conditions are appropriate and the Company has sufficient working capital available, the Company will enter into derivative contracts to hedge its exposure to price risk related to forecasted corn needs and forward corn purchase contracts.  The Company uses cash, futures and options contracts to hedge changes to the commodity prices of corn and ethanol.
Management has evaluated the Company’s contracts to determine whether the contracts are derivative instruments. Certain contracts that literally meet the definition of a derivative may be exempted from derivative accounting as normal purchases or normal sales.  Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business.   Gains and losses on contracts designated as normal purchases or normal sales contracts are not recognized until quantities are delivered or utilized in production.
The Company applies the normal purchase and sale exemption to forward contracts relating to ethanol and distillers grains and solubles and therefore these forward contracts are not marked to market. As of December 31, 2013 , the Company was committed to sell 5.516 million gallons of ethanol and 114 thousand tons of distillers grains and solubles.
Forward corn purchase contracts are recognized as derivatives. Changes in fair value of forward corn contracts, which are marked to market each period, are included in costs of goods sold.  As of December 31, 2013 , the Company was committed to purchasing 3.308 million bushels of corn on a forward contract basis resulting in a total commitment of $14,688,768 .  These forward contracts had a fair value of $13,567,187 at December 31, 2013 . There are 0.560 million bushels in basis commitments, and 0 .532 million bushels of unpriced corn, the price of which for both is at market price at time of purchase. In addition the Company was committed to buy 0.092 million bushels of corn on a hedged to arrive basis.
In addition, the Company enters into short-term cash, options and futures contracts as a means of managing exposure to changes in commodity prices.  The Company enters into derivative contracts to hedge the exposure to volatile commodity price fluctuations.  The Company maintains a risk management strategy that uses derivative instruments to minimize significant, unanticipated earnings fluctuations caused by market volatility.  The Company’s specific goal is to protect itself from large moves in commodity costs.   Although the contracts are intended to be effective economic hedges of specified risks, they are not designated as a hedge for accounting purposes and are recorded on the balance sheet at fair market value with changes in fair value recognized in current period earnings.
As part of its trading activity, the Company uses futures and option contracts offered through regulated commodity exchanges to reduce risk and risk of loss in the market value of inventories.  To reduce that risk, the Company generally takes positions using cash and futures contracts and options. The gains or losses on derivative instruments are included in revenue if the contracts relate to ethanol, and cost of goods sold if the contracts relate to corn. During the three months ended December 31, 2013 and December 31, 2012 , the Company recorded combined realized and unrealized losses of ($2,211,000) and ($1,293,000) , respectively, as a component of cost of goods sold. The Company reports all contracts with the same counter-party on a net basis on the balance sheet due to a master netting agreement.
Derivatives not designated as hedging instruments along with cash held by brokers at December 31, 2013 and September 30, 2013 at fair value are as follows:

6


 
Balance Sheet Classification
 
December 31, 2013
 
September 30, 2013
Futures and option contracts
 
 
 
 
 
In gain position
 
 
$
509,025

 
$
355,575

In loss position 
 
 
(118,150
)
 
(517,525
)
Cash held by broker
 
 
171,279

 
929,359

 
Current asset
 
562,154

 
767,409

 
 
 
 
 
 
Forward contracts, corn, related party
Current Liability
 
$
1,121,581

 
$
493,175

 
 
 
 
 
 
Net futures, options, and forward contracts
 
 
$
(559,427
)
 
$
274,234


The net realized and unrealized gains and losses on the Company’s derivative contracts for the three months ended December 31, 2013 and 2012 consist of the following:
 
Statement of Operations Classification
 
December 31, 2013
 
December 31, 2012
Net realized and unrealized (gains) losses related to:
 
 
 
 
 
Purchase contracts (corn):
 
 
 
 
 
Forward contracts
Cost of Goods Sold
 
$
1,856,105

 
$
2,599,745

Futures and option contracts
Cost of Goods Sold
 
$
355,255

 
(1,306,479
)
 
Inventory
Inventory is stated at the lower of cost or market value using the average cost method.  Market value is based on current replacement values, to the extent that it does not exceed net realizable values and it is not less than the net realizable values reduced by an allowance for normal profit margin.
Fair value of financial instruments
The carrying amounts of cash and cash equivalents, derivative financial instruments, accounts receivable, accounts payable, accrued expenses and debt approximate fair value due to the short term nature of these instruments.
Income (loss) Per Unit
Basic income (loss) per unit is calculated by dividing net income (loss) by the weighted average units outstanding for each period. Diluted income (loss) per unit is calculated by dividing income (loss) adjusted for interest on the convertible debt (when anti-dilutive) by the sum of the weighted average units outstanding and the weighted average dilutive units, using the treasury stock method.Units from convertible term notes are considered unit equivalents and are considered in the diluted income per unit computation, but have not been included in the computations of diluted income (loss) per unit for the three months ended December 31, 2012 because their effect would be anti-dilutive during those periods. Basic earnings and diluted per unit data were computed as follows (in thousands except per unit data):

7


 
Three Months Ended
 
December 31, 2013
 
December 31, 2012
Numerator:
 
 
 
Net income (loss) for basic earnings per unit
$
10,860

 
$
(8,683
)
Interest expense on convertible term note
733

 
—

Net income (loss) for diluted earnings per unit
$
11,593

 
$
(8,683
)
 
 
 
 
Denominator:
 
 
 
Weighted average units outstanding - basic
13,144

 
13,139

Weighted average units outstanding - diluted
25,516

 
13,139

Income (loss) per unit - basic
$
826.23

 
$
(660.82
)
Income (loss) per unit - diluted
$
454.34

 
$
(660.82
)

Note 3:  Inventory
Inventory is comprised of the following at:
 
December 31, 2013
 
September 30, 2013
 
(000's)
 
(000's)
Raw Materials - corn
$
1,269

 
$
2,607

Supplies and Chemicals
2,883

 
2,780

Work in Process
1,829

 
2,090

Finished Goods
3,719

 
968

Total
$
9,700

 
$
8,445

 
 
Note 4:   Members’ Equity
At December 31, 2013 outstanding member units were:
A Units
8,810

B Units
3,334

C Units
1,000

U Units
—

 
 
The Series A, B and C unit holders all vote on certain matters with equal rights.  The Series C unit holders as a group have the right to elect one member of the Board of Directors (the “ Board ”).  The Series B unit holders as a group have the right to elect two Board members.  Series A unit holders as a group have the right to elect the remaining number of Directors not elected by the Series C and B unit holders.

Note 5:   Revolving Loan/Credit Agreements
AgStar
The Company originally entered into a Credit Agreement, as amended (the “ Credit Agreement ”) with AgStar Financial Services, PCA (“ AgStar ”) and a group of lenders (together with AgStar, the “ Lenders ”) for $126,000,000 senior secured debt, consisting of a $101,000,000 term loan, a term revolver of up to $10,000,000 and a revolving working capital term facility of up

8


to $15,000,000 . On October 31, 2013, the Company entered into another amendment to the Credit Agreement (the “ October Amendment ”) to extend the maturity date of the working capital facility to August 1, 2014, the same date as the term loan and term revolving loans mature, and waived any default that had or could have occurred under certain financial covenants under the Credit Agreement as of September 30, 2013. The October Amendment includes $11,428,600 available under such revolving facility.
The Credit Agreement requires compliance with certain financial and non-financial covenants.  Borrowings under the Credit Agreement are collateralized by substantially all of the Company’s assets.  The term credit facility requires monthly principal payments.  The loan is amortized over 114 months and matures on August 1, 2014.  Any borrowings are subject to borrowing base restrictions as well as certain prepayment penalties.  The $10,000,000 term revolver is interest only until maturity on August 1, 2014.
Under the terms of the Credit Agreement, as amended in the October Amendment, the Company could draw a maximum $11,428,600 on the revolving working capital term facility. As part of the revolving line of credit, the Company may request letters of credit to be issued up to a maximum of $5,000,000 in the aggregate (the " Revolving LOC "). There were no outstanding letters of credit as of December 31, 2013 .There wa s no out standing balance on this loan as of December 31, 2013 and September 30, 2013 .

As of December 31, 2013 and September 30, 2013 , the outstanding balance under the Credit Agreement was $61,217,390 and $68,837,174 , respectively.  In addition to all the other payments due under the Credit Agreement, the Company must pay an annual amount equal to 65% of the Company’s Excess Cash Flow (as defined in the Credit Agreement), up to a total of $6,000,000 per year, and $24,000,000 over the term of the Credit Agreement.  

The Credit Agreement matures on August 1, 2014, at which time any principal amounts outstanding are due and, in accordance with GAAP, all outstanding amounts under the Credit Agreement are classified as current maturity in the financial statements. The Company is currently in negotiations with various lenders, including its current Lenders, to refinance all of its existing indebtedness or obtain new credit facilities. The Company currently anticipates closing on any refinancing or new facilities prior to the maturation of the Credit Agreement.
Bunge
On August 26, 2009, Bunge N.A. Holdings, Inc. (“ Holdings ”), an affiliate of Bunge, entered into subordinated convertible term note to the Company in the amount of $27,106,079 , which was assigned by Holdings to Bunge effective September 28, 2012 (the “ Bunge Note ”). The Bunge Note is due on August 31, 2014 and repayment is subordinated to the Credit Agreement. The Bunge Note is convertible into Series U Units at the price of $3,000 per Unit. As of December 31, 2013 and September 30, 2013 , there was  $36,765,265  and $36,765,265 , respectively outstanding under the Bunge Note  and $1,233,925 and $491,957 of accrued interest (included in accrued expenses, related parties) due to Bunge, respectively. Interest on the note accrues monthly and is added to the note principal on February 1 st and August 1 st each year.
The Company entered into a revolving note with Holdings dated August 26, 2009, providing for a maximum of $10,000,000 in revolving credit (the “ Bunge Revolving Note ”) which was assigned to Bunge effective September 28, 2012. Bunge has a commitment, subject to certain conditions, to advance up to $3,750,000 at the Company’s request under the Bunge Revolving Note; amounts in excess of $3,750,000 may be advanced by Bunge in its discretion.  Interest accrues at the rate of 7.5% over six-month LIBOR.  While repayment of the Bunge Revolving Note is subordinated to the Credit Agreement, the Company may make payments on the Bunge Revolving Note so long as it is in compliance with its borrowing base covenant and there is not a payment default under the Credit Agreement. The balance under the Bunge Revolving Note, as of December 31, 2013 and September 30, 2013 , was $0 and $5,000,000 , respectively.
The Bunge Note and Bunge Revolving Note mature on August 31, 2014, at which time any principal amounts outstanding are due and, in accordance with GAAP, all outstanding amounts under the Bunge Note and Bunge Revolving Note are classified as current maturity in the financial statements. The Company is currently in discussions with various lenders, including Bunge, to refinance all of its existing indebtedness or obtain new credit facilities. The Company anticipates closing on any refinancing or new facilities prior to the maturation of the Bunge Note and Bunge Revolving Note.
ICM     
On June 17, 2010, ICM, Inc. (“ ICM ”) entered into a subordinated convertible term note to the Company (the “ ICM Term Note ”) in the amount of $9,970,000 , which is convertible at the option of ICM into Series C Units at a conversion price of $3,000 per unit.  As of December 31, 2013 and September 30, 2013 , there was $12,671,481 outstanding under the ICM Term Note, and $425,283 and $169,557 of accrued interest due (included in accrued expense, related party) to ICM, respectively. Interest on the note accrues monthly and is added to the note principal on February 1 st and August 1 st   each year.

9


The ICM Term Note matures on August 31, 2014, at which time any principal amounts outstanding are due and, in accordance with GAAP, all outstanding amounts under the ICM Term Note are classified as current maturity in the financial statements. The Company is currently in discussions with various lenders, including ICM, to refinance all of its existing indebtedness or obtain new credit facilities. The Company anticipates closing on any refinancing or new facilities prior to the maturation of the ICM Term Note.

Notes payable consists of the following:
 
December 31, 2013

 
September 30, 2013

$300,000 Note payable to IDED, a non-interest bearing obligation with monthly payments of $2,500 due through the maturity date of March 26, 2016 on the non-forgivable portion.
$
212,500

 
$
220,000

Convertible Notes payable to unit holders, bearing interest at LIBOR plus 7.50 to 10.5% (7.897% at December 31, 2013); maturity on August 31, 2014.
551,941

 
551,941

Note payable to affiliate Bunge bearing interest at LIBOR plus 7.50 to 10.5% (7.897% at December 31, 2013); maturity on August 31, 2014.
36,765,265

 
36,765,265

Note payable to affiliate ICM, bearing interest at LIBOR plus 7.50 to 10.5% (7.897% at December 31, 2013); maturity on August 31, 2014.
12,671,481

 
12,671,481

Term facility payable to AgStar bearing interest at LIBOR plus 4.45% with a 6.00% floor (6.00% at December 31, 2013); maturity on August 1, 2014.
26,808,396

 
28,231,518

Term facility payable to AgStar bearing interest at a fixed 6%; maturity on August 1, 2014.
29,408,994

 
30,605,657

Term revolver payable to AgStar bearing interest at LIBOR plus 4.45% with a 6.00% floor (6.00% at December 31, 2013); maturity on August 1, 2014.
5,000,000

 
10,000,000

Capital leases payable to AgStar bearing interest at 3.088% matures May 15, 2014.
45,195

 
53,064

Revolving line of credit payable to Bunge, bearing interest at LIBOR plus 7.50 to 10.5% with a floor of 3.00% (7.683% at December 31, 2013).
—

 
5,000,000

$11.429 million revolving line of credit payable to AgStar bearing interest at LIBOR plus 4.45% with a 6.00% floor (6.00% at December 31, 2013); maturity on August 1, 2014.
—

 
—

 
111,463,772

 
124,098,926

Less Current Maturities
111,259,786

 
123,887,338

Total Long Term Debt
$
203,986

 
$
211,588

 
 
 
 

The approximate aggregate maturities of notes payable as of December 31, are as follows:
2014
$
111,259,786

 
 
2015
51,486

 
 
2016
152,500

 
 
Total
$
111,463,772

 
Note 6:  Fair Value Measurement
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  In determining fair value, the Company used various methods including market,

10


income and cost approaches.  Based on these approaches, the Company often utilized certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique.  These inputs can be readily observable, market corroborated, or generally unobservable inputs.  The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.  Based on the observable inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy.
The fair value hierarchy ranks the quality and reliability of the information used to determine fair values.  Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
Level 1 -
Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2 -
Valuations for assets and liabilities traded in less active dealer or broker markets.  Valuations are obtained from third-party pricing services for identical or similar assets or liabilities.
Level 3 -
Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.
A description of the valuation methodologies used for instruments measured at fair value, including the general classifications of such instruments pursuant to the valuation hierarchy, is set below.
Derivative financial instruments .  Commodity futures and exchange traded options are reported at fair value utilizing Level 1 inputs. For these contracts, the Company obtains fair value measurements from an independent pricing service.  The fair value measurements consider observable data that may include dealer quotes and live trading levels from the Chicago Mercantile Exchange (“ CME ”) market.  Ethanol contracts are reported at fair value utilizing Level 2 inputs from third-party pricing services.  Forward purchase contracts are reported at fair value utilizing Level 2 inputs.   For these contracts, the Company obtains fair value measurements from local grain terminal values.  The fair value measurements consider observable data that may include live trading bids from local elevators and processing plants which are based on the CME market.
The following table summarizes financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2013 and September 30, 2013 , categorized by the level of the valuation inputs within the fair value hierarchy:
 
December 31, 2013
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
Derivative financial instruments
$
509,025

 
$
—

 
$
—

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
Derivative financial instruments
118,150

 
1,121,581

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2013
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
Derivative financial instruments
$
355,575

 
$
—

 
$
—

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
Derivative financial instruments
517,525

 
493,175

 
—

 


11


Note 7:   Related Party Transactions
Bunge
On November 1, 2006, in consideration of its agreement to invest $20,004,000 in the Company, Bunge purchased the only Series B Units under an arrangement whereby the Company would (i) enter into various agreements with Bunge or its affiliates (discussed below) for management, marketing and other services, and (ii) have the right to elect a number of Series B Directors which are proportionate to the number of Series B Units owned by Bunge, as compared to all Units.  Under the Company’s Third Amended and Restated Operating Agreement (the “ Operating Agreement” ), the Company may not, without Bunge’s approval (i) issue additional Series B Units, (ii) create any additional Series of Units with rights which are superior to the Series B Units, (iii) modify the Operating Agreement to adversely impact the rights of Series B Unit holders, (iv) change its status from one which is managed by managers, or vise versa, (v) repurchase or redeem any Series B Units, (vi) take any action which would cause a bankruptcy, or (vii) approve a transfer of Units allowing the transferee to hold more than 17% of the Company’s Units or to a transferee which is a direct competitor of Bunge.
Under the Ethanol Agreement, the Company sells Bunge all of the ethanol produced at its facility, and Bunge purchases the same.  The Company pays Bunge a per-gallon fee for ethanol sold by Bunge, subject to a minimum annual fee of $750,000 and adjusted according to specified indexes after three years.  The Ethanol Agreement runs through August 31, 2014 and will automatically renew for successive three-year terms thereafter unless one party provides the other with notice of their election to terminate 180 days prior to the end of the term.  The Company has incurred expenses of $332,138  and   $302,318 during the three months ended December 31, 2013 and 2012 , respectively, respectively, under the Ethanol Agreement. Under a Risk Management Services Agreement effective January 1, 2009, Bunge agreed to provide the Company with assistance in managing its commodity price risks for a quarterly fee of $75,000 .  The Risk Management Services Agreement has an initial term of three years and automatically renews for successive three year terms, unless one party provides the other notice of their election to terminate 180 days prior to the end of the term.  Expenses under the Risk Management Services Agreement for the three months ended December 31, 2013 and 2012 were $75,000 .
On June 26, 2009, the Company executed a Railcar Agreement with Bunge for the lease of 325 ethanol cars and 350 hopper cars which are used for the delivery and marketing of ethanol and distillers grains.  Under the Railcar Agreement, the Company leases railcars for terms lasting 120 months and continuing on a month to month basis thereafter.  The Railcar Agreement will terminate upon the expiration of all railcar leases.  Expenses under this agreement for the three months ended December 31, 2013 and 2012 were $1,347,389 and $1,113,298 net of subleases and accretion, respectively. The Company has a sublease agreement for 100 hopper cars that are leased back to Bunge that expires on September 14, 2013.  As the sublease rate is less than the original lease rate, a loss was recorded at inception of the sublease and is being accreted to rent expense over the life of the sublease. Upon expiration of the sublease, the Company will continue to work with Bunge to determine the most economic use of the available ethanol and hopper cars in light of the current market conditions. In December 2013 SIRE subleased 55 cars to an unrelated party and recalled 25 cars from Bunge.
The Company entered into a Distillers Grain Purchase Agreement dated October 13, 2006, as amended (“ DG Agreement ”) with Bunge, under which Bunge is obligated to purchase from the Company and the Company is obligated to sell to Bunge all distillers grains produced at the facility.  If the Company finds another purchaser for distillers grains offering a better price for the same grade, quality, quantity, and delivery period, it can ask Bunge to either market directly to the other purchaser or market to another purchaser on the same terms and pricing. The initial 10 -year term of the DG Agreement began February 1, 2009.  The DG Agreement automatically renews for additional 3 -year terms unless one party provides the other party with notice of election to not renew 180 days or more prior to expiration.
Under the DG Agreement, Bunge pays the Company a purchase price equal to the sales price minus the marketing fee and transportation costs.  The sales price is the price received by Bunge in a contract consistent with the Company's DG Marketing Policy or the spot price agreed to between Bunge and the Company.  Bunge receives a marketing fee consisting of a percentage of the net sales price, subject to a minimum yearly payment of $150,000 .  Net sales price is the sales price less the transportation costs and rail lease charges.  The transportation costs are all freight charges, fuel surcharges, and other accessorial charges applicable to delivery of distillers grains.  Rail lease charges are the monthly lease payment for rail cars along with all administrative and tax filing fees for such leased rail cars.   Expenses under this agreement for the three months ended December 31, 2013 and 2012 were $511,112 and $517,669 , respectively.
On August 26, 2009, in connection with the original issuance of the Bunge Note to the Company also executed a Bunge Agreement—Equity Matters (the “ Equity Agreement ”), which was subsequently amended on June 17, 2010 and then assigned by Holdings to Bunge effective September 28, 2012. The Bunge Equity Agreement provides that (i) Bunge has preemptive rights to purchase new securities in the Company, and (ii) the Company is required to redeem any Series U Units held by Bunge with 76% of the proceeds received by the Company from the issuance of equity or debt securities.

12


The Company is a party to a Grain Feedstock Supply Agreement (the “ Supply Agreement ”) with Bunge on July 15, 2008. Under the Supply Agreement, Bunge provides the Company with all of the corn it needs to operate the ethanol plant, and the Company has agreed to only purchase corn from Bunge.  Bunge provides grain originators for purposes of fulfilling its obligations under the Supply Agreement.  The Company pays Bunge a per-bushel fee for corn under the Supply Agreement, subject to a minimum annual fee of $675,000 and adjustments according to specified indexes after three years.  The term of the Supply Agreement is 10 years , subject to earlier termination upon specified events. Expenses under this agreement for the three months ended December 31, 2013 and 2012 were $350,412 and  $256,453 , respectively.
On November 12, 2010, the Company entered into a Corn Oil Agency Agreement with Bunge to market its corn oil (the “ Corn Oil Agency Agreement ”).  The Corn Oil Agency Agreement has an initial term of three years and will automatically renew for successive three -year terms unless one party provides the other notice of their election to terminate 180 days prior to the end of the term.  Expenses under this agreement for the three months ended December 31, 2013 and 2012 were $57,674 and $44,072 , respectively.
     The Company and Bunge have also entered into certain term and revolving credit facilities. See Note 5   Revolving Loan/Credit Agreements for the terms of these financing arrangements.
ICM
On November 1, 2006, in consideration of its agreement to invest $6,000,000 in the Company, ICM became the sole Series C Member.  As part of ICM’s agreement to invest in Series C Units, the Operating Agreement provides that the Company will not, without ICM’s approval (i) issue additional Series C Units, (ii) create any additional Series of Units with rights senior to the Series C Units, (iii) modify the Operating Agreement to adversely impact the rights of Series C Unit holders, or (iv) repurchase or redeem any Series C Units.  Additionally, ICM, as the sole Series C Unit owner, is afforded the right to elect one Series C Director to the Board so long as ICM remains a Series C Member.
To induce ICM to agree to the ICM Term Note, the Company entered into an equity agreement with ICM (the “ ICM Equity Agreement ”) on June 17, 2010, whereby ICM (i) retains preemptive rights to purchase new securities in the Company, and (ii) receives 24% of the proceeds received by the Company from the issuance of equity or debt securities.
The Company and ICM have also entered into convertible term note.   See Note 5   Revolving Loan/Credit Agreements for the terms of this financing arrangement.
 
Note 8: Major Customer
The Company is party to the Ethanol, Supply, and Corn Oil Agency Agreements with Bunge for the exclusive marketing, selling, and distributing of all the ethanol, distillers grains, syrup, and corn oil produced by the Company. Revenues with this customer were $77,491,195 and $ 72,210,388 for the three months ended December 31, 2013 and 2012 , respectively.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
General
The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our consolidated financial condition and results of operations. This discussion should be read in conjunction with the consolidated financial statements included herewith and notes to the consolidated financial statements and our Form 10-Q for the three months ended December 31, 2013 including the consolidated financial statements, accompanying notes and the risk factors contained herein.

13


Cautionary Statements Regarding Forward Looking Statements
This Quarterly Report on Form 10-Q of Southwest Iowa Renewable Energy, LLC (the “ Company, ” “ 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:
•
Changes in the availability and price of corn, natural gas, and steam;
•
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 and distillers grains;
•
Ethanol supply exceeding demand; and corresponding ethanol price reductions;
•
Changes in the environmental regulations that apply to our plant operations including the levels of ethanol and other renewable fuel sources mandated by federal and state regulations;
•
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 federal and/or state laws (including the elimination of any federal and/or state ethanol tax incentives);
•
Changes and advances in ethanol production technology;
•
Additional ethanol plants built in close proximity to our ethanol facility in southwest Iowa;
•
Competition from alternative fuel additives;
•
Changes in interest rates and lending conditions of our loan covenants;
•
Our ability to retain key employees and maintain labor relations;
•
Volatile commodity and financial markets;
•
Continued price volatility in the price of corn; and
•
Decreased ethanol prices resulting from the oversupply of ethanol.

These forward-looking statements are based on management’s estimates, projections and assumptions as of the date hereof and include the assumptions that underlie such statements. Our actual results or actions could and likely will differ materially from those anticipated in the forward-looking statements for many reasons, including the reasons described in this reports.   Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed below and in the section titled “Risk Factors” in our Form 10-K for the fiscal year ended September 30, 2013 and in our other prior Securities 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 based on 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 report 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.

14


Overview, Status and Recent Developments
The Company is an Iowa limited liability company, located in Council Bluffs, Iowa, formed in March, 2005 to construct and operate a 125 million gallon capacity ethanol plant (the " Facility ").  We began producing ethanol in February, 2009 and sell our ethanol, modified wet distillers grains with solubles, corn oil and corn syrup in the continental United States.  We sell our dried distillers grains with solubles in the continental United States, Mexico, and the Pacific Rim.

In April 2013, we entered into a Carbon Dioxide Purchase and Sale Agreement (the “ CO2 Agreement ”) with EPCO Carbon Dioxide Products, Inc. (" EPCO ”) under which we agreed to supply, and EPCO agreed to purchase, a portion of raw CO2 gas produced by our Facility which meets certain specifications. In addition, we entered into a Non-Exclusive CO2 Facility Site Lease Agreement under which we granted EPCO a non-exclusive right of entry and license to EPCO to construct, maintain and operate a carbon dioxide liquefaction plant (the “ CO2 Plant ”) on a site consisting of 1-2 acres of land near our Facility. The term of the CO2 Agreement runs for ten (10) years from the startup of the EPCO Plant (the “ Initial Term ”) and then renews automatically for two (2) additional five (5) year periods thereafter, unless written notice of termination is submitted within six (6) months prior to the end of the then current term.
 
EPCO has agreed to pay us a set base price per ton during an initial period under the CO2 Agreement (the “ Ramp Up Period ”) and then an increased base price following the Ramp Up Period. In addition to the base price per ton, which acts as a floor price, EPCO will pay us an additional amount based on EPCO profits above a minimum targeted margin. The CO2 Agreement also contains a take or pay obligation pursuant to which EPCO agrees to pay us for a minimum number of tons each year.
 
We currently expect our first sale of raw CO2 gas to EPCO to occur during the fiscal year ending September 30, 2014 (“ Fiscal 2014 ”)

Industry Factors Affecting our Results of Operations

During the three months ending December 31, 2013, the ethanol industry experienced improved ethanol margins as a result of a combination of factors.

•
Corn prices decreased substantially during the three months ended December 31, 2013 as a result of the near record United States corn crop in 2013. For the three months ended December 31, 2013 as compared to the three months ended December 31, 2012, the average price per bushel paid was $4.34 and $7.46, respectively.

•
The latest estimates of supply and demand provided by the U.S. Department of Agriculture (the “ USDA ”) forecast 2014 ending corn stocks of over 1.6 billion bushels suggesting stable to lower corn prices. Lower than normal ethanol stocks continue to have a positive effect on ethanol margins in the last three quarters of Fiscal 2013 and the first quarter of Fiscal 2014.

•
Gasoline demand is currently higher than expected, keeping ethanol inventories tight.

•
Continuing decreases in imports of ethanol from foreign producers, principally Brazil which, as of September 30, 2013, represented 98.9% of shipments received in U.S. ports, according to the Renewable Fuels Association.

In response to the compressed ethanol margins which reached near break-even levels during the first quarter of our year ended September 30, 2013 (" Fiscal 2013 ") and affected our results of operations, we decreased production substantially in the first quarter of Fiscal 2013. We slightly increased production back toward capacity in the second quarter of Fiscal 2013 and during the third quarter of Fiscal 2013, we increased production further so that our plant began running at capacity and we have been running at capacity since. The full production during the three months ended December 31, 2013 coupled with low corn prices and good ethanol prices, resulted in net income of $10.860 million during the three months ended December 31, 2013, as compared to a net loss of $8.683 in the three months ended December 31, 2012.

Our indebtedness under the Credit Agreement matures on August 1, 2014, and our revolving and convertible term notes with Bunge and ICM mature on August 31, 2014, at which time any principal amounts outstanding are due. We are currently in negotiations with various lenders, including our current lenders, to refinance our existing indebtedness or to obtain new credit facilities. We currently anticipate closing on any refinancing or new facilities prior to the maturation of our current indebtedness.
    


15


Results of Operations
The following table shows our results of operations, stated as a percentage of revenue for the three months ended December 31, 2013 and 2012 .
 
Three months ended
 
Three months ended
 
December 31, 2013
 
December 31, 2012
 
Amounts
 
% of Revenues
 
Gallons Average Price
 
Amounts
 
% of Revenues
 
Gallons Average Price
 
in 000's
 
 
 
 
 
in 000's
 
 
 
 
Income Statement Data
 
 
 
 
 
 
 
 
 
 
 
Revenues
$
80,186

 
100.0
%
 
$
2.54

 
$
74,327

 
100.0
 %
 
$
3.02

Cost of Good Sold
 
 
 
 
 
 
 
 
 
 
 
Material Costs
50,564

 
63.1
%
 
1.60

 
66,010

 
88.8
 %
 
2.69

Variable Production Exp
10,044

 
12.5
%
 
0.32

 
8,073

 
10.9
 %
 
0.33

Fixed Production Exp
5,464

 
6.8
%
 
0.16

 
5,497

 
7.4
 %
 
0.22

Gross Margin (loss)
14,114

 
17.6
%
 
0.46

 
(5,253
)
 
(7.1
)%
 
(0.22
)
General and Administrative Expenses
1,206

 
1.5
%
 
0.04

 
1,057

 
1.4
 %
 
0.04

Other Expenses
2,048

 
2.6
%
 
0.08

 
2,373

 
3.2
 %
 
0.10

Net Income (Loss)
$
10,860

 
13.5
%
 
$
0.34

 
$
(8,683
)
 
(11.7
)%
 
$
(0.36
)
 
 
Revenues
 
Our revenue from operations is derived from four primary sources: sales of ethanol, distillers grains, corn oil, and corn syrup.  The following chart displays statistical information regarding our revenues. While crush margins last year were compressed, crush margins this year bounced back to slightly higher than the margin achieved in December 2011. As a result, revenues increased $5.9 million from the three months ended  December 31, 2012 to the three months ended December 31, 2013 . Ethanol gallons sold increased 6.9 million gallons which was slightly offset by the price per gallon decreasing $0.32 per gallon. The combined dried distillers grains with solubles, wet distillers grain with solubles and corn syrup average price decreased from approximately $180 to $149 per ton but this was offset by tonnage sold increasing by almost 29,000 tons between the two quarters. 
 
 
Three months ended
 
Three months ended
 
December 31, 2013
 
December 31, 2012
 
Gallons/Tons Sold
 
% of Revenues
 
Gallons/Tons Average Price
 
Gallons/Tons Sold
 
% of Revenues
 
Gallons/Tons Average Price
Statistical Revenue Information
 
 
 
 
 
 
 
 
 
 
 
Ethanol
31,510,594

 
75.36
%
 
$
1.92

 
24,580,450

 
73.95
%
 
$
2.24

Distiller's Grains
107,029

 
20.94

 
156.91

 
79,783

 
22.49

 
209.48

Corn Oil
3,845

 
3.31

 
690.13

 
2,949

 
2.94

 
741.60

Syrup
7,468

 
0.38

 
41.32

 
5,211

 
0.62

 
88.41


Cost of Goods Sold
 
Our cost of goods sold as a percentage of our revenues was 82.4% and 107% for the three months ended December 31, 2013 and 2012 , 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.  We ground 11,931,769 and 8,578,096 bushels of corn at an average price of $4.37 and $7.49 per bushel during

16


the three months ended December 31, 2013 and 2012 , respectively.  Our average steam and natural gas energy cost was $4.32 per MMBTU for the three months ended December 31, 2013 and 2012 , respectively.
Realized and unrealized gains (losses) related to our derivatives and hedging related to corn resulted in an increase of $2,211,360 in our cost of goods sold for the three months ended December 31, 2013 , compared to a increase of $1,293,265 in our cost of goods sold for the three months ended December 31, 2012 .  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 are impacted, which affects our financial performance.  We anticipate continued volatility in our cost of goods sold due to the timing of the changes in value of the derivative instruments relative to the cost and use of the commodity being hedged. 

Variable production expenses showed a slight increase when comparing the three months ended December 31, 2013  and 2012 due to the production increase.  Fixed production expenses showed a slight decrease when comparing the three months ended December 31, 2013  and 2012 .
General & Administrative Expense
 
Our general and administrative expenses as a percentage of revenues were 1.5% and 1.4% for the three months ended December 31, 2013 and 2012 , respectively.   General and administrative expenses include salaries and benefits of administrative employees, professional fees and other general administrative costs.  We expect our operating expenses to remain flat to slightly decreasing during the remainder of Fiscal 2013 compared to the Fiscal 2013 year-to-date amounts.
Other (Expense)
 
Our other expenses, primarily interest, for the three months ended December 31, 2013 were approximately 2.6% of revenue compared to 3.2% of revenue for the three months ended December 31, 2012 .  

Selected Financial Data.
Modified EBITDA is defined as net income (loss) plus interest expense net of interest income, plus income tax expense (benefit) and plus depreciation and amortization, or EBITDA, as adjusted for unrealized hedging losses (gains).  Modified EBITDA is not required by or presented in accordance with generally accepted accounting principles in the 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 modified 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 modified 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), unrealized hedging losses (gains) and other items that are unrelated to underlying operating performance.  We also present modified 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 modified EBITDA as an analytical tool, including the following:

•
Modified EBITDA does not reflect our interest expense or the cash requirements to pay our 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 material 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 modified 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 material limitations.
 

17


We compensate for these limitations by relying primarily on our GAAP financial measures and by using modified EBITDA only as supplemental information.  We believe that consideration of modified EBITDA, together with a careful review of our GAAP financial measures, is the most informed method of analyzing our operations.  Because modified EBITDA is not a measurement determined in accordance with GAAP and is susceptible to varying calculations, modified EBITDA, as presented, may not be comparable to other similarly titled measures of other companies.  The following table provides a reconciliation of modified EBITDA to net income (loss):
EBITDA to net income (loss) for the three months ended December 31, 2013 and December 31, 2012  are as follows:
 
 
Three months ended
 
Three months ended
 
December 31, 2013
 
December 31, 2012
 
in 000's
 
in 000's
EBITDA
 
 
 
Net Income (Loss)
$
10,860

 
$
(8,683
)
Interest Expense, Net
2,051

 
2,389

Depreciation
2,857

 
2,849

EBITDA
15,768

 
(3,445
)
 
 
 
 
Unrealized Hedging Loss
76

 
2,067

 
 
 
 
Modified EBITDA
$
15,844

 
$
(1,378
)
 
 
 
 
Modified EBITDA per unit - basic
$
1,205.42

 
$
(104.88
)

Liquidity and Capital Resources
As of December 31, 2013 , we had a balance of $61,217,390 under our Credit Agreement.  Our Credit Agreement originally consisted of $126,000,000 consisting of a $101,000,000 term loan, a term revolver of $10,000,000 and a revolving working capital term facility of $15,000,000. On October 31, 2013, we entered into another amendment to the Credit Agreement (the “ October Amendment ”) to extend the maturity date of the revolving working capital facility to August 1, 2014, the same date as the term loan and term revolving loans mature, and the October Amendment waived any default that had or could have occurred under certain financial covenants under the Credit Agreement as of September 30, 2013. Under the October Amendment, the amount of credit available under such revolving facility is $11,428,000. We are subject to various affirmative and negative covenants under the Credit Agreement.
    
As of December 31, 2013 and September 30, 2013 we had $56,217,000 and $68,837,174, respectively, under our term loan, $5,000,000 and $10,000,000, respectively, outstanding under the term revolver. We had an additional $16,428,600 and $13,214,000 as of December 31, 2013 and September 30, 2013 , respectively available under the seasonal and term revolvers. As part of the seasonal and term revolvers we may also request letters of credit to be issued up to a maximum of $5,000,000 in the aggregate. There were no outstanding letters of credit as of December 31, 2013 .
We entered into a revolving note with Bunge N.A. Holdings, Inc. (“ Holdings ”) dated August 26, 2009 (which Holdings assigned to Bunge effective September 28, 2012 (the “ Bunge Revolving Note ”), providing for the extension of a maximum of $10,000,000 in revolving credit.  Bunge has a commitment, subject to certain conditions, to advance up to $3,750,000 at our request under the Bunge Revolving Note; amounts in excess of $3,750,000 may be advanced by Bunge in its discretion.  Interest accrues at the rate of 7.5% over six-month LIBOR.  While repayment of the Bunge Revolving Note is subordinated to the Credit Agreement, we may make payments on the Bunge Revolving Note so long as we are in compliance with our borrowing base covenant and there is not a payment default under the Credit Agreement. As of December 31, 2013 and September 30, 2013 , the balance outstanding was $0 and $5,000,000, respectively, under the Bunge Revolving Note.   Under the Bunge Revolving Note, we made certain standard representations and warranties. The Bunge Revolving Note matures in August 2014 and we are currently in discussions with various lenders, including our current lenders, for a new credit facility and anticipate closing on a new credit new facility prior to the maturation of the current facility. In connection with the refinancing of our existing indebtedness, we may face various challenges due to the current market environment impacting the ethanol industry.

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The Credit Agreement matures on August 1, 2014, at which time any principal amounts outstanding are due and, in accordance with GAAP, all outstanding amounts under the Credit Agreement are classified as current maturity in our financial statements. We are currently in discussions with various lenders, including our current Lenders, for a new credit facility and anticipate closing on the new facility prior to the maturation of the Credit Agreement.

As a result of our Credit Agreement, Revolving LOC, convertible debt and the Bunge Revolving Note, we have a significant amount of debt, and our existing debt financing agreements contain, and our future debt financing agreements may contain, restrictive covenants that limit distributions and impose restrictions on the operation of our business.   The use of debt financing makes it more difficult for us to operate because we must make principal and interest payments on the indebtedness and abide by covenants contained in our debt financing agreements. The level of our debt has important implications on our liquidity and capital resources, including, among other things: (i) limiting our ability to obtain additional debt or equity financing; (ii) making us vulnerable to increases in prevailing interest rates; (iii) placing us at a competitive disadvantage because we may be substantially more leveraged than some of our competitors; (iv) subjecting all or substantially all of our assets to liens, which means that there may be no assets left for members in the event of a liquidation; and (v) limiting our ability to make business and operational decisions regarding our business, including, among other things, limiting our ability to pay dividends to our unit holders, make capital improvements, sell or purchase assets or engage in transactions we deem to be appropriate and in our best interest.

Primary Working Capital Needs
During the Second quarter of Fiscal 2014, we estimate that we will require approximately $49,385,000 for our primary input of corn and $4,012,580 for our energy sources of electricity, steam, and natural gas.  We currently have approximately $26.4 million available under our current revolving lines of credit to hedge commodity price fluctuations.  We cannot estimate the availability of funds for hedging in the future.
We believe that our existing sources of liquidity, including cash on hand, available revolving credit and cash provided by operating activities, will satisfy our projected liquidity requirements, which primarily consists of working capital requirements, for the next twelve months.   However, in the event that the market continues to experience significant price volatility and negative crush margins at the current levels or in excess of current levels, we may be required to explore alternative methods to meet our short-term liquidity needs including temporary shutdowns of operations, temporary reductions in our production levels, or negotiating short-term concessions from our lenders.   


Commodity Price Risk 
Our operations are highly dependent on commodity prices, especially prices for corn, ethanol and distillers grains and the spread between them. 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 effect 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 to 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

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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.
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 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). 


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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 profitability by approximately $44.2 million, or $0.35 per gallon, assuming our plant operates at 100% of our capacity (production of 125 million gallons per year) assuming no increase in the price of ethanol.  We expect the annual impact to our results of operations due to a $0.50 decrease in ethanol prices will result in approximately a $62.5 million decrease in revenue.


Off-Balance Sheet Arrangements
We do not have any off balance sheet arrangements.

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Item 3.   Quantitative and Qualitative Disclosures about Market Risk
Not applicable.

Item 4.   Controls and Procedures.
The Company’s management, including its President and Chief Executive Officer (our principal executive officer), Brian T. Cahill, along with its Chief Financial Officer (our principal financial officer), Brett L. Frevert, have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15 under the Securities Exchange Act of 1934, as amending, the “ Exchange Act ”), as of December 31, 2013 .  The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.   Based upon this review and evaluation, these officers believe that the Company’s disclosure controls and procedures are presently effective in ensuring that material information related to us is recorded, processed, summarized and reported within the time periods required by the forms and rules of the Securities and Exchange Commission (the “ SEC ”).
The Company’s  management, including the Company’s  principal executive officer and principal financial officer, have reviewed and evaluated any changes in the Company’s internal control over financial reporting that occurred as of December 31, 2013 and there has been no change that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.
The Company’s management assessed the effectiveness of the Company’s internal control over financing reporting as of December 31, 2013 .  In making this assessment, the Company’s management used the criteria set forth by the Committee Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework ("the 1992 Framework").  Based on this assessment, the Company’s management concluded that, as of December 31, 2013 , the Company’s integrated controls over financial report were effective.
This quarterly report does not include an attestation report of the company’s registered public accounting firm pursuant to the exemption under Section 989G of the Dodd-Frank Act of 2010.

PART II – OTHER INFORMATION
 
Item 1.   Legal Proceedings .
On August 25, 2010, the Company entered into a Tricanter Purchase and Installation Agreement (the “ Tricanter Agreement ”) with ICM, pursuant to which ICM sold the Company a tricanter corn oil separation system (the “ Tricanter Equipment ”). Under the Tricanter Agreement, ICM has agreed to indemnify the Company from any and all lawsuit and damages with respect to the Company's installation and use of the Tricanter Equipment.
On August 5, 2013, GS Cleantech Corporation (“ GS Cleantech ”) filed a suit in United States District Court for the Southern District of Iowa, Western Division (Case No. 2:13-CV-00021-JAJ-CFB), naming the Company as a defendant (the “ Lawsuit ”). The Lawsuit alleges infringement of a patent assigned to GS Cleantech with respect to the corn oil separation technology used in the Tricanter Equipment. The Lawsuit seeks preliminary and permanent injunctions against the Company to prevent future infringement on the patent owned by GS CleanTech and damages in an unspecified amount adequate to compensate GS CleanTech for the alleged patent infringement, plus attorney's fees.
The Company is not currently able to predict the outcome of this Lawsuit with any degree of certainty. Under the Tricanter Agreement, ICM is obligated to, and has indicated that it will, defend the Company in this Lawsuit. However, in the event that damages are awarded as a result of this Lawsuit and, if ICM is unable to fully indemnify the Company for any reason, the Company could be liable for such damages. In addition, the Company may need to cease use of its current oil separation process and seek out a replacement or cease oil production altogether.

 

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Item 1A.   Risk Factors.
There have been no material changes to the risk factors disclosed in Item 1A of our Form 10-K for the fiscal year ended September 30, 2013.  Additional risks and uncertainties, including risks and uncertainties not presently known to us, or that we currently deem immaterial, could also have an adverse effect on our business, financial condition and/or results of operations. 

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.
None

Item 3. Defaults Upon Senior Securities.
 
None

Item 4. Mine Safety Disclosures.
 
None

Item 5. Other Information.
 
None

Item 6.     Exhibits
31.1
Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002) executed by the Principal Executive Officer.
 
 
31.2
Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002) executed by the Principal Financial Officer.
 
 
32.1***
Rule 15d-14(b) Certifications (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) executed by the Principal Executive Officer.
 
 
32.2***
Rule 15d-14(b) Certifications (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) executed by the Principal Financial Officer.
 
 
101.XML^
XBRL Instance Document
 
 
101.XSD^
XBRL Taxonomy Schema
 
 
101.CAL^
XBRL Taxonomy Calculation Database
 
 
101.LAB^
XBRL Taxonomy Label Linkbase
 
 
101.PRE^
XBRL Taxonomy Presentation Linkbase
 
 
***
This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference.
^
Furnished, not filed.

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SIGNATURES
 
In accordance with the requirements of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
SOUTHWEST IOWA RENEWABLE ENERGY, LLC
 
 
 
Date:
February 6, 2014
/s/ Brian T. Cahill
 
 
Brian T. Cahill, President and Chief Executive Officer
 
 
 
Date:
February 6, 2014
/s/ Brett L. Frevert
 
 
Brett L. Frevert, CFO and Principal Financial Officer

24
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