News Column

HERON LAKE BIOENERGY, LLC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

January 29, 2014

The following discussion should be read in conjunction with our financial statements and related notes contained elsewhere in this Annual Report on Form 10-K. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of selected factors, including those set forth under "Risk Factors" in Part I, Item 1A of this Form 10- K. All forward-looking statements included herein are based on information available to us as of the date hereof, and we undertake no obligation to update any such forward-looking statements. We prepared the following discussion and analysis to help readers better understand our financial condition, changes in our financial condition, and results of operations for the fiscal year ended October 31, 2013 . Overview Heron Lake BioEnergy, LLC is a Minnesota limited liability company that owns and operates a dry mill corn-based, natural gas fired ethanol plant near Heron Lake, Minnesota . The plant has a stated capacity to produce 50 million gallons of denatured fuel grade ethanol and 160,000 tons of dried distillers' grains (DDGS) per year. Production of ethanol and distillers' grains at the plant began in September 2007 . We began recording revenue from plant production in October 2007 , the last month of our fiscal year. Our revenues are derived from the sale and distribution of our ethanol throughout the continental United States and in the sale and distribution of our distillers' grains (DGS) locally, and throughout the continental United States . Our subsidiary, Lakefield Farmers Elevator, LLC , had grain facilities at Lakefield and Wilder, Minnesota that were sold on February 1, 2013 . Our subsidiary, HLBE Pipeline Company, LLC , owns 73% of Agrinatural Gas, LLC , the pipeline company formed to construct, own, and operate a natural gas pipeline that provides natural gas to the Company's ethanol production facility through a connection with the natural gas pipeline facilities of Northern Border Pipeline Company in Cottonwood County, Minnesota . Our operating results are largely driven by the prices at which we sell ethanol and distillers grains and the costs related to their production, particularly the cost of corn. Historically, the price of ethanol tended to fluctuate in the same direction as the price of unleaded gasoline and other petroleum products. However, in recent years ethanol prices tended to move up and down proportionately with changes in corn prices. The price of ethanol can also be influenced by factors such as general economic conditions, concerns over blending capacities, and government policies and programs. The price of distillers grains is generally influenced by supply and demand, the price of substitute livestock feed, such as corn and soybean meal, and other animal feed proteins. Our largest component of and cost of production is corn. The cost of corn is affected primarily by factors over which we lack any control such as crop production, carryout, exports, government policies and programs, and weather. The growth of the ethanol industry has increased the demand for corn. We believe that continuing increase in global demand will result in corn prices above historic averages. As an example of our potential sensitivity to price changes, if the price of ethanol rises or falls $0.10 per gallon, our revenues may increase or decrease accordingly by approximately $5.0 million , assuming no other changes in our business. Additionally, if the price of corn rises or falls $0.25 per bushel, our cost of goods sold may increase or decrease by $5.0 million , again assuming no other changes in our business. During our fiscal 2013, the market price of ethanol and corn were extremely volatile. Trends and Uncertainties Impacting Our Operations Our current results of operation are affected and will continue to be affected by factors such as (a) volatile and uncertain pricing of ethanol and corn; (b) availability of corn that is, in turn, affected by trends such as corn acreage, weather conditions, and yields on existing and new acreage diverted from other crops; and (c) the supply and demand for ethanol, which is affected by acceptance of ethanol as a substitute for fuel, public perception of the ethanol industry, government incentives and regulation, and competition from new and existing construction, among other things. Other factors that may affect our future results of operation include those factors discussed in "Item 1. Business" and "Item 1A. Risk Factors." Critical Accounting Estimates We review long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Impairment testing for assets requires various estimates and assumptions, including an allocation of cash flows to those assets and, if required, an estimate of the fair value of those assets. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management's assumptions, which do not reflect unanticipated events and circumstances that may occur. In our analysis, we consider future corn costs and ethanol prices, break-even points for our plant and our risk management strategies in place 24 -------------------------------------------------------------------------------- Table of Contents through our derivative instruments and forward contracts. Given the significant assumptions required and the possibility that actual conditions will differ, we consider the assessment of impairment of our long-lived assets to be a critical accounting estimate. As a result of our review of long-lived assets for impairment at October 31, 2012 , we recorded an impairment charge of approximately $27.8 million . No impairment was recorded during fiscal year 2013. We enter forward contracts for corn purchases to supply the plant. These contracts represent firm purchase commitments which along with inventory on hand must be evaluated for potential market value losses. We estimated a loss on these firm purchase commitments to corn contracts in place and for corn on hand during 2011 where the price of corn exceeded the market price and upon being used in the manufacturing process and eventual sale of products we anticipate losses. Our estimates include various assumptions including the future prices of ethanol, distillers' grains and corn. For the fiscal years ended 2013, 2012 and 2011 we recognized a lower of cost or market losses of approximately $0 , $0 and $1,592,000 , respectively. Fiscal Year Ended October 31, 2013 Compared to Fiscal Year Ended October 31, 2012 The following table shows the results of our operations and the percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our statements of operations for the fiscal year ended October 31, 2013 and 2012: 2013 2012 Income Statement Data Amount % Amount % Revenues $ 163,764,144 100.0 % $ 168,659,935 100.0 % Cost of Goods Sold 155,536,974 95.0 % 166,529,283 98.7 % Gross Profit 8,227,170 5.0 % 2,130,652 1.3 % Operating Expenses (3,214,036 ) (2.0 )% (3,171,331 ) (1.9 )% Impairment Charge - - % (27,844,579 ) (16.5 )% Settlement Expense - - % (900,000 ) (0.5 )% Operating Income (Loss) 5,013,134 3.1 % (29,785,258 ) (17.7 )% Other Expense (2,745,274 ) (1.7 )% (2,567,385 ) (1.5 )% Net Income (Loss) before noncontrolling interest 2,267,860 1.4 % (32,352,643 ) (19.2 )% Noncontrolling Income (Loss) 327,018 0.2 % 353,019 0.2 % Net Income (Loss) attributable to Heron Lake BioEnergy, LLC $ 1,940,842 1.2 % $ (32,705,662 ) (19.4 )% Revenues Ethanol revenues during the fiscal year ended October 31, 2013 were approximately $125.5 million , comprising 76.7% of our revenues, as compared to approximately $128.6 million during the fiscal year ended October 31, 2012 , representing 76.2% of our revenues. For the year ended October 31, 2013 , we sold approximately 55.3 million gallons of ethanol at an average price of $2.27 per gallon. For the year ended October 31, 2012 , we sold approximately 58.2 million gallons of ethanol at an average price of $2.20 per gallon. The price of ethanol during our fiscal year was affected by the demand for ethanol as a motor fuel which is affected by, among other factors, regulatory developments, gasoline consumption, and the price of crude oil. The price was also affected by federal RFS blending mandates. We may hedge anticipated ethanol sales through a variety of mechanisms. Our prior marketer, Gavilon, was obligated, and our current marketer, Eco-Energy, is obligated, to use reasonable efforts to obtain the best price for our ethanol. To mitigate ethanol price risk and to obtain the best margins on ethanol that is marketed and sold by a marketer, we may utilize ethanol swaps, over-the-counter ("OTC") ethanol swaps, or OTC ethanol options that are typically settled in cash, rather than gallons of the ethanol we produce. Losses or gains on ethanol derivative instruments recorded in a particular period are reflected in revenue for that period. For the years ended October, 31, 2013 and 2012, we did not record any gains or losses related to ethanol derivative instruments. In the future, if we have such gains or losses, there may be timing differences in the recognition of losses or gains on derivatives as compared to the corresponding sale of ethanol. We expect to see fluctuations in ethanol prices over the next fiscal year. Although some level of demand is expected to continue since gasoline blenders will need to meet the Renewable Fuels Standard's blending requirements, the Environmental Protection Agency recently proposed decreasing those requirements relative to prior expected standards. Additionally, recent improved margins in the ethanol industry may lead to increased ethanol supply, as production facilities re-start or increase production in order to capture such margins. Such an increase in supply could pressure ethanol prices downward. In addition, 25 -------------------------------------------------------------------------------- Table of Contents low prices for petroleum and gasoline could exert downward pressure on ethanol prices. If ethanol prices decline, our earnings will also decline, particularly if corn prices do not also decrease proportionally. Future prices for fuel ethanol will be affected by a variety of factors beyond our control including, the demand for ethanol as a motor fuel, federal incentives for ethanol production, the amount and timing of additional domestic ethanol production and ethanol imports and petroleum and gasoline prices. Total sales of DGS during fiscal years 2013 and 2012 equaled approximately $32.8 million and $33.1 million , respectively, comprising 20.0% and 19.6% of our revenues for fiscal years 2013 and 2012, respectively. In fiscal years 2013 and 2012, we sold approximately 132,000 tons and 148,000 tons, respectively, of dried distillers' grain. The average price we received for distillers' grain was approximately $244 per ton in fiscal year 2013 and approximately $221 per ton in fiscal year 2012. Prices for distillers' grains are affected by a number of factors beyond our control such as the supply of and demand for distillers' grains as an animal feed and prices for competing feeds. We believe that prices for distillers' grains will be volatile as a result of changes in the prices of competing animal feeds. We expect prices to remain steady or increase so long as livestock feeders continue to create demand for alternative feed sources such as distillers' grains and the supply of distillers' grains remains relatively stable. On the other hand, if competing commodity price values retreat or distillers' supplies increase due to growth in the ethanol industry, distillers' grains prices may decline. Corn oil separation began in February 2012 . Total sales of corn oil during fiscal years 2013 and 2012 equaled approximately $4.0 million and $2.7 million , respectively, comprising 2.5% and 1.6% of our revenues for fiscal years 2013 and 2012, respectively. Cost of Goods Sold Our costs of sales include, among other things, the cost of corn used in ethanol and DGS production (which is the largest component of costs of sales), natural gas, processing ingredients, electricity, and wages, salaries and benefits of production personnel. We use approximately 1.6 million bushels of corn per month at the plant. We contract with local farmers and elevators for our corn supply. Our costs of sales as a percentage of revenues were 95.0% and 98.7% for the fiscal years ended October 31, 2013 and October 31, 2012 , respectively. The per bushel cost of corn purchased decreased approximately 1.9% in the fiscal year ended October 31, 2013 as compared to the fiscal year ended October 31, 2012 . We had gains related to corn derivative instruments of approximately $1.1 million for the fiscal year ended October 31, 2012 , which changed cost of sales, compared to no gains or losses related to corn derivative instruments for the fiscal year ended October 31, 2013 . The 1.9% decrease in the per bushel cost of corn, combined with the 3.2% increase in the per gallon sales price of ethanol, caused the decrease in the cost of goods sold as a percent of revenues for the fiscal year ended October 31, 2013 . Our gross margin for the fiscal year ended October 31, 2013 increased to 5.0% from 1.3% for the fiscal year ended October 31, 2012 . The cost of corn fluctuates based on supply and demand, which, in turn, is affected by a number of factors that are beyond our control. We expect our gross margin to fluctuate in the future based on the relative prices of corn and fuel ethanol. We use futures and options contracts to minimize our exposure to movements in corn prices, but there is no assurance that these hedging strategies will be effective. Gains or losses on derivative instruments do not necessarily coincide with the related corn purchases. This may cause fluctuations in cost of goods sold. While we do not use hedge accounting to match gains or losses on derivative instruments, we believe the derivative instruments provide an economic hedge. Operating Expenses Operating expenses include wages, salaries and benefits of administrative employees at the plant, insurance, professional fees and similar costs and generally do not vary with the level of production at the plant. These expenses were approximately $3.2 million in both the fiscal years ended October 31, 2013 and 2012. The Company recorded an impairment charge of approximately $27.8 million as of October 31, 2012 . The impairment charge was recorded after analysis by the Company whereby the fair value of long-lived assets was less than the carrying value. There was no similar impairment in 2013. The Company also recorded settlement expense of $900,000 during the fiscal year ended October 31, 2012 related to a dispute with its former coal supplier. Operating Income Our income from operations for fiscal year 2013 was $5.0 million , compared to an operating loss of $29.8 million for fiscal year 2012, which includes the impairment charge of $27.8 million . 26 -------------------------------------------------------------------------------- Table of Contents Other Expense Other expense in fiscal years 2013 and 2012 consisted primarily of interest expense. Interest expense consists primarily of interest payments on our credit facilities described below. Interest expense for fiscal year 2013, which was up as compared to fiscal year 2012, is dependent on the balances outstanding and interest rate fluctuations. As of October 31, 2013 , debt balances were down 31.5% as compared to balances at October 31, 2012 . The balance on our term note decreased from $36.6 million at October 31, 2012 , to $16.6 million at October 31, 2013 . Balances on our revolving term note were $6.0 million at October 31, 2013 as compared to $4.2 million at October 31, 2012 . During the year ended October 31, 2013 , we also issued $4.1 million in subordinated convertible debt. Fiscal Year Ended October 31, 2012 Compared to Fiscal Year Ended October 31, 2011 The following table shows the results of our operations and the percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our statements of operations for the fiscal year ended October 31, 2012 and 2011: 2012 2011 Income Statement Data Amount % Amount % Revenues $ 168,659,935 100.0 % $ 164,120,375 100.0 % Cost of Goods Sold 166,529,283 98.7 % 157,163,624 95.8 % Gross Profit 2,130,652 1.3 % 6,956,751 4.2 % Operating Expenses (3,171,331 ) (1.9 )% (3,613,465 ) (2.2 )% Impairment Charge (27,844,579 ) (16.5 )% - - % Settlement Expense (900,000 ) (0.5 )% - - % Operating Income (Loss) (29,785,258 ) (17.7 )% 3,343,286 2.0 % Other Expense (2,567,385 ) (1.5 )% (2,800,269 ) (1.7 )% Net Income (Loss) before noncontrolling interest (32,352,643 ) (19.2 )% 543,017 0.3 % Noncontrolling Income (Loss) 353,019 0.2 % (27,838 ) - % Net Income (Loss) attributable to Heron Lake BioEnergy, LLC $ (32,705,662 ) (19.4 )% $ 570,855 0.3 % Revenues Ethanol revenues during the fiscal year ended October 31, 2012 were approximately $128.6 million , comprising 76.2% of our revenues, as compared to approximately $130.6 million during the fiscal year ended October 31, 2011 , representing 80% of our revenues. For the year ended October 31, 2012 , we sold approximately 58.2 million gallons of ethanol at an average price of $2.20 per gallon. For the year ended October 31, 2011 , we sold approximately 53.4 million gallons of ethanol at an average price of $2.45 per gallon. Total sales of DGS during fiscal years 2012 and 2011 equaled approximately $33.1 million and $24.8 million , respectively, comprising 19.6% and 15% of our revenues for fiscal years 2012 and 2011, respectively. In fiscal years 2012 and 2011, we sold approximately 148,000 tons and 136,000 tons, respectively, of dried distillers' grain. The average price we received for distillers' grain was approximately $221 per ton in fiscal year 2012 and approximately $176 per ton in fiscal year 2011. Since we did not commence corn oil separation until February 2012 , we did not have any sales of corn oil during fiscal year 2011, compared to total sales of corn oil of $2.7 million in fiscal year 2012, comprising 1.6% of our revenues. Cost of Goods Sold Our costs of sales (including lower of cost or market adjustments) as a percentage of revenues were 98.7% and 95.8% for the fiscal years ended October 31, 2012 and October 31, 2011 , respectively. The per bushel cost of corn purchased increased approximately 10.0% in the fiscal year ended October 31, 2012 as compared to the fiscal year ended October 31, 2011 . Cost of goods sold includes lower of cost or market adjustments of approximately $1.6 million for the fiscal year ended October 31, 2011 . There were no such losses for the fiscal year ended October 31, 2012 . We had gains and losses related to corn derivative instruments of approximately $1.1 million and $0.4 million for the fiscal year ended October 31, 2012 and 2011, respectively, 27 -------------------------------------------------------------------------------- Table of Contents which were charged to cost of sales. In summary, lower of cost or market adjustments decreased approximately $1.6 million for the fiscal year ended October 31, 2012 as compared to the fiscal year ended October 31, 2011 . The 10.0% increase in the per bushel cost of corn outweighed the 10.0% decrease in the per gallon sales price of ethanol which caused the increase in the cost of goods sold as a percent of revenues for the fiscal year ended October 31, 2012 . Our gross margin for the fiscal year ended October 31, 2012 decreased to 1.3% from 4.2% for the fiscal year ended October 31, 2011 . Operating Expenses Operating expenses include wages, salaries and benefits of administrative employees at the plant, insurance, professional fees and similar costs and generally do not vary with the level of production at the plant. These expenses were $3.2 million for the fiscal year ended October 31, 2012 , down 12.2% from $3.6 million for the fiscal year ended October 31, 2011 . These expenses generally do not vary with the level of production at the plant and were relatively constant from period to period. The decline in operating expenses was primarily due to a reduction in professional fees. The Company recorded an impairment charge of approximately $27.8 million as of October 31, 2012 . The impairment charge was recorded after analysis by the Company whereby the fair value of long-lived assets was less than the carrying value. There was no similar impairment in 2011. The Company also recorded settlement expense of $900,000 in fiscal 2012 related to a dispute with its former coal supplier. Operating Income Our loss from operations for fiscal year 2012 was $29.8 million compared to operating income of $3.3 million for fiscal year 2011. The operating loss for fiscal year 2012 includes the impairment charge of $27.8 million . Other Expense Other expense in fiscal years 2012 and and 2011 consisted primarily of interest expense. Interest expense consists primarily of interest payments on our credit facilities described below. Interest expense for fiscal year 2012, which was down as compared to fiscal year 2011, is dependent on the balances outstanding and interest rate fluctuations. As of October 31, 2012 , debt balances were down 9% as compared to balances at October 31, 2011 , which was the main factor in the loan interest expense. Liquidity and Capital Resources As of October 31, 2013 , we had cash and equivalents (other than restricted cash) of approximately $0.5 million , current assets of approximately $7.8 million and total assets of approximately $60.8 million . Our principal sources of liquidity consist of available borrowings under our master loan agreement with AgStar, cash provided by operations, and cash and cash equivalents on hand. Under the master loan agreement with AgStar, we have two forms of debt: a term note and a revolving term note. The total indebtedness to AgStar at October 31, 2013 was $22.6 million , consisting of $16.6 million under the term note and $6.0 million under the revolving term note. Our revolving term note allows borrowing up to $18.5 million , reduced by $2 million at October 31 each year until maturity, subject to letters of credit outstanding. Among other provisions, our master loan agreement contains covenants requiring us to maintain various financial ratios and tangible net worth. It also limits our annual capital expenditures and membership distributions. All of our assets and real property are subject to security interests and mortgages in favor of AgStar as security for the obligations of the master loan agreement. Please see "Credit Arrangements-Credit Arrangement with AgStar" for a description of our indebtedness and agreements relating to our indebtedness with AgStar. In fiscal 2013 we raised $6.9 million in equity and another $5.1 million in subordinated convertible notes before conversion. The proceeds were used to reduce our debt obligations to AgStar and for operating working capital purposes. There is no assurance that our cash, cash generated from operations and, if necessary, available borrowing under our agreement with AgStar, will be sufficient to fund our anticipated capital needs and operating expenses, particularly if the sale of ethanol and DGS does not produce revenues in the amounts currently anticipated or if our operating costs, including specifically the cost of corn, natural gas and other inputs, are greater than anticipated. Historically, our cash and cash generated from operations have been insufficient to fund our capital needs and operating expenses, primarily due to the volatility in the ethanol and corn markets, thereby reducing or eliminating profit margins. Accordingly, we have relied on available borrowing under our agreement with AgStar for capital necessary to fund our business. The company has implemented measures to address these issues, including raising additional capital in fiscal year 2013 and entering into a management services agreement with Granite Falls Energy, LLC, the owner and operator of an ethanol plant located in Granite Falls, Minnesota , under which Granite Falls Energy provides us with management services. However, we previously had instances of unwaived debt covenant violations with AgStar and our working capital was at a lower level than desired. These conditions contributed to our long- 28 -------------------------------------------------------------------------------- Table of Contents term debt with AgStar being classified as current in previously filed financial statements. These factors and continually volatile commodity prices raise substantial doubt about our ability to continue as a going concern. Year Ended October 31, 2013 Compared to Year Ended October 31, 2012 Our principal uses of cash are to pay operating expenses of the plant and to make debt service payments. The following table summarizes our sources and uses of cash and equivalents from our consolidated statements of cash flows for the periods presented (in thousands): Year Ended October 31 (in thousands) 2013 2012 Net cash provided by operating activities $ 3,958 $ 398 Net cash provided by (used in) investing activities 2,812 (1,561 ) Net cash used in financing activities (6,880 ) (5,324 ) Net decrease in cash and equivalents $ (110 ) $ (6,487 ) During the twelve months ended October 31, 2013 , we received approximately $4.0 million in cash for operating activities. This consists primarily of generating a net income of $2.3 million plus non-cash expenses and charges including depreciation and amortization expense and net cash uses for changes in other current assets and liabilities. During the twelve months ended October 31, 2012 , we received approximately $398,000 in cash for operating activities. This consists primarily of generating a net loss of $32.4 million plus non-cash expenses and charges including depreciation and amortization expense, impairment charges of $27.8 million and net cash uses for changes in other current assets and liabilities. During the twelve months ended October 31, 2013 , investing activities provided approximately $2.8 million , primarily from proceeds from the sale by our subsidiary, Lakefield Farmers Elevator, LLC , of grain facilities at Lakefield and Wilder, Minnesota . These proceeds were offset by $0.9 million in capital expenditures. During the twelve months ended October 31, 2012 , we used approximately $1.6 million for investing activities primarily to pay for capital expenditures which included costs for the corn oil separation system. During the twelve months ended October 31, 2013 , we used approximately $6.9 million from financing activities consisting primarily of payments on our long term debt and line of credit of approximately $20.0 million . Offsetting cash sources from financing activities included issuances of member units and convertible subordinated debt. During the twelve months ended October 31, 2012 , we used approximately $5.3 million from financing activities consisting primarily of payments on our long term debt of approximately $6.9 million . Offsetting cash sources from financing activities included member contributions and modest borrowing. Year Ended October 31, 2012 Compared to Year Ended October 31, 2011 The following table summarizes our sources and uses of cash and equivalents from our consolidated statements of cash flows for the periods presented (in thousands): Year Ended October 31 (in thousands) 2012 2011 Net cash provided by operating activities $ 398 $ 14,258 Net cash used in investing activities (1,561 ) (4,493 ) Net cash used in financing activities (5,324 ) (4,148 ) Net increase (decrease) in cash and equivalents $ (6,487 ) $ 5,617 During the twelve months ended October 31, 2012 , we received approximately $398,000 in cash for operating activities. This consists primarily of generating a net loss of $32.4 million plus non-cash expenses and charges including depreciation and amortization expense, impairment charges of $27.8 million and net cash uses for changes in other current assets and liabilities. During the twelve months ended October 31, 2011 , we received $14.3 million in cash for operating activities. This consists primarily of generating net income of $0.5 million plus non-cash expenses including depreciation and amortization of $5.5 million and reductions in inventory and accounts receivable. During the twelve months ended October 31, 2012 , we used approximately $1.6 million for investing activities primarily to pay for capital expenditures which included costs for the corn oil separation system. During the twelve months ended 29 -------------------------------------------------------------------------------- Table of Contents October 31, 2011 , we used approximately $4.5 million for investing activities, primarily to pay for capital expenditures which included costs for the conversion from coal to natural gas. During the twelve months ended October 31, 2012 , we used approximately $5.3 million from financing activities consisting primarily of payments on our long term debt of approximately $6.9 million . Offsetting cash sources from financing activities included member contributions and modest borrowing. During the twelve months ended October 31, 2011 , we used approximately $4.1 million from financing activities, consisting primarily of payments on our term note of approximately $4.2 million and $3.5 million on our line of credit. We also raised $3.5 million from member contributions. Contractual Obligations The following table provides information regarding the consolidated contractual obligations of the Company as of October 31, 2013 : Less than One to Four to Greater Than Total One Year Three Years Five Years Five Years Long-term debt obligations(1) $ 34,736,887 $ 4,501,215 $ 23,866,342 $ 5,226,570 $ 1,142,760 Operating lease obligations 2,844,423 1,294,367 1,203,556 346,500 - Total contractual obligations $ 37,581,310 $ 5,795,582 $ 25,069,898 $ 5,573,070 $ 1,142,760 _______________________________________________________________________________ (1) Long-term debt obligations include estimated interest and interest on unused debt. Off Balance-Sheet Arrangements We have no off balance-sheet arrangements. Credit Arrangements Credit Arrangements with AgStar We have entered into an amended and restated master loan agreement with AgStar Financial Services , PCA ("AgStar") under which we have two forms of debt as of October 31, 2013 , a term note and a revolving term note. Our total indebtedness to AgStar as of October 31, 2013 was approximately $22.6 million , consisting of approximately $16.6 million under the term note and approximately $6.0 million under the revolving term note. Our loan agreements with AgStar are secured by substantially all business assets and are subject to various financial and non-financial covenants that limit distributions and debt and require minimum debt service coverage, net worth, and working capital requirements. The Company was in compliance with the covenants of its loan agreements with AgStar as of October 31, 2013 . In the past, the Company's failure to comply with the covenants of the master loan agreement and failure to timely pay required installments of principal has resulted in events of default under the master loan agreement, entitling AgStar to accelerate and declare due all amounts outstanding under the master loan agreement. If AgStar accelerated and declared due all amounts outstanding under the master loan agreement, the Company would not have adequate cash to repay the amounts due, resulting in a loss of control of our business or bankruptcy. There can be no assurance that the Company will be able to maintain compliance with its agreements with AgStar. Upon an occurrence of an event of default or an event that will lead to our default, AgStar may upon notice terminate its commitment to loan funds and declare the entire unpaid principal balance of the loans, plus accrued interest, immediately due and payable. An event of default includes, but is not limited to, our failure to make payments when due, insolvency, any material adverse change in our financial condition or our breach of any of the covenants, representations or warranties we have given in connection with the transaction. Term Note With respect to the term loan, the Company must make equal monthly payments of principal and interest on the term loan based on a 10-year amortization, provided the entire principal balance and accrued and unpaid interest on the term loan is due and payable in full on the maturity date of September 1, 2016 . In addition, the Company is required to make additional payments annually on debt for up to 25% of the excess cash flow, as defined by the agreement, up to $2 million per year. Through September 1, 2014 , the loan bears interest at 5.75% as long as the Company is in compliance with its debt covenants. On September 1, 2014 , the interest on the term loan will be adjusted to LIBOR plus 3.50%, but the total interest rate shall not be less than 5%. 30 -------------------------------------------------------------------------------- Table of Contents Revolving Term Note With respect to the revolving term loan, the loan matures in September 2016 . Amounts borrowed by the Company under the term revolving loan can be repaid and may be re-borrowed at any time prior to maturity date of the term revolving loan, provided that outstanding advances may not exceed the amount of the term revolving loan commitment. Amounts outstanding on the term revolving loan bear interest at a variable rate equal to the greater of a LIBOR rate plus 3.50% or 5.0%, payable monthly. At October 31, 2013 , the revolving term loan carried an interest rate of 5.0%. The Company also pays an unused commitment fee on the unused portion of the term revolving term loan commitment at the rate of 0.35% per annum, payable in arrears in quarterly installments during the term of the revolving term loan. At October 31, 2013 , the Company had $6.0 million outstanding under the revolving term loan and an additional $12.5 million was available. The amount available under the revolving term loan is reduced by $2 million at October 31 each year until September 2016 , when the unpaid balance is due. Subordinated Convertible Debt On September 18, 2013 , we entered into an indenture with U.S. Bank National Association (" U.S. Bank "), as trustee and collateral agent, in connection with the closing of our offering of a maximum of $12 million aggregate principal amount of 7.25% Secured Subordinated Notes due 2018 (the "Notes"). On September 18, 2013 , we sold an aggregate principal amount of approximately $2.8 million of the Notes. Additionally, subscribers from our prior interim subordinated notes offering holding an aggregate principal amount of approximately $1.3 million of our interim subordinated notes elected to exchange their notes for Notes under the indenture, per the original terms of the interim subordinated notes. Therefore we have an aggregate principal amount of approximately $4.1 million in Notes. The Notes are subordinated secured obligations, with interest payable on April 1 and October 1 of each year, beginning April 1, 2014 , through the maturity date of October 1, 2018 at a rate of 7.25% per annum. The Notes are secured by a second mortgage and lien position on, among other assets, our property, plant and equipment located in Heron Lake, Minnesota , which mortgage and lien position are junior to and subordinated to our senior debt with AgStar. Beginning on October 1, 2014 , and each anniversary date thereafter prior to the maturity date of the Notes, and on the maturity date of the Notes, and prior to the effective time of certain corporate actions, each holder of Notes has the right, at such holder's option, to irrevocably convert all (but not less than all) of such holder's Notes into our membership units at the rate of $0.30 of principal amount per unit. In addition to the anniversary and event conversion rights, prior to any prepayment date, each holder of Notes has the right, at such holder's option, to irrevocably convert the principal amount to be prepaid into our membership units at the rate of $0.30 of principal amount per unit. Subject to this conversion right, we may, with at least 45 days but not more than 60 days notice to the holders thereof, prepay the outstanding amount of the Notes in whole or in part with accrued interest to the date of such prepayment on the amount prepaid, without penalty or premium, provided that any prepayment of Notes must be done pro rata to all holders of Notes. Other Credit Arrangements In addition to our primary credit arrangement with AgStar and our subordinated convertible debt, we have other material credit arrangements and debt obligations. In October 2003 , we entered into an industrial water supply development and distribution agreement with the City of Heron Lake , Jackson County , and Minnesota Soybean Processors. In consideration of this agreement, we and Minnesota Soybean Processors are allocated equally the debt service on $735,000 in water revenue bonds that were issued by the City to support this project that mature in February 2019 . The parties have agreed that prior to the scheduled expiration of the agreement, they will negotiate in good faith to replace the agreement with a further agreement regarding the wells and related facilities. In May 2006 , we entered into an industrial water supply treatment agreement with the City of Heron Lake and Jackson County . Under this agreement, we pay monthly installments over 24 months starting January 1, 2007 equal to one years' debt service on approximately $3.6 million in water revenue bonds, which will be returned to us if any funds remain after final payment in full on the bonds and assuming we comply with all payment obligations under the agreement. As of October 31, 2013 and 2012, there was a total of $2.6 million and $2.9 million in outstanding water revenue bonds, respectively. We classify our obligations under these bonds as assessments payable. The interest rates on the bonds range from 0.50% to 8.73%. In November 2007 , we entered into a shared savings contract with Interstate Power and Light Company ("IPL"), our electrical service provider. Under the agreement, IPL is required to pay $1,850,000 to fund project costs for the purchase and installation of electrical equipment. In exchange, we are required to share a portion of the energy savings with IPL that may be derived from the decreased energy consumption from the new equipment. We are required to pay IPL approximately $30,000 for the first thirteen billing cycles, $140,000 at the end of the thirteenth billing cycle, and thereafter, approximately $30,000 for the remainder of the billing cycles. These amounts represent IPL's portion of the shared savings. We also granted IPL a security interest in the electrical equipment to be installed on our site. The shared savings contract expired December 31, 2012 . 31 -------------------------------------------------------------------------------- Table of Contents To fund the purchase of the distribution system and substation for the plant, we entered into a loan agreement with Federated Rural Electric Association pursuant to which we borrowed $600,000 by a secured promissory note. Under the note we are required to make monthly payments to Federated Rural Electric Association of $6,250 consisting of principal and an annual fee of 1% beginning on October 10, 2009 . In exchange for this loan, Federated Rural Electric Association was granted a security interest in the distribution system and substation for the plant. The balances of this loan at October 31, 2013 and 2012 were $293,750 and $368,750 , respectively. We have a note payable in connection with the construction of our pipeline assets. This loan was initially due in December 2011 , but was converted in February 2012 to a term loan with a three-year repayment period. The balances of this loan at October 31, 2013 and 2012 were $1,013,132 and $818,884 , respectively. Interest on the loan is at 5.29%. The note is secured by the assets of Agrinatural Gas, LLC . We financed our corn oil separation equipment from the equipment vendor. We pay approximately $40,000 per month on this debt, conditioned upon revenue generated from the corn oil separation equipment. The monthly payment includes implicit interest of 5.57% until maturity in May 2015 . The note is secured by the corn oil separation equipment. The balances of this loan at October 31, 2013 and 2012 were $640,653 and $1,072,310 , respectively. We also have a note payable to the minority owner of Agrinatural Gas, LLC in the amount of $300,000 at October 31, 2013 . Interest on the note is 5.43% and the note has a maturity date in October 2014 .


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Source: Edgar Glimpses


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