CONESTOGA ENERGY HOLDINGS, LLC AND SUBSIDIARIES Liberal, Kansas

Transcription

1 CONESTOGA ENERGY HOLDINGS, LLC AND SUBSIDIARIES Liberal, Kansas CONSOLIDATED FINANCIAL STATEMENTS For the Period March 1, 2013 (Date of Inception) to December 31, 2013 with Independent Auditors' Report

2 CONESTOGA ENERGY HOLDINGS, LLC AND SUBSIDIARIES Liberal, Kansas CONTENTS Page INDEPENDENT AUDITORS' REPORT... 1 FINANCIAL STATEMENTS Exhibit A CONSOLIDATED BALANCE SHEET... 3 Exhibit B CONSOLIDATED STATEMENT OF OPERATION... 4 Exhibit C CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' EQUITY... 5 Exhibit D CONSOLIDATED STATEMENT OF CASH FLOWS... 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS... 8 SUPPLEMENTAL INFORMATION Schedule 1 CONSOLIDATING BALANCE SHEET Schedule 2 CONSOLIDATING STATEMENT OF OPERATIONS Contents

3 To the Members Conestoga Energy Holdings, LLC: INDEPENDENT AUDITORS' REPORT We have audited the accompanying consolidated financial statements of Conestoga Energy Holdings, LLC and subsidiaries (a Kansas limited liability company), which comprise the consolidated balance sheet as of December 31, 2013, and the related consolidated statement of operations, changes in members' equity, and cash flows for the period March 1, 2013 (Date of Inception) to December 31, 2013, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessments of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion RENNER BLVD., SUITE 100, LENEXA, KS PHONE (913) FAX (913) Members of: American Institute of Certified Public Accountants. GENUINE PEOPLE. CREATIVE IDEAS. VALUABLE RESULTS. -1-

4 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Conestoga Energy Holdings, LLC and subsidiaries as of December 31, 2013, and the consolidated results of their operations and its cash flows for the period March 1, 2013 (Date of Inception) to December 31, 2013 in conformity with accounting principles generally accepted in the United States of America. Report on Consolidating Information Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The December 31, 2013 consolidating information in schedules 1 and 2 are presented for purposes of additional analysis of the December 31, 2013 consolidated financial statements rather than to present the financial position, results of operations, and cash flows of the individual companies, and is not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The consolidated information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the consolidating information is fairly stated in all material respects in relation to the consolidated financial statements as a whole. Respectfully submitted, Lenexa, Kansas February 11,

5 CONESTOGA ENERGY HOLDINGS, LLC AND SUBSIDIARIES Liberal, Kansas CONSOLIDATED BALANCE SHEET December 31, 2013 Exhibit A ASSETS Current Assets Cash $ 59,354,497 Certificate of deposit 114,416 Accounts receivable, less allowance for doubtful accounts: $132,101 15,821,256 Inventories 12,238,137 Margin deposits and cash balances 4,266,119 Prepaid expenses 1,004,296 Spare parts 1,998,157 Total Current Assets 94,796,878 Property, Plant and Equipment, at cost Land and improvements 20,344,154 Machinery and equipment 204,755,113 Buildings 29,655,115 Office furniture, fixtures, and software 1,937,988 Construction in progress 29, ,722,259 Deduct accumulated depreciation 99,159,182 Total Property, Plant and Equipment 157,563,077 Other Assets Investments 1,218,700 Loan fees, net of accumulated amortization: $540, ,060 Deposits 2,500,000 Other 168,632 Total Other Assets 4,402,392 Total Assets $ 256,762,347 LIABILITIES AND MEMBERS' EQUITY Current Liabilities Accounts payable $ 17,218,107 Accrued liabilities 3,784,473 Accrued liability for commodity contracts 532,653 Current maturities of long-term debt 21,392,015 Total Current Liabilities 42,927,248 Noncurrent Liabilities Long-Term Debt, less current maturities 63,617,529 Total Noncurrent Liabilities 63,617,529 Deferred Revenue 662,988 Members' Equity (Exhibit C) 149,554,582 Total Liabilities and Members' Equity $ 256,762,347 The accompanying notes are an integral part of these financial statements. -3-

6 CONESTOGA ENERGY HOLDINGS, LLC AND SUBSIDIARIES Liberal, Kansas Exhibit B CONSOLIDATED STATEMENT OF OPERATIONS For the Period March 1, 2013 (Date of Inception) to December 31, 2013 Sales Ethanol $ 338,075,170 Distillers grains 111,813,672 Carbon dioxide 1,607,313 Producer incentive payments 2,164,611 Other revenue 11,239,175 Net Sales 464,899,941 Cost of Sales 415,844,239 Gross Profit (Loss) on Sales 49,055,702 Operating Expenses General and administrative 12,680,965 Operating Income (Loss) 36,374,737 Other Income (Expense) Interest income 21,336 Interest expense (4,944,628) Gain (loss) on interest rate swap and rate cap 79,118 Amortization of loan fees (2,333,520) Other income (expense) 501,871 Total Other Income (Expense) (6,675,823) Net Income (Loss) $ 29,698,914 The accompanying notes are an integral part of these financial statements. -4-

7 CONESTOGA ENERGY HOLDINGS, LLC AND SUBSIDIARIES Liberal, Kansas Exhibit C CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' EQUITY Units Capital Contributions Retained Earnings (Deficit) Total Balance, March 1, $ - $ - $ - (Date of Inception) Merger of Arkalon Energy, LLC as of March 1, , ,237,082 (30,453,602) 74,783,480 Merger of Bonanza BioEnergy, LLC as of March 1, ,273 38,516,460 6,555,728 45,072,188 Net income (loss) for the period ended December 31, ,698,914 29,698,914 Balance, December 31, ,003 $ 143,753,542 $ 5,801,040 $ 149,554,582 The accompanying notes are an integral part of these financial statements. -5-

8 CONESTOGA ENERGY HOLDINGS, LLC AND SUBSIDIARIES Liberal, Kansas CONSOLIDATED STATEMENT OF CASH FLOWS Increase (Decrease) in Cash For the Period March 1, 2013 (Date of Inception) to December 31, 2013 Exhibit D Cash Flows From Operating Activities Net income (loss) (Exhibit B) $ 29,698,914 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation of property, plant, and equipment 13,594,097 Amortization of loan fees and interest rate cap 2,412,686 (Gain) loss on interest rate swap and rate cap (79,118) (Increase) decrease in: Accounts receivable 2,183,925 Inventories (228,009) Margin deposits and cash balances (2,048,708) Prepaids 6,077,298 Commodity contracts 1,091,109 Spare parts 21,074 Deposits (1,300,000) Other assets (31,501) Increase (decrease) in: Deferred revenue (55,249) Accounts payable 4,825,251 Accrued liabilities (571,311) Total Adjustments 25,891,544 Net Cash Provided by (Used in) Operating Activities 55,590,458 Cash Flows From Investing Activities Purchase of property, plant, and equipment (1,317,337) Net Cash Provided by (Used in) Investing Activities (1,317,337) Cash Flows From Financing Activities Payment of loan fees (291,341) Payments of long-term borrowings (13,623,772) Capital contributions from members 18,996,489 Net Cash Provided by (Used in) Financing Activities 5,081,376 Net Increase (Decrease) in Cash and Cash Equivalents 59,354,497 Cash and Cash Equivalents, Beginning of Year - Cash and Cash Equivalents, End of Year $ 59,354,497-6-

9 CONESTOGA ENERGY HOLDINGS, LLC AND SUBSIDIARIES Liberal, Kansas Exhibit D (Contd.) CONSOLIDATED STATEMENT OF CASH FLOWS Increase (Decrease) in Cash For the Period March 1, 2013 (Date of Inception) to December 31, 2013 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest $ 4,885,578 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Property, plant and equipment additions included in long-term obligations - Contributions from the members during 2013 included the following non-cash assets and liabilities: Certificate of deposit $ 114,416 Accounts receivable 18,005,181 Inventories 12,010,128 Margin deposits and cash balances 2,217,411 Receivables on commodity contracts 640,205 Prepaid expenses 7,081,594 Property, plant, and equipment, net of accumulated depreciation 169,839,837 Spare parts 2,019,231 Investments 1,218,700 Deposits 1,200,000 Other assets 137,131 Loan fees, net of accumulated amortization 2,557,238 Interest rate cap asset 49 Accounts payable (12,392,856) Accrued liabilities (4,355,784) Accrued liability for commodity contracts (81,749) Short-term borrowings (6,500,000) Notes payable - Long-term (92,133,316) Deferred revenue (718,237) Net Contribution $ 100,859,179 The accompanying notes are an integral part of these financial statements. -7-

10 CONESTOGA ENERGY HOLDINGS, LLC AND SUBSIDIARIES Liberal, Kansas NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Period March 1, 2013 (Date of Inception) to December 31, Summary of Significant Accounting Policies a. Nature of Business: The consolidated financial statements include accounts of Conestoga Energy Holdings, LLC and its wholly owned subsidiaries, Arkalon Energy, LLC, Bonanza BioEnergy, LLC, and Conestoga Energy Partners, LLC. All significant intercompany balances and transactions have been eliminated. Conestoga Energy Holdings, LLC (a Kansas limited liability company) was formed March 1, Conestoga Energy Holdings, LLC and subsidiaries (the Company) are primarily engaged in the management of and distillation and production of fuel grade ethanol and distillers grains as well as providing insurance, information technology, management, and transportation services. The Company has locations in Liberal, Kansas and Garden City, Kansas. Arkalon Energy, LLC and Conestoga Energy Partners, LLC have wholly own subsidiaries as listed below. Arkalon Energy, LLC Montana de Oro, LLC Conestoga Energy Insurance, LLC Conestoga Logistics, LLC Conestoga Energy Partners, LLC Prairie Schooner, LLC Arkalon Ethanol, LLC Arkalon ICD, Inc. b. Merger and Distribution: The Company was involved in a merger with Arkalon Energy, LLC and Bonanza BioEnergy, LLC as of March 1, In this merger, all units of Arkalon Energy, LLC and Bonanza BioEnergy, LLC were exchanged for units in Conestoga Energy Holdings. Conestoga Energy Holdings, LLC is now the sole unit holder of Arkalon Energy, LLC and Bonanza BioEnergy, LLC. Immediately following this transaction, Arkalon Energy, LLC and Bonanza BioEnergy, LLC distributed their units in Conestoga Energy Partners, LLC to Conestoga Energy Holdings, LLC. Prior to March 1, 2013, Arkalon Energy, LLC and Bonanza BioEnergy, LLC were owned by individual unit holders and Conestoga Energy Partners, LLC was owned equally by Arkalon Energy, LLC and Bonanza BioEnergy, LLC. This merger is being treated as a merger of entities under common control and has been recorded at cost basis of each of the underlying entities. c. Principles of Consolidation: The accompanying financial statements include the accounts of the Company and its wholly owned subsidiaries from the period of March 1, 2013 (date of inception) to December 31, All significant intercompany balances and transactions have been eliminated. d. Basis of Accounting: The Company uses the accrual basis of accounting in accordance with U.S. generally accepted accounting principles. This method recognizes revenues as earned and expenses as incurred. e. Estimates: Management uses estimates and assumptions in preparing financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses. Actual results could differ from the estimates used. -8-

11 f. Revenue Recognition: Revenue from the production of ethanol and related products is recognized upon transfer of title to the customer. The transfer takes place at the plant site and therefore shipping terms are FOB shipping point for all ethanol sales and carbon dioxide sales. The transfer of title for distillers grains is based on contract terms and revenue is recognized upon delivery. Income from federal and state incentives programs is recognized when received due to uncertainty of available funds and pro-rations used by the sponsoring organization. Revenue from management, information technology, labor-related services, insurance commissions, and interest income are recognized when earned. g. Taxes Collected from Customers: The Company excludes from its revenue all taxes collected from customers. Such taxes are recorded as a current liability until remitted to the respective tax authorities. h. Receivables: Receivables are presented at face value, net of the allowance for doubtful accounts. The allowance for doubtful accounts is established through provisions charged against income and is maintained at a level believed adequate by management to absorb estimated bad debts based on historical experience and current economic conditions. i. Inventories: Inventories are stated at the lower of cost, determined on a last in, first out (LIFO) basis, or market value for Arkalon Energy, LLC and Bonanza BioEnergy, LLC. Conestoga Energy Partners, LLC states inventory at the lower of cost, determined on a first in, first out (FIFO) basis, or replacement market. j. Investments in Commodity Contracts, Derivatives Instruments, and Hedging Activities: FASB Accounting Standards Codification (ASC) requires a company to evaluate its contracts to determine whether the contracts are derivatives. Certain contracts that literally meet the definition of a derivative may be exempted from FASB ASC as normal purchases or normal sales. Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. Contracts that meet the requirements of normal purchases and sales are documented as normal and exempted from the accounting and reporting requirements of FASB ASC The Company utilizes risk management strategies to minimize the Company's exposure to commodity price risk with certain anticipated commodity purchases (grain and natural gas) and sales (ethanol). As allowed for by FASB ASC , contracts are not designated as or accounted for as hedging instruments, although the contracts are effective economic hedges of specified risks. As part of Arkalon Ethanol, LLC s interest rate risk management strategy, Arkalon Ethanol LLC used derivatives instruments to minimize fluctuations that may have arisen from rising variable interest rate costs associated with existing and anticipated borrowings. To meet these, objectives, Arkalon Ethanol, LLC entered into an interest rate cap agreement to effectively convert a portion of its variable rate debt to fixed rate debt. As of December 31, 2013, Arkalon Ethanol, LLC restructured its debt, and there is no longer an interest rate cap agreement in place. k. Income Taxes: The Company is organized as a limited liability company under state law and is treated as a partnership for income tax purposes. Under this type of organization, the Company's earnings pass through to the members and are taxed at the member level. Accordingly, no income tax provision has been calculated. -9-

12 The Company files income tax returns in the U.S. Federal jurisdiction and two U.S. state jurisdictions. The Company is subject to U.S. federal or state income tax examinations by tax authorities for a period of three years after the filing of the tax return. l. Cash Equivalents: For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents include investment in money market portfolio funds. m. Fair Value of Financial Instruments: The Company believes the carrying value of cash and cash equivalents approximates fair value due to the short term maturity of these instruments. The Company believes the fair value of the Company's debt approximates the carrying value due to the variable interest rates and fixed interest rates being comparable to the current lending rates. n. Property, Plant and Equipment: Property, plant and equipment are carried at cost. When property, plant and equipment are sold or otherwise disposed of, the cost and related accumulated depreciation are eliminated from the accounts and any resulting gain or loss is reflected in income. o. Depreciation: Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Estimated useful lives generally used in computing depreciation are: Buildings Machinery and equipment Office furniture, fixtures and software 15 to 40 years 5 to 15 years 3 to 10 years Accelerated methods and statutory lives are used for income tax purposes. Long-lived assets to be held and used are tested for recoverability whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable. When required, impairment losses on assets to be held and used are recognized based on the fair value of the asset and long lived assets to be disposed of by sale are reported at the lower of carrying amount or fair value less cost to sell. p. Loan Fees: Costs incurred to obtain long-term financing are deferred and amortized on a straight-line method over the term of the related debt. q. Shipping and Handling: The Company includes shipping and handling costs with the cost of the item sold or purchased. Therefore, shipping and handling costs are included in net sales for ethanol and cost of sales for grain purchases and sales of distillers grain. r. Environmental Liabilities: The Company's operations are subject to federal, state and local environmental laws and regulations. These laws require the Company to investigate and remediate the effects of the release or disposal of materials at its location. Accordingly, the Company has adopted policies, practices and procedures in the areas of pollution control, occupational health, and the production, handling, storage and use of hazardous materials to prevent material environmental or other damage; and to limit the financial liability which could result from such events. Management believes there are no liabilities to record that would be probable and reasonable to estimate at December 31, s. Change in Accounting Principle: The Company has re-evaluated the turnover of spare parts and has determined the items turn consistently within one operating cycle and are generally expensed as used and therefore have determined it is appropriate to classify the spare parts as a current asset. The reclassification did not change net income for the years ended, December 31, 2013 and

13 2. Condensed Financial Information for Conestoga Energy Holdings, LLC and Conestoga Insurance Partners, LLC As discussed in Note 1a, Conestoga Energy Holdings was formed March 1, 2013, which holds ownership of Arkalon Energy, LLC, Bonanza BioEnergy, LLC, and Conestoga Energy Partners, LLC. The condensed financial information is presented for the purposes of additional analysis and was subjected to the auditing procedures performed in relation to the audit of the consolidated financial statements as a whole. Condensed pro forma operational information for Conestoga Energy Holdings, LLC for the period January 1, 2013 to February 28, 2013 have been included with the condensed operations of the company from March 1, 2013 to December 31, 2013, and the pro forma operations for the year as if Conestoga Energy Holdings was formed as of the beginning of the year and are summarized on a pro forma basis as follows: January-February 2013 March-December 2013 January-December 2013 Sales $ 89,174,487 $ 464,899,941 $ 554,074,428 Cost of Sales 87,812, ,844, ,657,055 Gross Profit (Loss) 1,361,671 49,055,702 50,417,373 General and Administrative Costs 2,791,758 12,680,965 15,472,723 Operating Income (Loss) (1,430,087) 36,374,737 34,944,650 Other Income (Expense) (1,092,838) (6,675,823) (7,768,661) Net Income (Loss) $ (2,522,925) $ 29,698,914 $ 27,175,989 Also discussed in Note 1a, Conestoga Energy Partners, LLC formed a wholly owned subsidiary, Conestoga Insurance Partners, LLC, during The subsidiary accounts have been included in the consolidated balances of Conestoga Energy Partners, LLC. The condensed financial information is presented for the purposes of additional analysis and was subjected to the auditing procedures performed in relation to the audit of the consolidated financial statements as a whole. 3. Incentive Payments The Company has been approved for the Kansas Qualified Agricultural Ethanol Producer Incentive Fund. Incentive payments are limited to 15,000,000 gallons per production year, per ethanol plant. The Company has included state incentives of $1,050,000 in revenue for the period ended December 31, Also for the period ended December 31, 2013, the Company qualified for the Federal Advanced Bio-Producer program and received $1,114,611 which is included in revenue. 4. Restricted Cash Arkalon Energy, LLC maintained a debt service reserve account according to the terms of the credit agreement with its lender (See Note 6). As of December 31, 2013, there was no reserve needed as the credit agreement was refinanced through Palmer/American Holding, LLC, which does not require a reserve account. -11-

14 5. Inventory Inventory at December 31, 2013 is summarized below: December 31, 2013 Total Amount Grains and chemicals $ 5,893,376 Work in process 3,048,478 Finished goods 1,946,394 Other inventory 123,781 11,012,029 Allowance to adjust carrying - value of LIFO items 1,226,108 - Total Inventory $ 12,238, Line of Credit and Long-Term Debt Arkalon Ethanol's agreement with Portigon AG (formerly West LB AG), Merrill Lynch Capital Services, Inc., and Investec Bank Plc was refinanced on October 31, 2013 through Palmer/American Holding, Inc., a related party. Outstanding borrowings under term loan agreements totaled $57,175,114 at December 31, Principal payments are due in monthly installments of $1,000,000 and all unpaid principal is due June 30, Interest accrues on the term loan at a fixed rate 5% per annum. Arkalon Ethanol, LLC agreed to pay Portigon AG a commitment fee on the daily average unused amount for the term loan commitment and working capital loan commitment at a rate of 0.50% per annum, which totaled $41,975 for the period ended December 31, The borrowings under the credit agreement are collateralized by substantially all assets of the Arkalon Ethanol, LLC. The credit agreement contains various restrictive covenants that limit the activities of the Arkalon Ethanol, LLC with respect to purchases of assets, payment of debt, and distributions to its member, unless such transactions are approved in advance by the lenders. In management's opinion, the Company complied with all restrictive covenants for the period ended December 31, The working capital loan through Palmer/American Holding, Inc., with an aggregate principal amount not to exceed $10,000,000 and was available through September 30, Interest accrued at a variable rate based on the London interbank offering rate (LIBOR) plus 6.0% per annum. Accrued interest was due quarterly and the principal amount was due at the maturity of the loan, which was September 30, The working capital loan through Palmer/American Holding, Inc. was refinanced through Murex N.A., Ltd, a related party, on November 1, The loan, not to exceed $11,000,000, is available through December 31, Amounts prepaid may be reborrowed and as of December 31, 2013, Arkalon Ethanol, LLC had borrowed $6,500,000 from the working capital loan. Interest accrues at a variable rate based on the London interbank offering rate (LIBOR) plus 6.0% per annum, which the variable rate was 7.7% as of December 31, Accrued interest is due monthly and the principal amount is due at the maturity date of the loan. -12-

15 The borrowings under the Murex working capital loan are collateralized by all inventory and accounts receivable, excluding accounts existing or hereafter created from the sale of distillers grains and carbon dioxide of the Company. The working capital loan contains various restrictive covenants that limit the activities of the Arkalon Ethanol, LLC with respect to the collection of accounts receivable and the safekeeping and sale of inventory. In management's opinion, Arkalon Ethanol, LLC complied with all restrictive covenants for the period ended December 31, Arkalon Ethanol, LLC entered into a note payable for equipment financing with Caterpillar Financial Services Corporation on August 2, From the closing date until the maturity date, three years after the closing date, interest accrued on the outstanding principal amount of the loan at a fixed interest rate of 8.25% per annum. The note was paid in full during At December 31, 2013, Arkalon Energy, LLC has accrued interest payable of $0 included in the balance sheet. Bonanza BioEnergy, LLC has a credit agreement with Farm Credit Services of America. Credit Facility B provided $21,000,000 as a revolving loan for financing construction of the ethanol plant and working capital until December 1, Each advance made will reduce the funds available for future advances by the amount of the advance; however, repayments of principal will be available for subsequent advances. Beginning December 1, 2013 and every June and December 1 thereafter, the maximum principal balance shall reduce by $1,250,000 until June 1, 2017 when the maximum principal balance reaches $11,000,000. The entire unpaid principal balance is due on December 19, Interest only is due monthly as long as the amount borrowed is less than the maximum advancement amount. Interest accrues from the date of each advance at a variable rate calculated on a 360-day basis, at the one month LIBOR index rate plus 4.15%. The Company had an outstanding principal balance of $19,750,000 at December 31, 2013, on Credit Facility B. Credit Facility C allows the Company to draw up to $6,000,000 until May 1, Each advance made will reduce the funds available for future advances by the amount of the advance; however, repayments of principal will be available for subsequent advances. The proceeds are for financing of eligible grain inventory, receivables, and margin account equity. Interest is due monthly and accrues at the one month LIBOR rate plus 3.75% and is payable on the first day of each month. Principal plus all accrued interest are due in full on May 1, The Company had no outstanding principal balance at December 31, 2013 on Credit Facility C. Credit Facility D allows the Company to draw up to $209,709 until June 1, Each advance made will reduce the funds available for future advances by the amount of the advance and repayments of principal are not available for subsequent advances. The principal shall be reduced by $28,118 on June 1 of every year through and including June 1, On the final advancement date, the maximum principal balance shall be $69,119. No advances have been made as of December 31, The proceeds are for funding draws on the Letters of Credit. Interest accrues at the one month LIBOR rate plus 3.90% and is payable on the first day of each month. Bonanza BioEnergy, LLC agreed to own or purchase, if necessary, such stock in Farm Credit Services of America, as is from time to time required by Farm Credit Services of America's policies and bylaws. Capitalization requirements are met by such stock owned by Bonanza BioEnergy, LLC. Bonanza BioEnergy, LLC had investments of $1,000 in stock as of December 31, 2013, which is included in investments on the balance sheets. Bonanza BioEnergy, LLC has agreed to pay commitment fees at the rate of 0.35% per annum of the unused portions of Credit Facility B and C. For the period ended December 31, 2013, Bonanza BioEnergy, LLC paid non-use fees of $16,932. Prepayment fees apply if Bonanza BioEnergy, LLC refinances the debt as per terms of the agreement. -13-

16 The borrowings under the credit agreement are collateralized by substantially all assets of Bonanza BioEnergy, LLC. Borrowings may not exceed the borrowing base, as defined in the credit agreement. The credit agreement contains various restrictive covenants which include requirements for maintenance of specified levels of working capital, tangible net worth, and debt coverage, and certain provisions limiting, among other things, the incurrence of additional debt, the annual dollar amount of capital expenditures, and the amount of distributions to owners, unless such transactions are approved in advance by the lender. In management's opinion, Bonanza BioEnergy complied with all restrictive covenants for the period ended December 31, On March 31, 2008, three members of the Company or businesses owned by the members loaned Bonanza BioEnergy, LLC long-term subordinated debt totaling $3,000,000. Simple interest was accrued on the debt at the rate of 14% until July 1, 2011, when it then decreased to 7.5%. Collateral for the debt is a security interest in personal property and a real estate mortgage, which are junior and subordinate to Farm Credit Services of America. Payments of principal and interest are subject to the Bonanza BioEnergy's compliance with the credit agreement with Farm Credit Services of America. On March 16, 2011, the Company paid the subordinated debt owed to one member upon the advanced approval by Farm Credit Services of America. The subordinated debt agreements contemplate amortization of the debt which commenced in April 2011, over a seven year period. Bonanza BioEnergy, LLC had an outstanding subordinated debt principal balance of $1,214,285 at December 31, At December 31, 2013, Bonanza BioEnergy, LLC has accrued interest payable of $97,923 included in the balance sheet. Conestoga Energy Partners, LLC obtained a line of credit of $1,000,000 at an interest rate of 4.25% on June 1, 2012 with a maturity date of June 1, At December 31, 2013, there was $0 borrowed against this line. The line of credit is collateralized by substantially all of the property of Conestoga Energy Partners, LLC. On January 14, 2011, Conestoga Energy Partners, LLC entered into a contract payable for the purchase of its office building. The contract bears an interest rate of 5% and requires monthly payments. The contract matures on August 15, Long-term borrowings are as follows as of December 31, 2013: December 31, 2013 Term loan $ 57,175,114 Other notes payable 6,500,000 Credit facility B 19,750,000 Subordinated debt 1,214,286 Contract payable 174,543 Capital lease obligations 195,601 85,009,544 Less current maturities 21,392,015 Total Long-Term Debt $ 63,617,

17 The aggregate maturities of all long-term debt are as follows: Year Ending December 31, Total Amount 2014 $ 21,392, ,872, ,859, ,561, ,274,170 Thereafter 11,049,221 Totals $ 85,009, Capital Leases Conestoga Energy Partners, LLC leases various plant equipment generally over periods ranging up to 4 years. The economic substance of the lease is that Conestoga Energy Partners, LLC is financing the acquisition of the assets through the lease and, accordingly, it is recorded in Conestoga Energy Partners, LLC assets and liabilities. The lease agreement contains a bargain purchase option at the end of the lease term. The following is a schedule of future minimum lease payments under capital leases for Conestoga Energy Partners, LLC as of December 31, 2013: Year Ending December 31, Total 2014 $ 93, , , Thereafter Total minimum lease payments - 209,852 Less: Amount representing interest 14,251 Present Value of Minimum Lease Payments $ 195,601 The obligations under the capital leases are collateralized by the leased equipment, with a gross carrying amount of $287,037 and accumulated depreciation of $46,293 at December 31, The depreciation of assets held under capital leases is included with depreciation expense. 8. Deferred Revenue Arkalon Energy, LLC has a Carbon Dioxide Purchase and Sale Agreement with Chaparral CO2, LLC (Chaparral) to exclusively sell all carbon dioxide produced by Arkalon Energy, LLC (See Note 15). Chaparral paid Arkalon Energy, LLC $994,481 for this access right. The amount will be recognized as revenue over the next fifteen-year term of the agreement beginning in 2009 and ending in Arkalon Energy, LLC recognized revenue for access rights of $55,249 for the period ended December 31,

18 9. Members' Equity On March 1, 2013, the Company merged with Arkalon Energy, LLC and Bonanza BioEnergy, LLC, see Note 1b. In the merger, members of Arkalon Energy, LLC and Bonanza BioEnergy, LLC exchanged their originally issued units in Arkalon Energy, LLC and Bonanza BioEnergy, LLC for units of Conestoga Energy Holdings units which were issued in three classes: Class A (639 units), Class B (5,028 units), and Class C (56,336 units). The board of directors is authorized to create classes of units and establish the designations, powers, preferences, and governance and also other rights, qualifications, limitations, and restrictions applicable to such classes. Voting rights are one vote for each voting unit registered in the name of such member as shown on the membership registration maintained by the Conestoga Energy Holdings, LLC. No member shall directly or indirectly vote more than 40% of the issued and outstanding voting membership interest in Conestoga Energy Holdings at any time, regardless of actual ownership. Class A unit holders are eligible to vote in the elections to remove or elect a director, approve the sale of Conestoga Energy Holdings, LLC's assets, and in all proposed mergers or consolidations. Holders of Class B units are eligible to vote in elections that Class A is allowed to as well as proposed amendments to the Operating Agreement. Holders of Class C units are eligible to vote on all issues that Class A and Class B are eligible to vote on, along with all other member voting matters of Conestoga Energy Holdings, LLC. Distribution of income and losses of the Company are allocated among the unit holders in proportion to each unit holder's respective percentage of units when compared with the total units issued. The directors of the Company direct the business affairs of the Company and are responsible for management. At each annual meeting of the members, directors are elected by the members for staggered terms of three years. The Company's board of directors may distribute cash to members based on the Company's net profit, not to exceed 40% of the Company's net profit of the previous year, less all payment on Subordinated Debt, so long as the distributions do not cause the Company to violate any loan agreements. No unit holder has the right to demand and receive any distribution from the Company other than in cash. No distribution shall be made if, as a result thereof, the Company's liabilities would exceed the gross asset value of its assets. Transfer, disposition, or encumbrance of capital units is subject to certain restrictions, including approval by the board of directors. 10. Related Party Transactions Arkalon Energy, LLC sells to and purchases from Diamond Ethanol, LLC distillers grains, chemicals, and supplies The intercompany sales and purchase transactions are regularly cash settled. The total intercompany sales and purchases for the period ended December 31, 2013 are disclosed as follows. Conestoga Energy Partners, LLC has a minority interest in and entered into a separate Operation and Maintenance Agreement and Services Agreement with Diamond Ethanol, LLC (Diamond) to provide all labor-related operation and maintenance services for the ethanol facility, as well as all management, marketing, risk management, finance, accounting, human resources, and other administrative services in connection with the operation of the facility. The monthly rate is subject -16-

19 to increase annually based on the change in the Consumer Price Index, but in the event of unforeseen increases in costs to Conestoga Energy Partners, LLC, may be increased by ten, fifteen, or twenty percent per year as set forth in the agreements. The agreement is a five year term for Diamond, expiring in 2017, which may be extended by agreement, but may be terminated upon the earlier sale of the Conestoga Energy Partners or Diamond Ethanol, LLC. Diamond's monthly rates for management fees for 2013 were $166,375 per month throughout the entire period. Diamond's labor fee is based upon direct labor related costs plus ten percent. Other expenses and supplies are provided to Diamond on a cost reimbursement basis. Other Conestoga Energy Partners, LLC related party revenue transactions include fees for services provided to companies and individuals that are affiliates with members of Diamond. Transactions with Diamond, and other related parties during the period ended December 31, 2013 are disclosed as follows: Arkalon Ethanol, LLC and Bonanza BioEnergy, LLC sells to and purchases from each other distillers grains, chemicals, and supplies. The pricing methodology for distiller sales is principally based on a percentage of the Chicago Board of Trade published corn price. During 2013, Arkalon Ethanol, LLC's and Bonanza BioEnergy, LLC's policy is to set pricing weekly based upon a percentage of the Chicago Board of Trade published price, with the same price charged to each company for loads sold during that weekly contract period. The intercompany sales transactions are regularly cash settled and have been eliminated in the consolidated statement of income. Related party transactions included on the balance sheets as of December 31, 2013, are as follows. December 31, 2013 Accounts Receivable Diamond Ethanol, LLC $ 537,690 Murex N.A., Ltd. 7,368,508 Other related parties* 20,959 Accounts Payable and Accrued Liabilities Other related parties* 1,901,525 Long-Term Senior Debt 63,675,114 Long-Term Subordinated Debt 1,214,

20 Related party transactions for the period ended December 31, 2013, included on the statements of operations, are presented as follows: Period Ended December 31, 2013 Sales - Ethanol Murex N.A., Ltd $ 222,019,458 Sales - Distillers Grains Diamond Ethanol, LLC 331,740 Other related parties* 4,842,287 Management and Labor Fee Revenue 6,053,794 Cost of Sales Diamond Ethanol, LLC 580,964 Other related parties* 39,868,728 General and Administrative Trailer rental and hauling services 4,331,842 Interest Expense - Other Related Parties* 857,974 *Other related party transactions include transactions with members or businesses owned by members of the Company during the period ended December 31, Concentrations The Company maintains cash balances at various financial institutions in its trade area. At times, the Company's bank balances may exceed the amount insured by the Federal Deposit Insurance Corporation. The Company's credit is primarily from two lenders for Arkalon Ethanol, LLC and from one lender for Bonanza Holding, LLC as discussed in Note 6. Arkalon Energy, LLC currently has a marketing agreement with one customer, who is also a member, Murex N.A., Ltd., to sell all ethanol produced (See Note 13). At December 31, 2013, Arkalon Energy, LLC had outstanding net receivables of $7,369,508 with this customer. Bonanza BioEnergy, LLC has a marketing agreement with one customer to sell all the ethanol produced. The Company had an outstanding accrued liability balance of $417,565 at December 31, 2013, due to provisional pricing. Purchases of grain for Arkalon Ethanol, LLC from the top two significant vendors was $100,915,715 for the period ended December 31, Total grain purchases were $228,787,255 for the period ended December 31, Total amounts due from the aforementioned vendors at December 31, 2013 were $1,932,734. As discussed in Note 13, the Bonanza BioEnergy, LLC had an agreement with one vendor, Wind River Grain, LLC, to exclusively obtain its supply of grain. Purchases from this vendor for the period ending December 31, 2013 totaled $115,220,285 and at December 31, 2013, the Company had an outstanding receivable of $7,550 with this vendor. -18-

21 Arkalon Ethanol, LLC and Bonanza BioEnergy, LLC had agreements with one vendor, Frontier Transportation, Inc., to exclusively provide transportation services for the delivery of wet and dry distillers grains (See Note 13). This agreement was terminated May 31, After termination, Arkalon Ethanol, LLC and Bonanza BioEnergy, LLC paid $403,561 for charges not previously invoiced. There were no purchases from this vendor during Operating Leases Bonanza Holding, LLC entered into an agreement to lease office space from Wind River Grain, LLC. The lease term is for twelve years and the monthly base rent is $2,400 for five years with an escalator based on market rate. For the period ended December 31, 2013, Bonanza BioEnergy, LLC incurred $21,600 of rent expense. Future minimum lease payments are $28,800 per year through May 31, Bonanza BioEnergy, LLC entered into an agreement to lease 160 rail cars from Trinity Industries Leasing Company, for the period ended December 31, The lease term is for 60 months ending December 31, 2017, and the monthly base rent is $1,010 per car per month. For the period ended December 31, 2013, Bonanza BioEnergy, LLC incurred lease expense of $1,616,000. Future minimum lease payments are $1,939,200 per year through December Bonanza BioEnergy, LLC entered into an agreement to lease four rail cars from Midwest RailCar Corporation. The lease term is for 24 months and the monthly base rent is $335 per car per month beginning in January This agreement has been renewed for an additional five years. Bonanza BioEnergy, LLC incurred lease expense of $13,400 for the period ended December 31, Conestoga Energy Partners, LLC entered into an agreement to lease two copiers on August 19, The lease term is for 39 months and the monthly rent is $597 per month beginning in September The Company incurred lease expense of $2,389 for the period ended December 31, Future minimum lease payments due under these leases are as follows: Total Amount 2014 $ 1,991, ,991, ,990, ,984, ,800 Thereafter - Total Minimum Lease Payments $ 7,986, Commitments and Contingencies Arkalon Ethanol, LLC has an agreement with CMS Electric Cooperative, Inc. (Cooperative) to obtain electric services for the ethanol facility. The Company agreed to provide a deposit an amount equivalent to six months of estimated power service of $2,500,000 for the period ended December 31,

22 Arkalon Ethanol, LLC and the City of Liberal, Kansas have a water supply contract for the ethanol plant. The initial contract is for ten years, expiring December 2017, and may be renewed for an additional period of ten years. The initial contract gives Arkalon Ethanol, LLC the right to purchase a maximum quantity of 1,970 acre feet of water annually at $1.00 per 1,000 gallons of water, and the right to discharge pretreated effluent into the city's treatment plant. Arkalon Ethanol, LLC has an agreement to sell 100% of the ethanol produced at the ethanol facility to Murex, N.A., Ltd, a related party. The term of the initial agreement was for a three-year period and renews automatically unless required notice is given by either party. The agreement was renewed for a one year period, beginning on January 1, The sales price fluctuates with the market price at time of sale as defined in the agreement. Arkalon Ethanol, LLC entered into a unit train terminal storage agreement with Murex, N.A., Ltd., and has agreed to lease a certain number of railcars from Murex for a monthly charge of $123,400, until June 30, Effective July 1, 2013, Arkalon Ethanol, LLC will reimburse Murex, N.A., Ltd. s actual costs per tank car for each month. The reimbursements shall not exceed $950 per month per tank car. Bonanza BioEnergy, LLC has an agreement to sell 100% of the ethanol produced at the ethanol facility to one customer. The initial term of the agreement is for a two year period, which began January 1, 2011, and renewed as of January 1, 2013 on a quarterly basis. The sales price fluctuates with the market price at time of sale as defined in the agreement. This agreement was terminated as of September 30, On October 1, 2013, Bonanza BioEnergy, LLC entered into an agreement with a different customer to sell 100% of the ethanol produced at the ethanol facility. The initial term of the agreement is for a one year period with the option to extend by 90 days if notice is given by August 15, If notice is not provided, the agreement will terminate on September 30, The sales price fluctuates with the market price at time of sale as defined in the agreement. Arkalon Ethanol, LLC has a Large Volume Transportation Service Agreement with Black Hills Corporation to supply natural gas to the ethanol facility. The primary term is for ten years expiring on December 24, Following the expiration of the primary term, the agreement may be extended for an additional ten years. Arkalon Ethanol, LLC agreed to use a minimum of 2,160,000 MMBtu per contract year during the primary term. If Arkalon Ethanol, LLC fails to meet the minimum requirement, they will be billed for the difference between the required and actual usage at a rate of $.14 MMBtu. Arkalon Energy, LLC will pay $.04 per MMBtu for all volumes in excess of 2,160,000 MMBtu. Bonanza BioEnergy, LLC has a Large Volume Transportation Service Agreement with Black Hills Corporation to supply natural gas to the ethanol facility. The primary term is for ten years commencing on the first day the plant is operational, which was August 15, Following the expiration of the primary term, the agreement will be extended for an additional ten years. Bonanza BioEnergy, LLC agreed to use a minimum of 990,000 MMBtu per contract year during the primary term. If Bonanza Holding, LLC fails to meet the minimum requirement, they will be billed for the difference between the required and actual usage at a rate of $.1575 MMBtu. Bonanza Holding, LLC will pay $.04 MMBtu for all volumes in excess of 990,000 MMBtu. Arkalon Ethanol, LLC has a carbon dioxide purchase and sale agreement with Chaparral CO 2, LLC (Chaparral), where Arkalon Ethanol, LLC agreed to exclusively sell all carbon dioxide produced at the Liberal, Kansas plant to Chaparral. The initial term of the agreement is for fifteen years from the date of first delivery of carbon dioxide to Chaparral which was in After the initial term expires in 2024, the agreement automatically renews for consecutive five-year renewal periods, unless required notice is given by Chaparral. The agreed upon price per unit of carbon dioxide is $0.131 per MCF for the term of the agreement. -20-

23 Bonanza BioEnergy, LLC has an agreement with the City of Garden City to purchase up to 5,000 kilowatts of electric energy per day from the City for the ethanol plant. The term of the agreement renews annually unless terminated by either party giving not less than 180 days written notice. Bonanza BioEnergy, LLC has an agreement to obtain the supply of grain exclusively from Wind River Grain, LLC. The initial term of this agreement is for four years from August 2007, but Bonanza Holding, LLC may early terminate the agreement if certain events as set forth in the agreement occur. The term automatically extends for two year increments thereafter unless elected by either party. Bonanza BioEnergy, LLC agreed to pay Wind River Grain, LLC a sourcing fee of $.032 per bushel of grain delivered to Bonanza BioEnergy, LLC, and a put-through charge of an additional $.05 per bushel for grains elevated and conveyed from Wind River Grain, LLC bins, in addition to the market price of the grain. Bonanza BioEnergy, LLC has a Transportation Service Agreement dated April 1, 2007 with Colorado Interstate Gas Company to tender gas for transportation service. The term is for ten years beginning April 1, The maximum daily quantity is 1,154 Dth/d (Dekatherms per day). The rates, as defined in the agreement, will be amended from time to time based on the gas tariff order, regulations, or provisions of law. Bonanza BioEnergy, LLC has a carbon dioxide purchase and sale agreement with PetroSantander (USA) Inc. (PetroSantander), where Bonanza Holding, LLC agreed to exclusively sell all carbon dioxide produced at the Garden City, Kansas plant to PetroSantander. The initial term of the agreement is for five years beginning on March 5, After the initial term expires in 2015, the agreement automatically renews for consecutive three year renewal periods, unless required notice is given by PetroSantander or Bonanza. The agreed upon price per unit of carbon dioxide is $0.29 per MCF for the term of the agreement. Arkalon Ethanol, LLC and Bonanza BioEnergy, LLC have agreements with Syngenta Seeds, Inc. (Syngenta) to purchase grain containing Syngenta's Enogen Technology for use in the ethanol plant's ethanol production process. The agreements are for four twelve (12) month periods (Production Year) with the first Production Year commencing on October 1, The Companies are committed to purchase all Enogen Grain produced by its Growers in accordance with the Enogen Corn Production Agreements. In the first Production Year, the Companies have both set a goal for up to 10,000 acres of production. The goal is to get 10% of the total grain used by each of the Companies to be Enogen Grain (inclusion rate). In Production Year's two through four, Arkalon Ethanol, LLC and Bonanza BioEnergy, LLC will both strive to contract for sufficient Enogen Grain as is necessary to meet their own 10% inclusion rate. On June 1, 2012, Conestoga Energy Partners, LLC entered into agreements through Conestoga Logistics, LLC with two vendors that are affiliates of Conestoga Energy Partners, LLC for the rental of trailers. These agreements run through June 1, No minimum volume of freight is mandated in these agreements. The Company is involved in various claims, both for and against the Company, arising in the normal course of business. Management believes that any financial responsibility that may be incurred in the settlement of such claims and lawsuits would not be material to the Company's financial position. Conestoga Energy Partners, LLC has outstanding commitments to purchase a new office building and computer equipment within the next year of $1,323,200 at December 31, Bonanza BioEnergy, LLC is involved in litigation with Finney County, Kansas (County) through the Kansas Court of Tax Appeals (Court). The County has filed pleadings with the Court to reinterpret the terms and conditions of the ad valorem tax exemption granted with respect to assets owned by -21-