BONANZA BIOENERGY, LLC Garden City, Kansas

Transcription

1 FINANCIAL STATEMENTS Years Ended with Independent Auditors' Report

2 CONTENTS Page INDEPENDENT AUDITORS' REPORT... 1 FINANCIAL STATEMENTS Exhibit A BALANCE SHEETS... 2 Exhibit B STATEMENTS OF OPERATIONS... 3 Exhibit C STATEMENTS OF CHANGES IN MEMBERS' EQUITY... 4 Exhibit D STATEMENTS OF CASH FLOWS Contents

3 INDEPENDENT AUDITORS' REPORT To the Members Bonanza BioEnergy, LLC: We have audited the accompanying balance sheets of Bonanza BioEnergy, LLC as of December 31, 2009 and 2008, and the related statements of operations, changes in members' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with U.S. generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Bonanza BioEnergy, LLC as of, and the results of its operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles. Respectfully submitted, Wichita, Kansas February 15, N WATERFRONT PARKWAY, SUITE 200, WICHITA, KS PHONE (316) FAX (316) Members of: American Institute of Certified Public Accountants. Offices in Kansas and Colorado

4 BALANCE SHEETS Exhibit A December 31, ASSETS Current Assets Cash $ 4,358,850 $ 1,366,265 Accounts receivable, less allowance for doubtful accounts: $32,590; $45,777 5,092,609 8,841,138 Inventories 3,690,577 3,833,774 Margin deposits and cash balances 3,570, , Prepaids 426, ,530 Total Current Assets 17,139,154 14,807,547 Property, Plant and Equipment, at cost Land and improvements 6,023,518 6,023,518 Machinery and equipment 61,797,475 61,693,915 Buildings 11,901,669 11,901,669 Deposits on equipment - 83,668 79,722,662 79,702,770 Deduct accumulated depreciation 12,650,527 7,766,077 Total Property, Plant and Equipment 67,072,135 71,936,693 Other Assets Spare parts 341, ,143 Investments 657, ,886 Loan fees, net of accumulated amortization: $252,316; $181, , ,464 Total Other Assets 1,510,711 1,313,493 Total Assets $ 85,722,000 $ 88,057,733 LIABILITIES AND MEMBERS' EQUITY Current Liabilities Accounts payable $ 1,258,145 $ 1,465,187 Accrued liabilities 902,745 6,631,431 Accrued liability for commodity contracts 1,644,081 27,198 Line of credit 745,980 1,345,980 Current maturities of long-term debt 7,068,620 5,068,620 Total Current Liabilities 11,619,571 14,538, Long-Term Debt, less current maturities 36,480,340 43,548,960 Members' Equity (Exhibit C) 37,622,089 29,970,357 Total Liabilities and Members' Equity $ 85,722,000 $ 88,057,733 The accompanying notes are an integral part of these financial statements. -2-

5 Exhibit B STATEMENTS OF OPERATIONS December 31, Sales Ethanol $ 91,351,811 $ 123,364,077 Distillers grains 24,357,878 36,569,353 Producer incentive payments 769, ,883 Net Sales 116,479, ,849,313 Cost of Sales 104,183, ,409,935 Gross Profit on Sales 12,295,749 2,439,378 Operating Expenses General and administrative 2,708,736 2,301,236 Operating Income 9,587, ,142 Other Income (Expense) Interest income 51,564 52,328 Interest expense (2,605,014) 014) (3,530,275) Amortization of loan fees (70,362) (105,829) Other income - Net 688,531 16,040 Total Other Income (Expense) (1,935,281) (3,567,736) Net Income (Loss) $ 7,651,732 $ (3,429,594) The accompanying notes are an integral part of these financial statements. -3-

6 Exhibit C STATEMENTS OF CHANGES IN MEMBERS' EQUITY Units Capital Contributions Retained Earnings (Deficit) Total Balance, December 31, ,593 $ 38,516,460 $ (5,116,509) $ 33,399,951 Net income (loss) for the year ended December 31, 2008 (Exhibit B) - - (3,429,594) (3,429,594) Balance, December 31, ,593 38,516,460 (8,546,103) 29,970,357 Net income for the year ended December 31, 2009 (Exhibit B) - - 7,651,732 7,651,732 Balance, December 31, ,593 $ 38,516,460 $ (894,371) $ 37,622,089 The accompanying notes are an integral part of these financial statements. -4-

7 STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash Exhibit D December 31, Cash Flows From Operating Activities Net income (loss) (Exhibit B) $ 7,651,732 $ (3,429,594) Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation of property, plant, and equipment 4,884,450 4,877,550 Amortization of loan fees 70, ,829 Equity in (income) loss of Conestoga Energy Partners, LLC (270,378) 35,711 (Increase) decrease in: Accounts receivable 3,748,529 (165,687) Inventories 143, ,188 Margin deposits and cash balances (3,101,291) (450,302) Prepaids (129,457) 226,776 Spare parts 2,798 (39,723) Increase (decrease) in: Accounts payable (123,374) (1,077,893) Accrued liabilities (4,111,803) 6,575,236 Total Adjustments 1,113,033 10,867,685 Net Cash Provided by (Used In) Operating Activities 8,764,765 7,438,091 Cash Flows From Investing Activities Expenditures for property, plant and equipment (103,560) (253,649) Net Cash Provided by (Used in) Investing Activities (103,560) (253,649) Cash Flows From Financing Activities Net change in line of credit (600,000) (4,000,000) Proceeds from long-term borrowings - 3,000,000 Payments of long-term borrowings (5,068,620) (5,068,620) Net Cash Provided by (Used in) Financing Activities (5,668,620) (6,068,620) Net Increase (Decrease) in Cash and Cash Equivalents 2,992,585 1,115,822 Cash and Cash Equivalents, Beginning of Year 1,366, ,443 Cash and Cash Equivalents, End of Year $ 4,358,850 $ 1,366,265 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest $ 2,425,046 $ 3,269,114 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Property, plant and equipment additions included in accounts payable and accrued liabilities $ - $ 83,668 The accompanying notes are an integral part of these financial statements. -5-

8 1. Summary of Significant Accounting Policies a. Nature of Business: Bonanza BioEnergy, LLC (a Kansas limited liability company) located in, was formed May 3, 2005 to own and operate a 55 million gallon nameplate ethanol plant. The principal business of Bonanza BioEnergy, LLC (the Company) is distillation and production of fuel grade ethanol and distillers grains. The Company's plant became operational on August 15, b. 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. c. 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. d. Revenue Recognition: Revenue from the production of ethanol and related products is recorded 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. The transfer of title for distillers grains is based on contract terms and revenue is recognized upon delivery. Interest income is recognized as earned. Income from federal and state incentives is recognized when received due to uncertainty of available funds and pro-rations used by the sponsoring organization. e. 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. f. Inventories: Inventories are stated at the lower of cost or replacement market. Cost is determined by the "first-in, first-out" (FIFO) method. g. Investments in Commodity Contracts, Derivatives Instruments, and Hedging Activities: Statement of Financial Accounting Standards (SFAS) No. 133 (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 SFAS No. 133 (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 SFAS No. 133 (FASB ASC ). -6-

9 The Company has adopted new guidance related to derivative disclosure and hedging activities. This guidance requires entities that utilize derivative instruments to provide qualitative disclosures about their objectives and strategies for using such instruments, as well as any details of credit-risk-related contingent features contained within derivatives. The guidance also requires entities to disclose additional information about the amounts and location of derivatives located within the financial statements and the impact that hedges have on an entity's operating results, financial position or cash flows. 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). All derivatives are designated as non-hedge derivatives. Although the contracts are effective economic hedges of specified risks, they are not designated as and accounted for as hedging instruments. h. 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. i. 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. j. 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. k. 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 Plant equipment Computer equipment 15 to 40 years 15 years 3 to 5 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. l. 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. -7-

10 m. 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 and cost of sales. n. 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. Environmental liabilities are recorded when the liability is probable and the costs can be reasonably estimated. o. Reclassifications: Certain amounts in the prior year comparative information have been reclassified for comparative purposes to conform to the presentation in the current year financial statements. 2. Incentive Payments The Company has been approved for the Kansas Qualified Agricultural Ethanol Producer Incentive Fund. The incentive rate is $.075 per gallon of ethanol produced. The Company must establish they have produced 5,000,000 gallons of ethanol before the State of Kansas will disburse the funds. Incentive payments are limited to 15,000,000 gallons per production year. The Company has included state incentives of $503,520 and $915,883, respectively, in revenue for the years ended. For the year ended December 31, 2009, the Company qualified for the Federal Advanced Bio-Producer program and received $266,261, which is included in revenue. 3. Inventory Inventory at is summarized as follows: Unprocessed grains and chemicals $ 1,599,358 $ 1,391,041 Work in process 1,212,776 1,061,502 Finished goods 878,444 1,381,231 Total Inventory $ 3,690,578 $ 3,833, Line of Credit and Long-Term Debt The Company has a credit agreement with Farm Credit Services of America. The terms of the credit agreement were last amended on November 12, 2009 and the current terms are described on the following page. -8-

11 Credit Facility A provided $38,014,650 as a term loan for financing construction of the ethanol plant. Each advance made reduces the funds available for future advances by the amount of the advance, and repayments of principal are not available for subsequent advances. Principal payments of $422,385 plus accrued interest are payable monthly until the principal is paid in full but no later than October 1, Interest accrues from the date of each advance at a variable rate calculated on a 360-day basis, at the three month LIBOR index rate plus 4.35%. Such variable rate shall not, in any event, be less than 5% per annum. The variable rate is adjusted every month with any change in the three month LIBOR index rate. The three month LIBOR index rate was 0.65% and 2.20% at, respectively. The Company had an outstanding principal balance of $27,877,410 and $32,946,030 at, respectively, on Credit Facility A. Credit Facility B provided $12,671,550 as a revolving loan for financing construction of the ethanol plant and working capital until thirty months after Credit Facility A has been repaid, but no later than April 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. Interest only is due monthly until Credit Facility A is paid in full. Quarterly principal payments of $1,267,155 plus accrued interest commence three months following full repayment of Credit Facility A or January 1, 2016, whichever occurs first and final payment is due April 1, Interest accrues at the same rate as Credit Facility A. Credit Facility C allows the Company to draw up to $4,000,000 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 same rate as Credit Facility A 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 an outstanding principal balance of $745,980 and $1,345,980 at, on Credit Facility C. Credit Facility D allows the Company to draw up to $38,700 until December 1, Each advance made will reduce the funds available for future advances by the amount of the advance and repayments of principal will not be available for subsequent advances. No advances have been made as of December 31, The proceeds are for funding draws on the Letter of Credit Colorado Interstate Gas Company. Interest accrues at the same rate as Credit Facility A and is payable on the first day of each month. Principal plus all accrued interest are due in full on December 1, Credit Facility E allows the Company to draw up to $224,946 effective June 1, 2009 until May 31, Each advance made will reduce the funds available for future advances by the amount of the advance and repayments of principal will not be available for subsequent advances. No advances have been made as of December 31, The proceeds are for funding draws on the Letter of Credit Black Hills Corporation. Interest accrues at the same rate as Credit Facility A and is payable on the first day of each month. Principal plus all accrued interest are due in full on May 31,

12 The Company 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 the Company. The Company had investments of $1,000 in stock as of respectively, which is included in investments on the balance sheets. The Company has agreed to pay commitment fees at the rate of 0.5% per annum of the unused portions of Credit Facilities B and C. For the years ended, the Company paid non-use fees of $26,947 and $34,772, respectively. Prepayment fees apply if the Company refinances the debt as per terms of the agreement. In addition to the scheduled principal payments, the Company agreed to make special principal payments equal to 65% of excess cash flow, as defined in the credit agreement, on an annual basis for Credit Facility A in inverse order of maturity, not to exceed $2,000,000 per year or $7,000,000 in the aggregate. Such payments are due within 120 days of the end of each calendar year. On January 20, 2009, the credit agreement was amended to revise the special principal payment for calendar year 2008 only to be equal to 35% of excess cash flow, as defined in the credit agreement, due no later than July 1, 2009, increasing back to 65% thereafter. Based upon this calculation, a special principal payment of $2,000,000 is required for 2009, due by April 30, The borrowings under the credit agreement are collateralized by substantially all assets of the Company. 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, the Company complied with all restrictive covenants or obtained applicable waivers for the years ended. On March 31, 2008, three members or businesses owned by the members loaned the Company long-term subordinated debt totaling $3,000,000. Simple interest is accrued on the debt at the rate of 14%. 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 Company's compliance with the credit agreement with Farm Credit Services of America. The subordinated debt agreements contemplate amortization of the debt will commence in April 2011, over a seven year period. At, the Company has accrued interest payable of $441,129 and $261,161, respectively, included in the balance sheets. -10-

13 The long-term loans are as follows as of : Credit Facility A $ 27,877,410 $ 32,946,030 Credit Facility B 12,671,550 12,671,550 Subordinated debt 3,000,000 3,000,000 43,548,960 48,617,580 Less current maturities 7,068,620 5,068,620 Long-Term Debt $ 36,480,340 $ 43,548,960 The aggregate maturities of all long-term debt are as follows: Year Ending December 31, Amount 2010 $ 7,068, ,271, ,371, ,415, ,467,243 Thereafter 14,954,537 Total $ 43,548,960 The fair value of the Company's debt approximates carrying value due to the variable interest rate. 5. Members' Equity As specified in the Company's Operating Agreement, voting rights are one vote for each voting unit registered in the name of such member as shown on the Membership Register maintained by the Company. There is a single class of membership interests currently. The board of directors is authorized to create classes of units. If additional classes are created, the board of directors is further authorized to establish the designations, powers, preferences, and governance and also other rights, qualifications, limitations, and restrictions applicable to such classes. Distribution of income and losses of the Company is 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. -11-

14 The Company's board of directors may distribute cash to members based on the Company's net cash flow so long as the distributions do not cause the Company to violate any loan agreements. Net cash flow is defined in the Operating Agreement as revenues less cash operating expenses, capital expenditures, and debt service. 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. 6. Investment The Company has a 50% interest in Conestoga Energy Partners, LLC (Conestoga), which provides all labor-related services plus all management, administrative, and marketing services for its two members, Arkalon Energy, LLC and Bonanza. Arkalon Energy, LLC is a related party which through its subsidiary, Arkalon Ethanol, LLC, operates an ethanol plant. The Company uses the equity method to account for its investment in Conestoga. Condensed financial information for Conestoga as of and for the years ended is summarized as follows: Current assets $ 1,903,310 $ 6,247,477 Noncurrent assets 409, ,259 Current liabilities (1,000,508) (5,980,033) Noncurrent liabilities - (24,332) Net Equity $ 1,312,126 $ 771,371 Revenues $ 7,889,829 $ 7,364,699 Net Income (Loss) $ 540,755 $ (71,423) 7. Related Party Transactions The Company has an arrangement with Conestoga to obtain operation and maintenance services for the ethanol facility, as well as all labor-related services and all management, finance, accounting, human resources, and other administrative services in connection with the operation of the facility. The agreement is for a ten year term expiring in 2017, which may be extended by agreement, but may be terminated upon the earlier sale of the Company or Conestoga. The Company's monthly rates for management fees for 2009 were $137,500 per month (January October) and $151,250 (November December) and for 2008 were $125,000 per month (January October) and $137,500 (November December). The Company also reimburses Conestoga for payroll costs incurred and any other costs Conestoga incurs for the direct benefit of the Company. -12-

15 The Company sold distillers grains to and purchased distillers grains from Arkalon Ethanol, LLC, a related party, during 2009 and The pricing methodology is principally based upon a percentage of the Chicago Board of Trade published corn price. The companies agreed to value loads sold from January 1, 2008 through March 31, 2008 (during the ramp up period of Arkalon Ethanol, LLC) at 105% of the market price of corn and loads sold from April 1, 2008 through December 31, 2008 at 82.5% of the market price of corn. These sales and purchases for 2008 were included in accounts receivable and accrued liabilities as of December 31, 2008 and were cash settled in During 2009, the companies' 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. The total intercompany distillers grains sales for the years ended are disclosed below. Other related party transactions include transactions with members or businesses owned by members of the Company during the years ended. Related party transactions included on the balance sheets as of, are as follows: Accounts Receivable Arkalon Ethanol, LLC $ 77,270 $ 3,672,548 Other related parties 3,907,476 3,354,122 Investment in Conestoga 656, ,686 Accounts Payable and Accrued Liabilities Arkalon Ethanol, LLC 80,478 5,570,651 Conestoga 386, ,444 Other related parties 413, ,214 Long-Term Subordinated Debt 3,000,000 3,000,000 Related party transactions for the years ended included on the statements of operations are presented on the following page. -13-

16 Sales Ethanol (See Note 8) $ 91,351,811 $ 123,364,077 Sales Distillers Grains Arkalon Ethanol, LLC 1,116,077 3,672,548 Other related parties 1,977,258 3,154,443 Cost of Sales Arkalon Ethanol, LLC 3,550,441 4,462,668 Conestoga 1,841,609 1,480,329 Other related parties 3,899,859 3,664,679 General and Administrative - Conestoga 1,677,500 1,525,000 Other Income (Expense) - Net Income (loss) on equity in earnings from Conestoga 270,378 (35,711) Interest Expense - Other Related Parties (420,000) (317,590) 8. Concentrations The Company maintains cash balances at a financial institution 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 from one lender as discussed in Note 4. As discussed in Note 10, the Company currently has a marketing agreement with one customer, who is also a member, Murex N.A., Ltd., to sell all ethanol produced. Sales of ethanol during 2009 and 2008 totaled $91,351,811 and $123,364,077, respectively, and at December 31, 2009 and 2008, respectively, the Company had outstanding receivables of $3,812,638 and $3,196,681 with this customer. As discussed in Note 10, the Company has an agreement with one vendor, Wind River Grain, LLC, to exclusively obtain its supply of grain. Purchases from this vendor during 2009 and 2008 totaled $79,641,389 and $123,519,421, respectively, and at, respectively, the Company had outstanding payables of $0 and $340,650 with this vendor. As discussed in Note 10, the Company has an agreement with one vendor, Frontier Transportation, Inc., to exclusively provide transportation services for the delivery of wet and dry distillers grains. Purchases from this vendor during 2009 and 2008 totaled $3,642,106 and $3,541,447, respectively, and at, respectively, the Company had outstanding payables of $127,295 and $95,494 with this vendor. -14-

17 9. Leases The Company 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 years ended, the Company incurred $28,800 and $28,800, respectively, of rent expense. Future minimum lease payments are $28,800 per year through May 31, Commitments and Contingencies The Company has an agreement to sell 100% of the ethanol produced at the ethanol facility to Murex, N.A., LTD. The initial term of the agreement is for a three year period, beginning on the date of the first delivery in 2007, and renews automatically unless required notice is given by either party. The sales price fluctuates with the market price at time of sale as defined in the agreement. Frontier Transportation, Inc. (a related party) provides transportation services for the shipment of the wet and dry distillers grains from the ethanol plant under a trucking agreement. The agreement runs through May 17, 2012, and will automatically renew for additional periods of one year thereafter, unless required notice to terminate is given by either party. For the first two years, the base rate, determined by miles transported, remains constant and increases three percent each year for the final three years. In addition to the base rate, a fuel surcharge may also apply. The Company has an agreement with the City of Garden City dated June 16, 2006, to purchase up to 5,000 kilowatts electric energy per day from the City for the ethanol plant. The term of the agreement is for five years and will renew annually for terms of one year unless terminated by either party giving not less than 180 days written notice. The Company has a Large Volume Transportation Service Agreement with Black Hills Corporation (previously Aquila, Inc.) 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. The Company agreed to use a minimum of 990,000 MMBtu per contract year during the primary term. If the Company 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. The Company will pay $.04 MMBtu for all volumes in excess of 990,000 MMBtu. The Company 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 the Company 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. The Company agreed to pay Wind River Grain, LLC a sourcing fee of $.032 per bushel of grain delivered to the Company, 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. -15-

18 The Company 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 for the first three years is 2,000 Dth/d and 1,154 Dth/d for the remaining seven years. 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. 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. The Company accrues for estimated losses on non-cancelable purchase and sales commitments. At, the Company estimated that the value of certain grain purchase commitments exceeded the fair value; accordingly, losses of $0 and $535,888, respectively, for these commitments have been accrued and are included in cost of sales. On December 31, 2009, the Company had commitments to purchase approximately 6,389,922 bushels of corn, 290,242 of which are priced at a weighted average of $3.93 per bushel; the remaining bushels were not priced as of December 31, On December 31, 2009, the Company had commitments to sell approximately 329,175 tons of distillers grains, 30,240 of which are priced at a weighted average of $49.33 per ton; the remaining tons were not priced as of December 31, Fair Value Measurements The Company follows SFAS No. 157 (FASB ASC ), Fair Value Measurements, which defines a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities. SFAS No. 157 (FASB ASC ) is applicable whenever another accounting pronouncement requires or permits assets and liabilities to be measured at fair value, but does not require any new fair value measurement. The fair value hierarchy established by SFAS No. 157 (FASB ASC ) prioritizes the inputs used in valuation techniques into three levels as follows: Level 1 - Observable inputs - unadjusted quoted prices in active markets for identical assets and liabilities; Level 2 - Observable inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data; and Level 3 - Unobservable inputs - includes amounts derived from valuation models where one or more significant inputs are unobservable. In accordance with SFAS No. 157 (FASB ASC ), the Company has classified its derivative investments into these levels depending on the inputs used to determine their fair values. The Company's derivative instruments consist of commodity positions. The fair value of the commodity positions are based on quoted prices on the commodity exchanges and are designated as Level

19 The following table summarizes fair value measurements by level at December 31, 2009: Level 1 Level 2 Level 3 Liabilities Commodity contracts $ 1,644,081 $ - $ - The following table summarizes fair value measurements by level at December 31, 2008: Level 1 Level 2 Level 3 Liabilities Commodity contracts $ 27,198 $ - $ Derivative Financial Instruments From time to time the Company enters into derivative transactions to hedge its exposures to commodity price fluctuations. The Company does not enter into derivative transactions for trading purposes. As discussed in Note 1, the Company adopted new guidance requiring holders of derivative instruments to provide qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses from derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. The Company is required to record derivative financial instruments as either assets or liabilities at fair value in the balance sheets. Commodity Contracts The Company enters into ethanol and corn commodity-based derivatives in order to protect cash flows from fluctuations caused by volatility in the commodity prices for periods up to twelve months in order to protect gross profit margins from potentially adverse effects of market and price volatility on ethanol sales and corn purchase commitments where the prices are set at a future date. In addition, the Company hedges anticipated sales of ethanol to minimize its exposure to the potentially adverse effect of price volatility. To reduce these risks, the Company generally takes positions using cash and futures contracts and options. These derivatives are not designated as effective hedges for accounting purposes. For derivative instruments that are not accounted for as hedges, the change in fair value is recorded through earnings in the period of change. Derivative fair market value gains and losses are included in the results of operations and are included in revenue or cost of sales depending on the nature of the hedged position. The table on the following page provides the fair value of the Company's derivative financial instruments not designated as hedging instruments under SFAS 133 (FASB ASC ) as of December

20 Current Current 2009 Assets Liabilities Commodity contracts $ - $ 1,644,081 Current Current 2008 Assets Liabilities Commodity contracts $ - $ 27,198 The following table provides the net gains (losses) on the Company's derivative financial instruments not designated as hedging instruments that have been included in the statement of operations for the years ended December 31: Statement of Operations Location Commodity contracts Net sales $ (3,532,628) $ - Cost of sales 835, , Income Taxes Total Net Gain (Loss) $ (2,697,392) $ 406,348 The Company adopted the provisions of Financial Accounting Standards Board Interpretation 48 (FIN 48), Accounting for Uncertainty in Income Taxes, on January 1, 2009 (which is included in FASB ASC ). The cumulative effect of adoption of FIN 48 did not have a material effect on the Company's financial position and results of operations. The Company files income tax returns in the U.S. Federal jurisdiction and one U.S. state jurisdiction. The Company is no longer subject to U.S. federal or state income tax examinations by tax authorities for years before Subsequent Events The Company has evaluated subsequent events through February 15, 2010, the date which the financial statements were available to be issued. On February 8, 2010, during a hearing in the Kansas Court of Tax Appeals (Court), an attorney for Finney County, Kansas, (County) announced the County's intention to file pleadings with the Court to reinterpret the terms and conditions of the ad valorem tax exemption granted by the Court with respect to assets owned by the Company. It is the apparent intention of the County to reduce the extent of the exemption from 2009 through 2017, as well as the underlying classification of real versus personal property. Under the current exemption, the Company received an abatement of 60% of the ad valorem taxes for a period of 10 years ending in The Company will contest such litigation vigorously. None of the issues involved in the matter are free from doubt, and there can be no assurance that the court will ultimately rule in favor of the Company on any issues involved in any such action. No additional accrual has been made as it is not reasonably possible to estimate the ultimate outcome of this matter. There have been no other events identified which require disclosure. -18-