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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**

 
| **T**

**Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.**

 

**For the quarterly period ended September 30, 2009**

 

**OR**

 

**£**

**Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.**

 

**For the transition period from  _______   to  _________  **

 

**Commission file number 000-50733**

**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

(Exact name of registrant as specified in its charter)

** **

**Wisconsin**

 

**39-2032455**

(State or other jurisdiction ofincorporation or organization)

 

(I.R.S. Employer Identification No.)

 

**W1231 Tessmann Drive,  Friesland, Wisconsin**

**53935-0247**

(Address of principal executive offices)

(Zip Code)

 

**(920) 348-5016**

(Registrant's telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

S  Yes          £No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

 ̈ Yes         £No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 

Large accelerated filer     ̈

Accelerated filer    ̈  

Non-accelerated filerS (Do not check if a smaller reporting company)

Smaller reporting company   ̈

  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

  ̈ Yes          S  No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  

As of November 1, 2009, there were 28,475 membership units outstanding.

Table of Contents

**INDEX**

**Page No.**

**PART I.     FINANCIAL INFORMATION**

**3**

**Item 1.  Financial Statements**

**3**

**Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations**

**16**

**Item 3.  Quantitative and Qualitative Disclosures About Market Risk**

**26**

**Item 4.  Controls and Procedures**

**27**

**PART II.  OTHER INFORMATION**

**28**

**Item 1.  Legal Proceedings**

**28**

**Item 1A.  Risk Factors**

**28**

**Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds**

**28**

**Item 3.  Defaults Upon Senior Securities**

**28**

**Item 4.  Submission of Matters to a Vote of Security Holders**

**29**

**Item 5.  Other Information**

**29**

**Item 6.  Exhibits**

**29**

**SIGNATURES**

**30**

2

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**PART I.     FINANCIAL INFORMATION
 

**Item 1.  Financial Statements.
**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

 

 

 

Condensed Balance Sheets

 

 

 

 

 

 

 

 

 

 

 

 

**         ASSETS**

 

**September 30, 2009**

** **

**December 31, 2008**

 

 

 

**             (Unaudited)**

 

 

 

 

 

 

 

 

 

**Current Assets**

 

 

 

 

 

Cash and cash equivalents

 

$

3,982,465 

 

$

9,384,848 

 

Restricted cash

 

4,345,883 

 

1,486,525 

 

Derivative instruments

 

130,950 

 

35,610 

 

Accounts receivable, net of allowance for doubtful

 

 

 

 

 

   accounts of $54,000 and $59,000, respectively

 

1,440,436 

 

2,354,767 

 

Prepaid expenses and other current assets

 

100,473 

 

400,917 

 

Inventory

 

 

4,172,032 

 

 

3,559,634 

 

Total current assets

 

 

14,172,239 

 

 

17,222,301 

 

 

 

 

 

 

 

**Property, Plant and Equipment**

 

 

 

 

 

Land and land improvements

 

6,207,410 

 

6,207,410 

 

Office equipment

 

611,016 

 

607,816 

 

Buildings

 

2,690,178 

 

2,447,579 

 

Plant and process equipment

 

65,513,778 

 

59,626,959 

 

Construction in process

 

 

887,141 

 

 

3,864,418 

 

  Total property, plant, and equipment

 

75,909,523 

 

72,754,182 

 

    Less accumulated depreciation

 

 

23,186,936 

 

 

18,365,679 

 

Net property, plant and equipment

 

52,722,587 

 

54,388,503 

 

 

 

 

 

 

 

**Other Assets**

 

 

 

 

 

Investment

 

 

- 

 

 

162,067 

 

Total other assets

 

 

- 

 

 

162,067 

 

** **

 

 

 

 

 

**Total Assets**

 

 

$

66,894,826 

 

 

$ 

71,772,871 

 

 

 

 

 

 

 

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

 

3

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**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

 

 

 

 

 

 

Condensed Balance Sheets

 

 

 

 

 

 

 

 

 

 

 

 

 **   LIABILITIES AND MEMBERS' EQUITY**

 

**September 30, 2009**

** **

**December 31, 2008**

 

 

 

**          (Unaudited)**

 

 

 

 

 

 

 

 

 

**Current Liabilities**

 

 

 

 

 

Current maturities of long-term debt

 

$

459,389 

 

$

- 

 

Derivative instruments

 

2,979,866 

 

- 

 

Accounts payable

 

1,239,464 

 

4,015,582 

 

Accrued loss of forward contracts

 

- 

 

1,058,536 

 

Accrued liabilities

 

 

581,845 

 

 

539,587

 

Total current liabilities

 

 

5,260,564

 

 

5,613,705

 

 

 

 

 

 

 

**Long-Term Debt, less current maturities**

 

2,397,611 

 

- 

 

 

 

 

 

 

 

**Commitments and Contingencies**

 

 

 

 

 

 

 

 

 

 

 

**Members’ Equity,  **28,475 units authorized, 

 

 

 

 

 

    issued and outstanding

 

 

59,236,651 

 

 

66,159,166 

 

 

 

 

 

 

 

**Total Liabilities and Members’ Equity**

 

 

$

66,894,826

 

 

$

71,772,871

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

4

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**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

 

 

Condensed Statements of Operations

(Unaudited)

 

 

 

 

 

 

 

 

**Quarter Ended**

** **

**Quarter Ended**

 

 

 

**September 30, 2009**

 

**September 30, 2008**

 

 

 

 

 

 

 

**Revenues**

** **

$

22,852,274 

 

$

37,876,941 

 

 

 

 

 

 

 

**Cost of Goods Sold**

** **

 

24,577,349

 

 

43,318,504

 

 

 

 

 

 

 

**Gross Loss**

** **

(1,725,075) 

 

(5,441,563) 

 

 

 

 

 

 

 

**Operating Expenses**

** **

 

655,869 

 

 

681,085 

 

 

 

 

 

 

 

**Operating Loss**

** **

(2,380,944) 

 

(6,122,648)

 

 

 

 

 

 

 

**Other Income (Expense)**

** **

 

 

 

 

Interest income

 

12,377 

 

75,494 

 

Interest expense

** **

(64,367) 

 

(4,265) 

 

Miscellaneous income, net

** **

 

52,336

 

 

76,072 

 

Total other income, net

 

 

346 

 

 

147,301 

 

 

** **

 

 

 

 

**Net Loss**

 

 

$ 

(2,380,598) 

 

 

$

(5,975,347) 

 

** **

** **

 

 

 

 

**Weighted Average Units Outstanding - Basic and Diluted**

 

 

28,475 

 

 

28,475 

 

** **

** **

 

 

 

 

**Net Loss Per Unit - Basic and Diluted**

 

 

$ 

(83.60) 

 

 

$

(209.85) 

 

 

** **

 

 

 

 

**Distribution Per Unit - Basic and Diluted**

 

 

$

- 

 

 

$

200.00 

 

 

 

 

 

 

 

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

 

5

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**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

 

 

Condensed Statements of Operations

(Unaudited)

 

 

 

 

 

 

 

 

**Nine Months Ended**

** **

**Nine Months Ended**

 

 

 

**September 30, 2009**

 

**September 30, 2008**

 

 

 

 

 

 

 

**Revenues**

** **

$

73,698,325 

 

$

108,302,919 

 

 

 

 

 

 

 

**Cost of Goods Sold**

** **

 

75,922,432

 

 

92,742,985

 

 

 

 

 

 

 

**Gross Margin (Loss)**

** **

(2,224,107) 

 

15,559,934 

 

 

 

 

 

 

 

**Operating Expenses**

** **

 

2,123,855 

 

 

2,585,650 

 

 

 

 

 

 

 

**Operating Income (Loss)**

** **

(4,347,962) 

 

12,974,284

 

 

 

 

 

 

 

**Other Income (Expense)**

** **

 

 

 

 

Interest income

 

59,425 

 

451,886 

 

Interest expense

** **

(87,854) 

 

(334,780) 

 

Equity in net gain (loss) of investment

 

915 

 

(879,079) 

 

Miscellaneous income, net

** **

 

300,461

 

 

173,779 

 

Total other income (expense), net

 

 

272,947 

 

 

(588,194) 

 

 

** **

 

 

 

 

**Net Income (Loss)**

 

 

$ 

(4,075,015) 

 

 

$

12,386,090 

 

** **

** **

 

 

 

 

**Weighted Average Units Outstanding - Basic and Diluted**

 

 

28,475 

 

 

28,536 

 

** **

** **

 

 

 

 

**Net Income (Loss) Per Unit - Basic and Diluted**

 

 

$ 

(143.11) 

 

 

$

434.05 

 

 

** **

 

 

 

 

**Distribution Per Unit - Basic and Diluted**

 

 

$

100.00 

 

 

$

450.00 

 

 

 

 

 

 

 

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

 

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**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

Condensed Statements of Cash Flows

(Unaudited)

 

 

 

 

 

 

**Nine Months Ended**

** **

**Nine Months Ended**

 

 

 

**September 30, 2009**

 

**September 30, 2008**

 

**Cash Flows from Operating Activities**

** **

** **

 

** **

 

Net Income (Loss)

 

$

(4,075,015) 

 

$

12,386,090 

 

Adjustments to reconcile net income (loss) to net cash provided by operations:

** **

 

 

 

 

Depreciation

 

4,821,257 

 

4,190,512 

 

Provision for losses on accounts receivable

** **

(5,683) 

 

25,624 

 

Change in fair value of derivative instruments

 

5,718,378 

 

(6,573,165) 

 

Equity in net loss of investment

** **

- 

 

879,079 

 

Changes in operating assets and liabilities:

 

 

 

 

 

   Restricted cash

** **

(2,859,358) 

 

(5,005,354) 

 

   Derivative instruments

 

(2,833,852) 

 

9,639,047 

 

   Accounts receivable

** **

920,014 

 

1,943,031 

 

   Inventory

 

(612,398) 

 

(2,295,264) 

 

   Prepaid expenses and other current assets

** **

300,444 

 

470,990 

 

   Accounts payable

 

(2,776,118)

 

(197,453) 

 

   Accrued loss on forward contracts

 

(1,058,536)

 

- 

 

   Accrued liabilities

** **

 

42,258 

 

 

518,828 

 

Net cash provided (used in) by operating activities

 

(2,418,609) 

 

15,981,965 

 

** **

** **

 

 

 

 

**Cash Flows from Investing Activities**

 

 

 

 

 

Capital expenditures

** **

(1,242,669) 

 

(1,834,059) 

 

Payments for construction in process

 

(1,912,672) 

 

(4,962,759) 

 

Proceeds from investment

** **

 

162,067 

 

 

- 

 

Net cash used in investing activities

 

(2,993,274) 

 

(6,796,818)

 

** **

** **

 

 

 

** **

**Cash Flows from Financing Activities**

 

 

 

 

 

Net proceeds from (payments on) revolving line of credit

** **

(50,000) 

 

4,000,000 

 

Proceeds from long term debt

 

2,857,000 

 

- 

 

Payments on long term debt

 

- 

 

(14,356,139) 

 

Repurchase of membership units

** **

- 

 

(677,800) 

 

Payment of member distribution

 

 

(2,847,500) 

 

 

(12,870,000)

 

Net cash used in financing activities

** **

 

(40,500) 

 

 

(23,903,939)

 

 

 

 

 

 

 

**Net Decrease in Cash and Cash Equivalents**

** **

(5,452,383) 

 

(14,718,792) 

 

 

 

 

 

 

 

**Cash and Cash Equivalents**– Beginning of Period

** **

 

9,384,848 

 

 

24,759,614

 

 

 

 

 

 

 

**Cash and Cash Equivalents**– End of Period

** **

 

$ 

3,932,465 

 

 

$ 

10,040,822 

 

 

 

 

 

 

 

**Supplemental Cash Flow Information**

 

 

 

** **

 

Interest expensed

 

 

$ 

87,854 

 

 

$ 

334,780 

 

Interest capitalized

 

 

- 

 

 

12,634

 

    Total interest paid

 

 

$

87,854 

 

 

$

347,414 

 

 

 

 

 

 

 

**Noncash Financing Activities**

 

 

 

 

 

Construction in process in accounts payable

 

 

$

- 

 

 

$

351,761 

 

Transfer of construction in process to property, plant, and equipment

 

 

$

5,777,090 

 

 

$

- 

 

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

 

 

 

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**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

Notes to Condensed Financial Statements (Unaudited) 

September 30, 2009

**1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES **

The accompanying condensed balance sheet as of December 31, 2008 is derived from audited financial statements.  The unaudited interim condensed financial statements of United Wisconsin Grain Producers, LLC (the “Company”) reflect all adjustments consisting only of normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of their financial position and results of operations and cash flows.  

The results for the three and nine month periods ended September 30, 2009 are not necessarily indicative of the results that may be expected for a full fiscal year.  Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) are condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), although the Company believes that the disclosures made are adequate to make the information not misleading.  These condensed financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in its annual report for the year ended December 31, 2008 filed on Form 10-K with the SEC.

*Nature of Business *

United Wisconsin Grain Producers LLC (a Wisconsin limited liability company) is a 60 million gallon per year ethanol plant located near the town of Friesland in the township of Randolph, Wisconsin.  During 2007, the Company substantially completed Phase I of an expansion project which increased the plant production capacity from the initial nameplate production capacity of 40 million gallons per year to 60 million gallons per year.  The Company sells its production of ethanol and distillers grains, a co-product of ethanol production, within the United States.

*Accounting Estimates *

Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles in the United States of America.  Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses.  The Company uses estimates and assumptions in accounting for the following significant matters, among others:  allowances for doubtful accounts, useful lives of property, plant, and equipment, the valuation of derivatives, inventory, inventory purchase commitments, and long-lived asset impairments.  Actual results may differ from previously estimated amounts, and such differences may be material to our financial statements.  The Company periodically reviews estimates and assumptions, and the effects of revisions are reflected in the period in which the revision is made.

*Revenue Recognition*

The Company generally sells ethanol and related products pursuant to marketing agreements.  Revenues from the production of ethanol and the related products are recorded when the customer has taken title and has assumed the risks and rewards of ownership, prices are fixed or determinable and collectibility is reasonably assured.  Title is generally assumed by the buyer at the end of the Company’s shipping point.

In accordance with the Company’s agreements for the marketing and sale of ethanol and related products, marketing fees and commissions due to the marketers are deducted from the gross sales price as earned.  These fees and commissions are recorded net of revenues as they do not provide an identifiable benefit that is sufficiently separable from the sale of ethanol and related products. Shipping costs incurred by the Company in the sale of ethanol are not specifically identifiable and as a result, are recorded based on the net selling price reported to the Company from the marketer.  Shipping costs incurred by the Company in the sale of ethanol related products are included in cost of goods sold.

In June 2009, the Company provided notice to its ethanol marketer of the termination of the Ethanol Purchase and Sale Agreement between the Company and the marketer dated December 12, 2007, such termination to be effective as of the end of the initial two year term of the agreement.  The Company expects to market and sell its own ethanol beginning in January 2010.

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**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

Notes to Condensed Financial Statements (Unaudited) 

September 30, 2009

The Company records incentives received, if any, from federal and state programs related to the production of ethanol, as other income, when the Company has sold the ethanol and completed all the requirements of the applicable incentive program.  Interest income is recognized as earned.

*Derivative Instruments *

From time to time the Company enters into derivative transactions to hedge its exposures to commodity price fluctuations.  The Company is required to record these derivatives in the balance sheet at fair value.

In order for a derivative to qualify as a hedge, specific criteria must be met and appropriate documentation maintained.  Gains and losses from derivatives that do not qualify as hedges, or are undesignated, must be recognized immediately in earnings.  If the derivative does qualify as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will be either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings.  Changes in the fair value of undesignated derivatives are recorded in revenue or cost of goods sold based on the commodity being hedged.

Additionally, the Company is required to evaluate its contracts to determine whether the contracts are derivatives.  Certain contracts that literally meet the definition of a derivative may be exempted 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.  Certain corn and distillers grains contracts that meet the requirements of normal purchases or sales are documented as normal and exempted from the accounting and reporting requirements and therefore, are not marked to market in the financial statements.

On January 1, 2009, the Company adopted the guidance that has been codified under FASB ASC Topic 815, “Derivatives and Hedging,” and has included the required enhanced quantitative and qualitative disclosure 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.

*Fair Value of Financial Instruments*

The carrying values of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued liabilities approximate fair value due to the short maturity of the instruments.

The fair value of long-term debt has been estimated using discounted cash flow analysis based upon the Company’s current incremental borrowing rates for similar types of financing arrangements.  The fair value of outstanding debt will fluctuate with changes in applicable interest rates.  Fair value will exceed carrying value when the current market interest rate is lower than the interest rate at which the debt was originally issued.  The fair value of a company’s debt is a measure of its current value under present market conditions.  It does not impact the financial statements under current accounting rules.  The Company believes the carrying amount of the line of credit and fixed rate term loan approximates the fair value due to the minimal change in interest rates from the inception of the loans in April 2009.

*Adoption of New Accounting Pronouncements*

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Topic 105 –*Generally Accepted Accounting Principles Amendments Based on Statement of Financial Accounting Standards No. 168* –*The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (Accounting Standards Update (ASU No. 2009-01))*.  The topic modifies the GAAP hierarchy by establishing only two levels of GAAP, authoritative and nonauthoritative accounting literature.  Effective July 2009, the FASB Accounting Standards Codification (“ASC”), also known collectively as the “Codification,” is considered the single source of authoritative U.S. accounting and reporting standards, except for additional authoritative rules and interpretive releases issued by the SEC.  Nonauthoritative guidance and literature would include, among other things, FASB Concepts Statements, American Institute of Certified Public Accountants Issue Papers and Technical Practice Aids and accounting textbooks.  The 

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**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

Notes to Condensed Financial Statements (Unaudited) 

September 30, 2009

Codification was developed to organize GAAP pronouncements by topic so that users can more easily access authoritative accounting guidance.  It is organized by topic, subtopic, section, and paragraph, each of which is identified by a numerical designation.  All accounting references have been updated, and therefore SFAS references have been replaced with ASC references where applicable. The Company adopted the provisions of the authoritative accounting guidance for the interim reporting period ended September 30, 2009, the adoption of which did not have a material effect on the Company’s financial statements.

In August 2009, the FASB issued ASC Update 2009-5,*“Fair Value Measurements and Disclosure (Topic 820) – Measuring Liabilities at Fair Value,”* which included amendments to Subtopic 820-10,*“Fair Value Measurements and Disclosures – Overall,”* for the fair value measurement of liabilities and provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, an entity is required to measure fair value using one or more of the techniques provided for in this update, including the quoted price of the liability when traded as an asset.  The guidance in this update is effective for interim and annual periods ending after September 30, 2009.  The Company does not expect the adoption to have a material impact on its results of operations or financial position; however, this standard may impact the Company in future periods.

In April 2009, the FASB issued three related standards to clarify the application of FASB ASC 820*“Fair Value Measurements and Disclosures,”* to fair value measurements in the current economic environment, modify the recognition of other-than-temporary impairments of debt securities, and require companies to disclose the fair value of financial instruments in interim periods.  The final standards are effective for interim and annual periods ending after June 15, 2009, and the Company adopted the new standards effective June 30, 2009.  The adoption did not have a material impact on the Company’s results of operations or financial position.  The three related standards are as follows:

·

FASB ASC820-10-65-4, *“Transition Related to FASB Staff Position FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,”*provides guidance on how to determine the fair value of assets and liabilities under FASB ASC 820 in the current economic environment and reemphasizes that the objective of a fair value measurement remains the price that would be received to sell an asset or paid to transfer a liability at the measurement date.

·

FASB ASC320-10-65-1 *“Transition Related to FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other Than-Temporary Impairment”* modified the requirements for recognizing other-than-temporarily impaired debt securities and significantly changes the existing impairment model for such securities.  It also modifies the presentation of other-than-temporary impairment losses and increases the frequency of and expands already required disclosures about other-than-temporary impairment for debt and equity securities.

·

FASB ASC 825-10-65-1, *“Transition Related to FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments,”* requires disclosures of the fair value of financial instruments within the scope of FASB ASC 825, “*Financial Instruments,”*in interim financial statements, adding to the current requirement to make those disclosures in annual financial statements.  It also requires that companies disclose the method or methods and significant assumptions used to estimate the fair value of financial instruments and a discussion of changes, if any, in the method or methods and significant assumptions during the period.

In May 2009, the FASB issued FASB ASC 855,*“Subsequent Events,”*which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued and requires disclosure of the date through which an entity has evaluated subsequent events.  This standard is effective for interim and annual periods ending after June 15, 2009, and the Company adopted it effective June 30, 2009.  The adoption did not have a material impact on the Company’s results of operations or financial position.

*Fair Value of Financial Instruments*

The carrying values of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued liabilities approximate fair value due to the short maturity of the instruments.  The Company believes the carrying amount of the line of credit and fixed rate term loan approximates the fair value due to the minimal change in interest rates from the inception of the loans in April 2009.

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**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

Notes to Condensed Financial Statements (Unaudited) 

September 30, 2009

*Subsequent Events*

The Company has evaluated subsequent events through November 13, 2009, the date the financial statements were available to be issued.

**2. RISKS AND UNCERTAINTIES**

The Company has certain risks and uncertainties that it experiences during volatile market conditions such as what the Company experienced during 2008 and into 2009.  These volatilities can have a severe impact on operations.  The Company’s revenues are derived from the sale and distribution of ethanol and distillers grains to customers primarily located in the United States.  Corn for the production process is supplied to our plant primarily from local agricultural producers and from purchases on the open market.  Ethanol sales, average approximately 85% of total revenues and corn costs average approximately 75% of cost of goods sold. 

The Company’s operating and financial performance is largely driven by the prices at which it sells ethanol and the net expense of corn.  The price of ethanol is influenced by factors such as supply and demand, the weather, government policies and programs, and unleaded gasoline prices and the petroleum markets as a whole.  Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol.  Our largest cost of production is corn.  The cost of corn is generally impacted by factors such as supply and demand, the weather, government policies and programs, and our risk management program used to protect against the price volatility of these commodities. 

**3.  INVENTORY**

Inventory consists of the following:

 

**September 30,  2009(unaudited)**

**December 31,  2008***

Raw Materials

$  1,790,249

$  1,495,032

Supplies

624,745

605,146

Work in Process

366,636

381,988

Finished goods

1,390,402

1,077,468

Total

$  4,172,032

$  3,559,634

*****Derived from audited financial statements.

**4.  DERIVATIVE INSTRUMENTS**

As of September 30, 2009, the Company has entered into corn and ethanol derivative instruments, which are required to be recorded as either assets or liabilities at fair value in the balance sheet.  Derivatives qualify for treatment as hedges when there is a high correlation between the change in fair value of the derivative instrument and the related change in value of the underlying hedged item and when the Company formally documents, designates, and assesses the effectiveness of transactions that receive hedge accounting initially and on an on-going basis.  The Company must designate the hedging instruments based upon the exposure being hedged as a fair value hedge or a cash flow hedge.  While the Company does not typically designate the derivative instruments that it enters into as hedging instruments because of the administrative costs associated with the related accounting, the Company believes that the derivative instruments represent an economic hedge.  The Company does not enter into derivative transactions for trading purposes.

In order to reduce the risk caused by market fluctuations, the Company occasionally hedges its anticipated corn purchases and ethanol sales by entering into options and futures contracts.  These contracts are used with the intention to fix the purchase price of anticipated requirements of corn in the Company’s ethanol production activities and the related sales price of ethanol.  The fair value of these contracts is based on quoted prices in active exchange-traded or over-the-counter markets.  Although the Company believes its commodity derivative positions are economic hedges, none have been formally designated as a hedge for accounting purposes and 

 

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**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

Notes to Condensed Financial Statements (Unaudited) 

September 30, 2009

derivative positions are recorded on the balance sheet at their fair market value, with changes in fair value recognized in current period earnings or losses.  Gains and losses from ethanol related derivative instruments, including unrealized changes in the fair value of these positions, are included in the results of operations and are classified as a component of revenue.  Gains and losses from corn derivative instruments, including unrealized changes in the fair value of these positions, are included in the results of operations and are classified as a component of costs of good sold.  The Company does not enter into financial instruments for trading or speculative purposes.  The Company records withdrawals and payments against the trade equity of derivative instruments as a reduction or increase in the value of the derivative instruments.

As of September 30, 2009, the total notional amount of the Company’s outstanding ethanol derivative instruments was approximately 34.7 million gallons that were entered into to hedge forecasted ethanol sales through June 2010.  As of September 30, 2009, the total notional amount of the Company’s outstanding corn derivative instruments of approximately, 12,435,000 bushels that were entered into to hedge forecasted corn purchases through December 2010.  There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding as disclosed above.

The following tables provide details regarding the Company’s derivative instruments at September 30, 2009, none of which are designated as hedging instruments:

 

**Balance Sheet Location**

**Assets**

**Liabilities**

Corn Contracts

Derivative Instruments

$

130,950

$

-

Ethanol Contracts

Derivative Instruments

 

-

 

(2,979,866)

   Totals

 

$

130,950

$

(2,979,866)

In addition, as of September 30, 2009, the Company maintains approximately $4,345,883 of restricted cash related to margin requirements for the Company’s derivative instrument positions.

The following tables provide details regarding the gains and (losses) from Company’s derivative instruments in statements of operations, none of which are designated as hedging instruments:

**Statement of Operations Location**

**Three Months Ended**

**September 30, 2009**

**Three Months Ended**

**September 30, 2008**

**Nine Months ended**

**September 30, 2009**

**Nine Months Ended**

**September 30, 2008**

Ethanol Contracts

Revenue

$

(4,551,673)

$

538,106

$

(2,855,987)

$

538,072

Corn Contracts

Cost of goods sold

(213,561) 

(5,889,555)

 

(2,862,391) 

 

6,035,093

  Total Gain (Loss)

 

$

(4,765,234)

$

(5,351,449)

$

(5,718,378) 

$

6,573,165

**5.  FAIR VALUE MEASUREMENTS**

Effective beginning second quarter 2009, the*Financial Instruments*Topic, ASC 825, requires disclosures about fair value of financial instruments in quarterly reports as well as in annual reports.  For the Company, this statement applies to certain derivative instruments.  Also, the*Fair Value Measurements and Disclosures*Topic, ASC 820, clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements.

Various inputs are considered when determining the value of financial instruments.  The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in these securities.  These inputs are summarized in the three broad levels listed below:

·

Level 1 inputs are quoted prices in active markets for identical assets or liabilities as of the reporting date.  Active markets are those in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

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**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

Notes to Condensed Financial Statements (Unaudited) 

September 30, 2009

·

Level 2 inputs include the following:

o

Quoted prices in active markets for similar assets or liabilities.

o

Quoted prices in markets that are not active for identical or similar assets or liabilities.

o

Inputs other than quoted prices that are observable for the asset or liability.

o

Inputs that are derived primarily from or corroborated by observable market data by correlation or other means.

·

Level 3 inputs are unobservable inputs for the asset or liability.

The following table provides information on those assets and liabilities measured at fair value on a recurring basis.

 

Carrying Amount in Balance Sheet

September 30, 2009

Fair Value

September 30, 2009

Fair Value Measurement Using

Quoted Prices in Active Markets (Level 1)

Significant Other Observable Inputs(Level 2)

Significant Unobservable Inputs(Level 3)

Financial Assets:

Derivative Instruments

$

130,950

$

130,950

$

130,950

$

-

$

-

Financial Liabilities:

Derivative Instruments

$

(2,979,866)

$

(2,979,866)

$

(2,979,866)

$

-

$

-

The fair value of the derivative instruments are based on quoted market prices in an active market. 

**6.  BANK FINANCING**

On April 2, 2009 the Company signed a Revolving and Term Credit Agreement with Farmers & Merchants Union Bank, increasing the Company’s revolving line of credit with Farmers & Merchants Union Bank from $5,000,000 to $10,000,000.  The Company also signed another Revolving and Term Credit Agreement with Farmers & Merchants Union Bank on April 2, 2009 for a $4,000,000 term loan.

The Company’s new revolving line of credit replaces the Company’s previous line of credit with Farmers & Merchants Union Bank executed on October 16, 2008.  The interest rate on amounts the Company borrows under the new line of credit is a variable rate equal to 2.0% over the highest US Prime Rate as published in the Wall Street Journal “Money Table.”  The interest rate adjusts as and when the index rate changes.  Interest is due monthly on this revolving credit facility.  No prepayment fees exist on the revolving credit facility; however, the Company is required to pay a commitment fee equal to 0.50% per year of the average daily unused portion of the line of credit.  The maturity date of the line of credit is April 1, 2012.

The Company’s previous line of credit had a variable interest rate equal to 0.5% over the highest US Prime Rate as published in the Wall Street Journal “Money Table”.  At September 30, 2009 and December 31, 2008, the Company had no borrowings on the revolving line of credit in effect on those dates.

The Company’s $4,000,000 term loan is at a fixed interest rate of 6.25%.  The term loan requires the Company to pay monthly payments of accrued interest until November 1, 2009.  Starting on that date, the Company is required to make 59 equal monthly payments of principal and interest in the amount of $77,975, followed by one final payment of the unpaid principal and all accrued interest remaining on the date the note evidencing the term loan is due, October 1, 2014.  If the Company prepays the term loan, it must pay a prepayment penalty of 1.0% of the outstanding loan balance, unless the Company can establish that the source of the prepayment is derived from cash flows from business operations.  The Company was required to pay a loan origination fee equal to 10 basis points.  Although the Company’s term loan is in the amount of $4,000,000, as of September 30, 2009, the Company has been advanced only $2,857,000 of this amount.  At September 30, 2009 and December 31, 2008, the Company had $2,857,000 and $0, respectively, outstanding on the term loan.

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**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

Notes to Condensed Financial Statements (Unaudited) 

September 30, 2009

Borrowings under the Company’s revolving line of credit and the Company’s term loan are secured by substantially all of the assets of the Company.  The Company’s revolving credit facility and its term loan are subject to restrictive covenants including, but not limited to, requiring minimum financial ratios and limitations on capital expenditures, investments and distributions.  As of the three and nine month periods ended September 30, 2009 and year ended December 31, 2008, the Company was in compliance with these covenants.

**7.  MEMBERS’ EQUITY**

As specified in the Company’s operating agreement, the Company has one class of membership units.  The Company is authorized to issue up to 28,000 membership units in addition to the 1,440 seed capital units issued prior to the Company’s initial registered offering for a total of 29,440.  As of September 30, 2009 and December 31, 2008, the Company had 28,475 membership units outstanding. 

**8.  COMMITMENTS AND CONTINGENCIES** 

*Ethanol Contracts*

At September 30, 2009, the Company had forward contracts to sell 34.7 million gallons of ethanol for various delivery periods from October 2009 through June 2010.  The prices on these contracts range from $1.45 to $1.80 per gallon.

*Distillers Grains Contracts*

At September 30, 2009, the Company had forward dry distillers grains sales contracts totaling 10,200 tons for various delivery periods from October 2009 to September 2010 with a price range of $85 to $140 per ton.  At September 30, 2009 the Company had forward modified wet distillers grains sales contracts totaling 14,600 tons for various delivery periods from October 2009 to May 2010 with a price range of $35 to $58 per ton.

*Corn and Natural Gas Contracts*

At September 30, 2009, the Company had forward corn purchase contracts totaling 4.3 million bushels for various delivery periods from October 2009 to March 2011.  The prices on these contracts range from $3.06 to $6.32 per bushel or have a basis level established by the CBOT futures between $0.30 and $-0.35.

At September 30, 2009, the Company had forward contracts to purchase approximately 682,000 British thermal units (MMBTU) of natural gas during the months of October 2009 through June 2010 at an average price of approximately $5.85 per MMBTU.

*Plant Expansion*

In July 2009, the Company completed and began operations of the corn oil extraction system.  The total cost of the corn oil extraction system was $2.6 million.  At the current production capacity, the system generates approximately 100,000 gallons of corn oil per month.  The Company also completed installation of the regenerative thermal oxidizer (RTO) with total cost of approximately $2.9 million.  The RTO was connected to the plant and began operations in a scheduled plant shut down during the third quarter of 2009.  Both of these projects were completed within the budgeted amounts.  As of September 30, 2009 the Company incurred approximately $890,000 on the engineering, design, and support piping of a distillation and evaporation system to increase the capacity of this portion of the plant to 90 million gallons per year.  This project is expected to cost $28 million in total but has been placed on hold indefinitely.

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**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

Notes to Condensed Financial Statements (Unaudited) 

September 30, 2009

**9.  LEGAL PROCEEDINGS** 

From time to time in the ordinary course of business, the Company may be named as a defendant in legal proceedings related to various issues, including without limitation, workers’ compensation claims, tort claims, or contractual disputes.  We are not currently a party to any material pending legal proceedings and we are not currently aware of any such proceedings contemplated by governmental authorities.

 

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**Item 2.  **

**Management’s Discussion and Analysis of Financial Condition and Results of Operations.
We prepared the following discussion and analysis to help you better understand our financial condition, changes in our financial condition, and results of operations for the period ended September 30, 2009 compared to the same period of the prior fiscal year.  This discussion should be read in conjunction with our annual report on Form 10-K for the fiscal year ended December 31, 2008, including the financial statements and notes and Management’s Discussion and Analysis contained within that report.

**Disclosure Regarding Forward-Looking Statements**

This report contains historical information, as well as forward-looking statements that involve known and unknown risks and relate to future events, our future financial performance, or our expected future operations and actions.  In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “future,” “intend,” “could,” “hope,” “predict,” “target,” “potential,” or “continue” or the negative of these terms or other similar expressions.  These forward-looking statements are only our predictions based upon current information and involve numerous assumptions, risks and uncertainties.  Our actual results or actions may differ materially from these forward-looking statements for many reasons, including the reasons described in this report.  While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include: 

 

 

•

Changes in the availability and price of corn and natural gas;

•

The availability of credit to support capital improvements, development, expansion and operations;

•

Changes in our business strategy, capital improvements or development plans;

•

Results of our hedging transactions and other risk management strategies;

•

Decreases in the market prices of ethanol and distillers grains;

•

Ethanol supply exceeding demand; and corresponding ethanol price reductions;

•

Changes in the environmental regulations that apply to our plant operations;

•

Our ability to generate sufficient liquidity to fund our operations and capital expenditures;

•

Changes in plant production capacity or technical difficulties in operating the plant;

•

Changes in general economic conditions or the occurrence of certain events causing an economic impact in the agriculture, oil or automobile industries;

•

Lack of transport, storage and blending infrastructure preventing ethanol from reaching high demand markets;

•

Changes in federal and/or state laws (including the elimination of any federal and/or state ethanol tax incentives);

•

Changes and advances in ethanol production technology;

•

Effects of mergers, consolidations or contractions in the ethanol industry;

•

Competition from alternative fuel additives;

•

Our liability resulting from litigation;

•

Our reliance on third parties to market our products;

•

The loss of, or our inability to obtain, any license or permit;

•

Our ability to retain key employees and maintain labor relations;

•

Volatile commodity and financial markets; and

•

Other factors described elsewhere in this report.

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The cautionary statements referred to in this section also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf.  We undertake no duty to update these forward-looking statements, even though our situation may change in the future. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements.  We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report.  You should read this report and the documents that we reference in this report and have filed as exhibits completely and with the understanding that our actual future results may be materially different from what we currently expect.  We qualify all of our forward-looking statements by these cautionary statements.

**Overview**

References to “we,” “us,” “our” and the “Company” refer to United Wisconsin Grain Producers, LLC.  United Wisconsin Grain Producers, LLC is a Wisconsin limited liability company that owns and manages the business and day-to-day operations of a 60 million gallon per year (“MGY”) ethanol plant near Friesland, Wisconsin.  The ethanol plant was originally constructed as a 40 MGY facility, but in late 2007 the plant’s production capacity was expanded to 60 MGY.  We began operating at this expanded production capacity in July 2008; however, during the period of September 2008 through February 2009 we operated at less than full capacity due to tightening industry margins.  During the three month and nine month periods ended September 30, 2009, we produced approximately 14,200,000 and 40,000,000 gallons of ethanol, respectively, compared to the same periods in 2008 when we produced approximately 13,700,000 and 41,200,000 gallons of ethanol, respectively.  In March of 2009 we returned to operating at full capacity; however, we may choose to operate at levels less than full capacity as the ethanol industry undergoes supply and demand corrections.

We anticipate further increasing our production capacity in the future to 90 million gallons per year; however, this additional expansion has been put on hold indefinitely pending management’s review of new technologies and due to the recent erosion of industry profit margins.

We have been engaged in the production of ethanol and distillers grains at our plant near Friesland, Wisconsin since May 2005. Our revenues are derived from the sale and distribution of ethanol and distillers grains throughout the continental United States and overseas. In fiscal year 2009, we anticipate producing approximately 53 million gallons of ethanol and 153,000 tons of distillers grains from approximately 18 million bushels of corn. However, there is no guarantee that we will be able to operate at these production levels.  Additionally, we may choose not to operate at these production levels due to tightening industry margins.  We expect to derive additional revenues from the extraction and sale of corn oil, as we began operating our corn oil extraction system in July 2009.

We are subject to industry-wide factors that affect our operating and financial performance.  Our operating results are largely driven by the prices at which we sell ethanol and distillers grains and the costs related to their production, particularly corn and natural gas.  Historically, the price of ethanol tends to fluctuate in the same direction as the price of unleaded gasoline and other petroleum products.  However, in 2007 surplus ethanol supplies resulting from increased industry production capacity put significant downward pressure on ethanol prices, even as unleaded gasoline prices increased.  More recently ethanol prices have correlated more closely with the price of corn.  In addition, the price of ethanol is generally influenced by factors such as general economic conditions, the weather, the season, and government policies and programs.  The price of distillers grains is generally influenced by supply and demand, seasonal fluctuations and the price of substitute livestock feed, such as corn and soybean meal and other animal feed proteins.  Recently, distillers grains pricing has faced downward pressure due to a reduction in exports.  In addition, our revenues are also impacted by factors such as our dependence on one or a few major customers who purchase and distribute our primary product; the intensely competitive nature of our industry; possible legislative changes at the federal, state and/or local level and changes in federal ethanol tax incentives. 

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Our two largest costs of production are corn and natural gas.  Both of these costs are affected by factors largely out of our control.  Corn prices have declined from their record high prices in mid 2008 but still remain at prices higher than historical averages.  The price of corn is affected primarily by the market’s perception of supply and demand factors such as crop production, industry year-end inventories, exports, government policies and programs, risk management and weather.  The growth of the ethanol industry itself has increased the average price of corn and is expected to continue to support the increased average price of corn as demand for corn continues to rise.  Natural gas prices fluctuate with the energy complex in general, but also have independent cost factors such as weather in the production areas, production disruption, storage levels, pipeline capacity and weather in use areas.  Natural gas prices have declined since mid 2008; however, there is no guarantee natural gas prices will remain at these lower levels.  We expect the price of natural gas to continue to correlate with the energy spectrum in general.  Our costs of production are also affected by the cost of complying with the extensive environmental laws that regulate our industry.

We expect to fund our operations during the next twelve months using cash flow from continuing operations and our credit facilities.  We expect to continue ongoing research and development activities in the next twelve months in the form of commissioning studies on internal energy generation in conjunction with our planned plant production capacity increase, in particular the possibility of using post-fermentation corn solids or other renewable fuel as an energy source, thereby offsetting our natural gas usage.  Due in part to this ongoing evaluation and analysis work, we have postponed the commencement date for the planned 60 to 90 MGY capacity increase (“Phase II” of our expansion) because our energy technology choice will impact the design of the 30 MGY capacity expansion.  Tightening industry profit margins have also caused us to indefinitely delay proceeding with Phase II of our expansion.

**Results of Operations**

 

***Comparison of the three months ended September 30, 2009 and 2008***

The following table shows the results of our operations and the percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our statements of operations for the three months ended September 30, 2009 and 2008: 

** **

** **

**Three months ended**

**September 30, 2009**

**(Unaudited)**

 

**Three months ended**

**September 30, 2008**

**(Unaudited)**

**Income Statement Data**

** **

**Amount**

 

**%**

 

**Amount**

 

**%**

Revenues

 

$

22,852,274

 

100.0

 

$

37,876,941

 

100.0

 

 

 

 

 

 

 

 

 

Cost of Goods Sold

 

$

24,577,349

 

107.5

 

$

43,318,504   

 

114.4

 

 

 

 

 

 

 

 

 

Gross Loss

 

$

( 1,725,075

)

( 7.5

)

$

(5,441,563

) 

(14.4)

 

 

 

 

 

 

 

 

 

Operating Expenses

 

$

655,869

 

2.9

 

$

681,085

 

   1.8

 

 

 

 

 

 

 

 

 

Operating Loss

 

$

( 2,380,944

)

( 10.4

)

$

( 6,122,648

) 

(16.2)

 

 

 

 

 

 

 

 

 

Other Income

 

$

346

 

0.0

 

$

147,301

 

   0.4

 

 

 

 

 

 

 

 

 

**Net Loss**

 

$

( 2,380,598

)

( 10.4

)

$

( 5,975,347

) 

(15.8)

*Revenues*.  Revenues from operations for the three months ended September 30, 2009 totaled $22,852,274.  In the three months ended September 30, 2009 ethanol sales comprised approximately 80% of our revenues, distillers grain sales (DGS) comprised approximately 18% of our revenues, and corn oil sales comprised approximately 2% of our revenues.  Revenues from operations for the three months ended September 30, 2008 totaled $37,876,941 of which ethanol sales comprised approximately 86% and distillers grains sales comprised approximately 14%.  The 40% decrease in revenues for the three months ended September 30, 2009 as compared to the same period in the previous year is due primarily to a 29% decrease in the revenues from ethanol sales, a 37% decrease in revenue from distillers grains sales and a loss from ethanol hedging activities of $4,551,673 compared to a gain from ethanol hedging activities of $538,106 in the same three month period in 2008. 

 

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The 29% decrease in revenue from ethanol sales in the three months ended September 30, 2009 compared to the three months ended September 30, 2008 is due to a 31% decrease in the price of ethanol sold, offset slightly by a 3% increase in gallons sold.  The decrease in the price of ethanol is due to an oversupply of ethanol in the first half of 2009, following record high prices in mid 2008.  During the first half of 2009, the industry curtailed production and this allowed for the price of ethanol to begin to recover.  Imports of ethanol into the U.S. have been very much reduced this year and this too has helped the U.S. industry produce more ethanol without creating an oversupply.  However, close to 20% of the production capacity in the U.S. remains idle.  Management believes the industry will need to continue to grow demand (or reduce production capacity) in order to increase or sustain current prices.  According to the Renewable Fuels Association, as of October 22, 2009 there were 202 ethanol plants (180 in operation) nationwide with the capacity to produce more than 13.1 billion gallons of ethanol annually, with an additional nine new plants and four expansions under construction expected to add an additional estimated 1.4 billion gallons of annual production capacity in the next 12 to 18 months.  Unless this new supply is equally met with increased demand, ethanol prices may be pressured downward.  If ethanol prices decline, our earnings will also decline, particularly if corn prices remain substantially higher than historic averages.  On June 4, 2009, we provided notice to our ethanol marketer of the termination of our ethanol marketing agreement, effective as of the end of the initial two-year term of the agreement in January 2010. 

Our revenues include a loss of $4,551,673 for the three months ended September 30, 2009 compared to a gain of $538,106 for the three months ended September 30, 2008 related to our ethanol derivative instruments.  We recognize the gains or losses that result from the changes in the value of our ethanol-related derivative instruments in revenues as the changes occur.  As ethanol prices fluctuate, the value of our ethanol-related derivative instruments changes, affecting our financial performance.  We expect the volatility in these derivative instruments to continue to have an effect on our revenues due to the timing of the changes in value of the derivative instruments relative to our sales.  These instruments are the primary tools of our risk management program for ethanol revenues.  At September 30, 2009, the Company had forward contracts to sell 34.7 million gallons of ethanol for various delivery periods from October 2009 through June 2010.  The prices on these contracts range from $1.45 to $1.80 per gallon.  Unforeseen increased demand for ethanol in recent months has caused ethanol prices to trend upward since late in August of this year, outpacing the relative cost of corn and thereby increasing the spread between ethanol prices and corn prices.  Part of our risk management strategy is to sell ethanol against our forward corn purchases, thus securing a reasonable operating margin and reducing our risk of a decline in the spread between ethanol and corn.  However, taking this more conservative approach to marketing has reduced our ability to benefit from the immediate high price of ethanol as compared to the price of corn.  

The average sales price for our distillers grains for the three months ended September 30, 2009 was down 23% compared to the three months ended September 30, 2008.  Decreased corn prices, lower soybean meal prices and an increase in DDGS suppliers to export markets have placed downward pressure on distillers grains prices.  Distillers grains prices are expected to follow the price of corn for the foreseeable future unless the price of soybean meal or other protein sources changes significantly.  Additionally, an increased supply of distillers grains resulting from additional ethanol production may put downward pressure on distillers grains prices.  At September 30, 2009, the Company had forward dry distillers grains contracts totaling 10,200 tons for various delivery periods from October 2009 to September 2010 with a price range of $85 to $140 per ton, and forward modified wet distillers grains sales contracts totaling 14,500 tons for various delivery periods from October 2009 to May 2010 with a price range of $35 to $58 per ton.

We also had revenue from the sale of corn oil from our corn oil extraction system completed in July 2009.  The average sale price for the three months ended September 30, 2009 was $1.73 per gallon.  There were no sales in the same period in 2008 because the corn oil extraction system was not yet complete.

*Cost of Goods Sold*.  Our cost of goods sold from the production of ethanol and distillers grains is primarily made up of raw grains expenses (corn) and energy expenses (natural gas and electricity).  Cost of goods sold for the three months ended September 30, 2009totaled $24,577,349 as compared to $43,318,504 for the three months ended September 30, 2008.  The 43% decrease in cost of goods sold in the three months ended September 30, 2009 as compared to the same period in 2008 is primarily a net result of an 11% increase in the volume of corn ground, a 37% decrease in the price of corn, a 6% increase in the amount of natural gas used, a 65% decrease in the price of natural gas, and a loss from hedging activities related to our corn-related derivative instruments of approximately $200,000 compared to a loss of approximately $5,900,000 in the same three months the previous year.  
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The average corn price for the three months ended September 30, 2009 was 37% lower than the average for the three months ended September 30, 2008.  Corn prices have declined from their peak in mid 2008 but remain higher than historical averages.  Management believes corn prices could remain higher than historical average prices due to uncertainty surrounding acres planted and slow maturation due to cooler than normal temperatures.  Corn demand for ethanol production and exports are both projected to increase this year.  According to the USDA’s October 9, 2009 report, corn production is projected at 13.018 billion bushels, compared to total use of 13.03 billion bushels, keeping the carryout inventory at 1.67 billion bushels, nearly identical to 2008.  A carryout inventory similar to last year could leave the market susceptible to volatility again this coming year.  The grain markets have also been influenced by outside market factors such as the value of the U.S. dollar.  As the dollar changes value, many speculators will take positions in the commodity markets as a means of heading inflation.  This outside influence has had substantial impact on the corn market over recent months.  Given a similar corn supply and demand picture as last year, we expect prices could be similar also.

Our cost of goods sold includes a loss of approximately $200,000 for the three months ended September 30, 2009 related to our corn-related derivative instruments as compared to a loss of approximately $5,900,000 for the three months ended September 30, 2008.  We recognize the gains or losses that result from the changes in the value of our corn-related derivative instruments in cost of goods sold as the changes occur.  As corn prices fluctuate, the value of our derivative instruments changes, which affects our financial performance.  We anticipate continued volatility in our cost of goods sold due to the timing of the changes in value of the derivative instruments relative to the cost and use of the commodity being hedged.   These instruments are the primary tools of our risk management program for corn prices.  As of September 30, 2009, the Company had forward corn purchase contracts totaling 4.3 million bushels for various delivery periods from October 2009 to March 2011.  The prices on these contracts range from $3.06 to $6.32 per bushel or have a basis level established by the CBOT futures between $0.30 and $-0.35. 

 

Natural gas is also an important input to our manufacturing process.  We use natural gas to dry a majority of our distillers grains products to moisture contents at which they can be stored for longer periods and transported greater distances, so that we can market them to broader livestock markets, including poultry and swine markets in the continental United States and to markets in Asia.  The cost of our natural gas decreased 63% for the three months ended September 30, 2009 as compared to the same period in 2008.   This decrease is a net result of 65% decrease in the price of natural gas, offset slightly by 6% increase in volume of natural gas. We expect our natural gas usage to be approximately 140,000 MMBTU per month when producing ethanol at a rate of 60 million gallons per year. We have secured firm pipeline capacity for natural gas delivery of 4,000 MMBTU per day and are working towards securing additional pipeline capacity to accommodate our planned, but indefinitely delayed, expansion.

Over the past two to three years natural gas has been available only at prices exceeding historical averages. These heightened prices increase our costs of production.  Natural gas prices recently have declined from their peak in mid 2008, and we expect natural gas prices to remain lower than prices witnessed in recent years.  Storage capacity for natural gas is virtually full, and all indications are that it will continue to remain full through the injection season, providing ample supply as we end the winter demand season.  Cooler than normal temperatures this summer have reduced the demand for electricity generation, which has also helped keep downward pressure on natural gas prices.  Hurricane season (June through November) always has the potential to affect prices, and should we experience an active season, natural gas prices would be pushed higher if production capacity is idled.  A colder than usual winter also has the potential to reduce inventories of natural gas and increase prices.  Any unforeseen price rises in crude oil would also affect natural gas prices, causing them to increase higher than current price levels.  If natural gas prices were to return to higher prices relative to historical average levels, it will continue to have a negative impact on our cost of goods sold.  We have secured a marketing firm and energy consultant for our natural gas supply and will continue to work with these parties on an ongoing basis to mitigate our exposure to volatile gas prices.  As of September 30, 2009, the Company had forward contracts to purchase approximately 682,000 MMBTU of natural gas during the months of October 2009 through June 2010 at an average price of approximately $5.85 per MMBTU.

*Gross Margin*.  Gross margin for the three months ended September 30, 2009 was a loss of $1,725,075, a 69% decrease from the gross margin loss of $5,441,563 for the three months ended September 30, 2008.  This increase is due primarily to the 40% decrease in revenues and 43% decrease in cost of goods sold discussed above (see “Revenue” and “Cost of Goods Sold” above).  

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In the three months ending September 30, 2009, our ethanol-corn price spread was approximately $0.94, as compared to a spread of approximately $0.98 for the same period in 2008, a 4% decrease.  Our gross margins as a percentage of revenue for the three months ended September 30, 2009 and 2008 were approximately negative 7.5% and approximately negative 14.4%, respectively.  We calculate our spread as the price we receive per gallon of ethanol, multiplied by the number of gallons of ethanol produced per bushel of corn, minus the price we paid per bushel of corn.  The calculation of our spread does not take into account sales of distillers grains or expenses from inputs other than corn, including the natural gas we use to dry our distillers grains.  The spread between the price we receive for our products and the costs of our raw materials may not continue at a favorable rate in the future.  The potentially increasing supply of ethanol may continue to outpace the demand for ethanol, placing additional downward pressure on our selling price and further eroding our margins.  The increased production of ethanol from corn may contribute to the already increasing demand for corn and put pressure on corn supplies, thereby increasing our cost of corn and reducing our profit margin.  A decrease in profit margin will adversely affect our financial performance.

*Operating Expenses*.  Operating expenses were $655,869 for the three months ended September 30, 2009, a 4% decrease from the $681,085 for three months ended September 30, 2008.   Operating expenses as a percentage of revenues were 2.9% and 1.8% for the three months ended September 30, 2009 and September 30, 2008, respectively.

*Operating Income(Loss)*.  We realized an operating loss for the three months ended September 30, 2009 of $2,380,944, or a negative 10.4% of revenues.  Operating loss for the three months ended September 30, 2008 totaled $6,122,648, or a negative 16.2% of revenues.  The decrease in operating loss for the three months ended September 30, 2009 compared to the three months ended September 30, 2008 is primarily a result of the decrease in “Revenues” and “Cost of Goods Sold” (discussed above).

*Other Income (Expense)*.  Our other income (expense) for the three months ended September 30, 2009 was an income of $346 as compared to an income of $147,301 for the three months ended September 30, 2008.  Our other income (expense) items at September 30, 2009 consisted primarily of interest and miscellaneous income.

***Comparison of the nine months ended September 30, 2009 and 2008***

The following table shows the results of our operations and the percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our statements of operations for the nine months ended September 30, 2009 and 2008:

** **

** **

**Nine months ended**

**September 30, 2009**

**(Unaudited)**

 

**Nine months ended**

**September 30, 2008**

**(Unaudited)**

**Income Statement Data**

** **

**Amount**

 

**%**

 

**Amount**

 

**%**

Revenues

 

$

73,698,325

 

100.0

 

$

108,302,919

 

100.0

 

 

 

 

 

 

 

 

 

Cost of Goods Sold

 

$

75,922,432

 

103.0

 

$

92,742,985

 

85.6

 

 

 

 

 

 

 

 

 

 

 

Gross Margin (Loss)

 

$

( 2,224,107

)

(3.0

)

$

15,559,934

 

14.4

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

2,123,855

 

2.9

 

$

2,585,650

 

2.4

 

 

 

 

 

 

 

 

 

 

 

Operating Income (Loss)

 

$

( 4,347,962

)

( 5.9

)

$

12,974,284

 

12.0

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expense)

 

$

272,947

 

0.4

 

$

( 588,194

)

   (0.6)

 

 

 

 

 

 

 

 

 

**Net Income (Loss)**

 

$

( 4,075,015

)

( 5.5

)

$

12,386,090

 

11.4

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*Revenues*.  Revenues from operations for the nine months ended September 30, 2009 totaled $73,698,325.  In the nine months ended September 30, 2009, ethanol sales comprised approximately 82% of our revenues and distillers grain sales (DGS) comprised approximately 18% of our revenues.  Revenues from operations for the nine months ended September 30, 2008 totaled $108,302,919, of which ethanol sales comprised approximately 84.5% and distillers grains sales comprised approximately 15.5%.  The 32% decrease in revenues for the nine months ended September 30, 2009 as compared to the same period in the previous year is due primarily to a decrease in the price of ethanol and a decrease in the price of distillers grains, as discussed in “RESULTS OF OPERATIONS --*Comparison of the three months ended September 30, 2009 and 2008*.” 

 

*Cost of Goods Sold*.  Our cost of goods sold for the nine months ended September 30, 2009 totaled $75,922,432 as compared to $92,742,985 for the nine months ended September 30, 2008.  The 18% decrease in cost of goods sold in the nine months ended September 30, 2009 as compared to the same period in 2008 is primarily a net result of a decrease in the price of corn and a decrease in the price of natural gas, offset slightly by an approximate $2,900,000 loss from our hedging activities related to our corn-related derivative instruments compared to a gain of $6,000,000 in the same nine months the previous year.  For further discussion see “RESULTS OF OPERATIONS --*Comparison of the three months ended September 30, 2009 and 2008*.” 

*Gross Margin*.  Gross margin for the nine months ended September 30, 2009 was a loss of $2,224,107, a decrease of 114% from the gross profit of $15,559,934 for the nine months ended September 30, 2008.  This decrease is due primarily to the 32% decrease in revenues and the 18% decrease in cost of goods sold discussed above.

In the nine months ending September 30, 2009, our ethanol-corn price spread was approximately $1.61, as compared to a spread of approximately $1.40 for the same period in 2008, a 15% increase.  However, despite the increase, our margins decreased due to the hedge loss we recognized in the nine months ended September 30, 2009 compared to the hedge gain we recognized in the nine months ended September 30, 2008. Our gross margins as a percentage of revenue for the three months ended September 30, 2009 and 2008 were approximately negative 3% and approximately 14.4%, respectively.  For further discussion regarding the calculation of our spread, see “RESULTS OF OPERATIONS --*Comparison of the three months ended September 30, 2009 and 2008*.”

*Operating Expenses*.  Operating expenses were $2,123,855 for the nine months ended September 30, 2009 as compared to $2,585,650 for nine months ended September 30, 2008.  The 18% decrease in operating expenses is primarily a net result of a decrease in general and administrative labor expense and insurance, partially offset by an increase in professional fees and other administrative expenses for the nine months ended September 30, 2009 over the same period in 2008.  Operating expenses as a percentage of revenues were 2.9% and 2.4% for the nine months ended September 30, 2009 and September 30, 2008, respectively.

*Operating Income*.  We realized an operating loss for the nine months ended September 30, 2009 of $4,347,962, or a negative 5.9% of revenues.  Operating income for the nine months ended September 30, 2008 totaled $12,974,284, or 12% of revenues.  The decrease in operating income for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008 is primarily a result of the decrease in “Gross Margin” (discussed above).  

 

*Other Income (Expense)*.  Our other income (expense) for the nine months ended September 30, 2009 was an income of $272,947 as compared to an expense of $588,194 for the nine months ended September 30, 2008.  Our other income (expense) items at September 30, 2009 consisted primarily of interest and miscellaneous income.  Our other income (expense) items at September 30, 2008 consisted primarily of equity in net loss of investment. 

**Changes in Financial Condition for the nine months ended September 30, 2009 Compared to the Fiscal Year endedDecember 31, 2008.**

Assets totaled $66,894,826 on September 30, 2009, as compared to $71,772,871 on December 31, 2008.  Current assets totaled $14,172,239 on September 30, 2009, as compared to $17,222,301 on December 31, 2008.  This change resulted from (i) a reduction in cash and cash equivalents on hand, which is primarily a result of a decrease in cash from operations, the $2,847,500 cash used for our member distributions in February 2009, and approximately $3,000,000 used for capital expenditures and construction in process and (ii) an approximate $2,900,000 net increase in our restricted cash and derivative instruments.

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Current liabilities were $5,260,564 on September 30, 2009, as compared to $5,613,705 on December 31, 2008.  Long-term debt, less current maturities, totaled $2,397,611 on September 30, 2009, as compared to $0 on December 31, 2008.  Our increase in long-term debt is due to our term loan, as discussed below in “***Short-Term and Long-Term Debt Sources***.” 

Members’ equity totaled $59,236,651 on September 30, 2009, as compared to $66,159,166 on December 31, 2008.  This change is a result of our net loss for the nine months ending September 30, 2009 and the $2,847,500 membership distribution paid out in February 2009.

**Liquidity and Capital Resources**

***Comparison of the nine months ended September 30, 2009 and 2008***

The following table shows cash flows for the nine months ended September 30, 2009 and 2008:

** **

**Nine months ended September 30**

** **

**2009**

 

**2008**

 

Net cash provided by (used in) operating activities

 

$

( 2,418,609

)

$

15,981,965

 

Net cash used in investing activities

 

$

( 2,993,274

)

$

( 6,796,818

)

Net cash used in financing activities

 

$

( 40,500

)

$

( 23,903,939

)

*Cash Flow Provided by (Used In) Operations.  *Our net cash flow provided by (used in) operating activities for the nine months ended September 30, 2009 was an expenditure of $2,418,609, as compared to net cash flow of $15,981,965 for the same period the previous year.  The decrease in net cash flow from operating activities for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008 was primarily due to the changes discussed in “Revenues” and “Gross Profit” above. Our capital needs are adequately met through cash from our operating activities and our current credit facilities.

 

*Cash Flow Used In Investing Activities.  *Our net cash flow used in investing activities for the nine months ended September 30, 2009 constituted expenditures of $2,993,274, as compared to expenditures of $6,796,818 for the nine months ended September 30, 2008.  During the nine months ended September 30, 2009, First Missouri Energy, LLC, an entity in which the Company had invested, sold the land owned by First Missouri Energy, LLC for approximately $1,430,000.  These monies were distributed to the members of First Missouri Energy, including $162,067 to United Wisconsin Grain Producers, LLC.

We presently estimate that an additional $28,000,000 will be required to construct Phase II of our capacity expansion, all of which is expected to be financed from a portion of cash flows from operations and additional debt financing.  See “**Plant Expansion and Construction in Process**” below.  We expect that Phase II of our expansion will provide additional ethanol production capacity of 30 million gallons per year at our Friesland plant site.  Tightening industry profit margins have led us to put this expansion on hold indefinitely.  We currently estimate the 30 million gallon per year expansion facility will not be complete by the second quarter of 2010, as we had previously projected, due to the indefinite delay.  Utilizing cash generated from operations for the plant expansion, if and when we proceed with the expansion, may impact our ability to pay out future member distributions.  Our projections are based upon our historical operating costs and historical revenues.  However, our past financial performance may not accurately predict future results. 

*Cash Flow Provided by ( Used In ) Financing Activities.  *Our net cash flow used in financing activities for the nine months ended September 30, 2009 constituted expenditures of $40,500, as compared to expenditures of $23,903,939 for the nine months ended September 30, 2008.  During the nine months ended September 30, 2009, we made cash distributions to our members in the amount of $2,847,500 as compared to $12,870,000 in the nine months ended September 30, 2008.  These distributions were financed with cash from operations.   Additionally, during the nine months ended September 30, 2009, we obtained a term loan in the amount of $4,000,000, as discussed below in “***Short-Term and Long-Term Debt Sources***” as compared to the nine months ended September 30, 2008, when we paid off our outstanding term debt.  Although our term loan is in the amount of $4,000,000, as of September 30, 2009, we have been advanced only $2,857,000 of this amount.   Finally, during the nine months ended September 30, 2009, we did not repurchase any membership units, as compared to the nine months ended September 30, 2008, when we used $677,800 to repurchase membership units. 

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Table of Contents

***Short-Term and Long-Term Debt Sources***

 

On April 2, 2009 we signed agreements with Farmers & Merchants Union Bank to increase our revolving line of credit from $5,000,000 to $10,000,000 and borrow an additional $4,000,000.  The interest rate on amounts we borrow under the line of credit is a variable rate of 2.0% over the highest US Prime Rate as published in the Wall Street Journal “Money Table”.  The interest rate adjusts as and when the index rate changes.  Interest is due monthly on this revolving credit facility.  No prepayment fees exist on the revolving credit facility; however, we are required to pay a commitment fee equal to 0.50% per year of the average daily unused portion of the line of credit.  The maturity date of our line of credit is April 1, 2012

Our $4,000,000 term loan is at a fixed interest rate of 6.25%.  Although our term loan is in the amount of $4,000,000, as of September 30, 2009, we have been advanced only $2,857,000 of this amount.  The term loan requires us to pay monthly payments of accrued interest until November 1, 2009.  Starting on that date, we are required to make 59 equal monthly payments of principal and interest in the amount of $77,975, followed by one final payment of the unpaid principal and all accrued interest remaining on the date the note evidencing the term loan is due, October 1, 2014.  If we prepay the term loan, we must pay a prepayment penalty of 1.0% of the outstanding loan balance, unless we can establish that the source of the prepayment is derived from our business operations. Additionally, we were required to pay a loan origination fee equal to 10 basis points.

 

Our revolving credit facility and our term loan are subject to protective covenants requiring us to maintain various financial ratios. We are required to maintain a minimum book value net worth of $50,000,000 and maintain a monthly working capital position of $7,500,000.  We must receive written approval from our lender to exceed $1,000,000 in annual capital expenditures and we must obtain consent prior to making membership distributions in excess of 50% of the previous year’s net income, excluding state and federal incentive payments.  Finally, we are prohibited from making investments not directly for the benefit of our existing plant site.  As of September 30, 2009, we are in compliance with all of our financial debt covenants.  The revolving line of credit and the term loan are secured by substantially all of our assets.

We expect to obtain additional debt financing of between approximately $14,000,000 and $21,000,000 when and if we proceed with Phase II of our expansion, which would increase our production capacity to 90 million gallons per year.  However, this expansion has been indefinitely delayed due to tightening industry profit margins.  See “**Plant Expansion and Construction in Process**” below. 

**Plant Expansion and Construction in Process**

During the three months ended September 30, 2009, we completed installation of a regenerative thermal oxidizer (RTO), a $3,150,000 project our Board approved on March 10, 2008.  We also completed the corn oil extraction system, a $3,671,000 project our Board approved on July 14, 2008.  Both projects were within budget with the total cost being approximately $5,800,000.  The projects were financed with a combination of cash from operations and debt financing.

In December 2007, we substantially completed an expansion of our plant capacity to 60 million gallons (“Phase I” of our expansion).  We began operating at this expanded capacity in July 2008; however, for the period of September 2008 through February 2009, we operated at less than full capacity due to tightening industry margins.  Phase I of our expansion increased the capacity of our grind, cook and fermentations systems.  Phase II of our expansion involves the distillation and downstream process on additional “beer,” the product removed from the fermentors after fermentation is complete.  The total estimated cost of this work, which will increase plant capacity by 30 million gallons, is $28,000,000.  The Board approved $16,700,000 for the development, design and completion of the distillation, dehydration and evaporation components of the Phase II expansion project on June 11, 2007.  The project is approximately 5% complete, which represents the early planning and design work.  We have paid for the work to date with cash from operations.  Phase II of our expansion is presently on hold due to management’s decision to re-examine the energy source and review new technologies, and due to the erosion of industry profit margins.  Should this project move forward, the Company expects to finance the project with approximately 40% to 60% debt financing and approximately 40% to 60% cash from operations.  If we are unsuccessful in obtaining such additional debt financing, we will not be able to construct Phase II of our expansion.

24

Table of Contents

**Off Balance Sheet Arrangements.**

We currently do not have any off-balance sheet arrangements. 

**Application of Critical Accounting Estimates**

Management uses estimates and assumptions in preparing our financial statements in accordance with generally accepted accounting principles.  These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses.  We had the following critical accounting estimates as of the nine months ended September 30, 2009.  

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable.  Impairment testing for assets requires various estimates and assumptions, including an allocation of cash flows to those assets and, if required, an estimate of the fair value of those assets.  Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management’s assumptions, which do not reflect unanticipated events and circumstances that may occur.  In our analysis, we consider future corn costs and ethanol prices, break-even points for our plant and our risk management strategies in place through our derivative instruments and forward contracts.  Given the significant assumptions required and the possibility that actual conditions will differ, we consider the assessment of impairment of our long-lived assets to be a critical accounting estimate.

Our allowance for doubtful accounts was $54,000 and $59,000 at September 30, 2009 and December 31, 2008, respectively.  These amounts are based on our historical experience and take into account factors such as our marketing agreements in place for the marketing and sale of all of our ethanol and a portion of our distillers grains, the payment due date for such ethanol and distillers grains relative to when our marketers take possession of the products, and our past success in collecting payment for the ethanol and distillers grains sold pursuant to our marketing agreements.  Because our allowance for doubtful accounts is based in part on our assumption that our future collection of accounts will be similar to our historical experiences, we consider this to be a critical accounting estimate.

25

Table of Contents

**Item 3.  Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to the impact of market fluctuations associated with interest rates and commodity prices as discussed below. We have no exposure to foreign currency risk as all of our business is conducted in U.S. Dollars. We use derivative financial instruments as part of an overall strategy to manage market risk. We use cash, futures and option contracts to hedge changes to the commodity prices of corn, natural gas and ethanol. We do not enter into these derivative financial instruments for trading or speculative purposes, nor do we designate these contracts as hedges for accounting purposes pursuant to the requirements of SFAS 133,*Accounting for Derivative Instruments and Hedging Activities*.

**Interest Rate Risk**

We are exposed to market risk from changes in interest rates.  On April 2, 2009, we signed an agreement for a new revolving line of credit, which bears a variable interest rate.  This line of credit replaced our previous line of credit.  Our $4,000,000 term loan has a fixed interest rate.  At September 30, 2009 , our exposure to interest rate risk resulted primarily from the variable interest rate for borrowings against our revolving line of credit. At September30, 2009, we had no borrowings against our revolving line of credit .  The specifics of our revolving line of credit and term loan are discussed in greater detail in “**Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Short-Term and Long-Term Debt Sources**.”

Below is a sensitivity analysis we prepared regarding our income exposure to changes in interest rates. The sensitivity analysis below shows the anticipated effect on our income from a 10% adverse change in interest rates for a one year period.

**Outstanding Variable Rate Debt at 9/30/09**

**Interest Rate at 9/30/09**

**Adverse 10% Change in Interest Rates**

**Annual Adverse Change to Income**

$0

5.25%

.525%

$0

**Commodity Price Risk**

We seek to minimize the risks from fluctuations in the prices of raw material inputs, such as corn and natural gas, and finished products, such as ethanol and distillers grains, through the use of hedging instruments.  In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate.  Although we believe our hedge positions accomplish an economic hedge against our future purchases and sales, management has chosen not to use hedge accounting, which would match the gain or loss on our hedge positions to the specific commodity purchase being hedged.  We are using fair value accounting for our hedge positions, which means as the current market price of our hedge positions changes, the realized or unrealized gains and losses are immediately recognized in our cost of goods sold or as an offset to revenues. The immediate recognition of hedging gains and losses under fair value accounting can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged.

As corn prices move in reaction to market trends and information, our income statement will be affected depending on the impact such market movements have on the value of our derivative instruments.  Depending on market movements, crop prospects and weather, these price protection positions may cause immediate adverse effects, but are expected to produce long-term positive growth for us.

A sensitivity analysis has been prepared to estimate our exposure to ethanol, corn and natural gas price risk. Market risk related to these factors is estimated as the potential change in income resulting from a hypothetical 10% adverse change in the fair value of our corn and natural gas prices and average ethanol price as of September30 , 2009, net of the forward and futures contracts used to hedge our market risk for corn and natural gas usage requirements.  The volumes are based on our expected use and sale of 

 

26

Table of Contents

these commodities for a one year period from September 30, 2009.  As of September 30, 2009, approximately 61% of our estimated corn usage, 40% of our anticipated natural gas usage and 57% of our ethanol sales over the next 12 months were subject to fixed price or index contracts where a price has been established with an exchange.  The results of this analysis, which may differ from actual results, are as follows:

 

**Estimated Volume Requirements for the next 12 months (net of forward and futures contracts)**

**Unit of Measure**

**Hypothetical Adverse Change in Price as of 6/30/2009**

**Approximate Adverse Change to Income**

Natural Gas

998,000

MMBTU

10%

$

450,000

Ethanol

25,300,000

Gallons

10%

$

4,048,000

Corn

8,100,000

Bushels

10%

$

3,200,000

**Item 4.  Controls and Procedures
Our management, including our Chief Executive Officer (the principal executive officer), Jeff Robertson, along with our Chief Financial Officer (the principal financial officer), Barb Bontrager, have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of September30 , 2009.  Based on this review and evaluation, these officers have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act  is recorded, processed, summarized and reported within the time periods specified in the forms and rules of the Securities and Exchange Commission; and to ensure that the information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Our management, consisting of our principal executive officer and principal financial officer, have reviewed and evaluated any changes in our internal control over financial reporting that occurred during the fiscal quarter ended September30 , 2009 and there has been no change that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

 

27

Table of Contents

**PART II.     OTHER INFORMATION
**Item 1.**

** Legal Proceedings
From time to time in the ordinary course of business, we may be named as a defendant in legal proceedings related to various issues, including without limitation, workers’ compensation claims, tort claims, or contractual disputes.  We are not currently a party to any material pending legal proceedings and we are not currently aware of any such proceedings contemplated by governmental authorities.

**Item 1A.  Risk Factors
The following Risk Factors are provided due to material changes from the Risk Factors previously disclosed in our Annual Report on Form 10-K.  The Risk Factors set forth below should be read in conjunction with the Risk Factors section and the Management’s Discussion and Analysis section for the fiscal year ended December 31, 2008, included in our Annual Report on Form 10-K.

***The spread between ethanol and corn prices can vary significantly, which could prevent us from operating the ethanol plant profitably.***  Corn costs significantly impact our cost of goods sold.  The spread between the price of ethanol and the price we pay per bushel of corn has fluctuated significantly in the past and may continue to fluctuate significantly in the future.  The spread between the price of ethanol and price of corn may continue to be volatile and may lead to volatility in our net income and could lead to negative operating margins in the future.  Any reduction in the spread between ethanol and corn prices, whether as a result of an increase in corn prices or a reduction in ethanol prices, could prevent us from operating the ethanol plant profitably.  Our inability to operate the ethanol plant profitably for an extended period of time may reduce or eliminate the value of our units.

***Demand for ethanol may not continue to grow unless ethanol can be blended into gasoline in higher percentage blends for conventional automobiles, which could impact our ability to operate profitably.***  Currently, ethanol is blended with conventional gasoline for use in standard (non-flex fuel) vehicles to create a blend which is 10% ethanol and 90% conventional gasoline.  Estimates indicate that approximately 135 billion gallons of gasoline are sold in the United States each year.  Assuming that all gasoline in the United States is blended at a rate of 10% ethanol and 90% gasoline, the maximum demand for ethanol is 13.5 billion gallons.  This is commonly referred to as the “blending wall” which represents a theoretical limit where more ethanol cannot be blended into the national gasoline pool.  Many believe that the ethanol industry will reach this blending wall in 2009 or 2010.  However, the Renewable Fuels Standard (RFS) requires that 36 billion gallons of renewable fuels must be blended in the United States by 2022.  In order to meet the RFS and expand demand for ethanol, higher blends of ethanol must be utilized in conventional automobiles.  Such higher blends of ethanol have recently become a contentious issue.  Automobile manufacturers and environmental groups have fought against higher ethanol blends.  Currently, state and federal regulations prohibit the use of higher ethanol blends in conventional automobiles and automobile manufacturers have stated that using higher percentage blends of ethanol in conventional automobiles would void the manufacturer’s warranty.  Without increases in the allowable percentage blends of ethanol, demand for ethanol may not continue to increase which could decrease the selling price of ethanol and could result in our inability to operate the ethanol plant profitably.

***We may be unsuccessful in marketing our own ethanol, which could impact our ability to operate profitably.***  We currently sell the ethanol we produce to Noble Americas Corp. (“Noble”) pursuant to our ethanol marketing agreement with Noble.  Noble is the sole buyer of all of our ethanol, and we rely heavily on its marketing efforts to successfully sell our product.  One June 4, 2009, we provided notice to Noble of the termination of our ethanol marketing agreement, effective as of the end of the initial two-year term of the agreement in January 2010.  Therefore, beginning in January 2010, we expect to market and sell our own ethanol.  By marketing our own ethanol, we will not have to pay marketing fees to a third party marketer.  However, we have no experience in marketing our own ethanol and may be unsuccessful in doing so, which may result in our inability to operate the ethanol plant profitably and may reduce or eliminate the value of our units.

**Item 2.**

**Unregistered Sales of Equity Securities and Use of Proceeds
None.

**Item 3.**

** Defaults Upon Senior Securities
None.

28

Table of Contents

**Item 4.**

**Submission of Matters to a Vote of Security Holders
None.

**Item 5.**

**Other Information
None.

**Item 6.**

**Exhibits 
 

(a)

The following exhibits are filed as part of this report:

**Exhibit No.**

**Exhibit**

 

 

31.1

Certificate pursuant to 17 CFR 240.13a-14(a).

31.2

Certificate pursuant to 17 CFR 240.13a-14(a).

32.1

Certificate pursuant to 18 U.S.C. Section 1350.

32.2

Certificate pursuant to 18 U.S.C. Section 1350.

29

Table of Contents

**SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

 

 

 

 

Date:

November 13, 2009

 

  /s/ J.F. Robertson

 

J.F. Robertson

 

Chief Executive Officer(Principal Executive Officer)

 

 

 

 

Date:

November 13, 2009

 

  /s/ Barb Bontrager

 

Barb Bontrager

 

Chief Financial Officer(Principal Financial and Accounting Officer)

30

Table of Contents

**EXHIBIT INDEX**

**Exhibit No.**

**Description**

31.1

Certificate pursuant to 17 CFR 240.13a-14(a).

31.2

Certificate pursuant to 17 CFR 240.13a-14(a).

32.1

Certificate pursuant to 18 U.S.C. Section 1350.

32.2

Certificate pursuant to 18 U.S.C. Section 1350.

 

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