Garden State Ethanol
University of Wisconsin Center for Cooperatives
University of Wisconsin-Extension
UNIVERSITY OF WISCONSIN
CENTER FOR COOPERATIVES
UNIVERSITY OF WISCONSIN-EXTENSION
Valuing the Cooperative Business
in the 21st Century
November 5-6, 2007
Michael L. Weaver
Agribusiness and Energy Group
Lindquist & Vennum P.L.L.P.
Minneapolis, Minnesota
612612-371371-3987
Bioenergy: Trends in Finance
and Business Structures
What we are seeing in Bioenergy
University of Wisconsin Center for Cooperatives
University of Wisconsin-Extension
Bioenergy: Trends in Finance
and Business Structures
What we are seeing in Bioenergy
Ethanol (cont.)
Bio-diesel
Feedstock and distribution economics
Fluctuation in commodity prices
Government policies
Ethanol
Rising organizational/construction costs
Increasing air/water regulatory activity
More difficult land use environment
University of Wisconsin Center for Cooperatives
University of Wisconsin-Extension
What we are seeing in Bioenergy
Current business climate
Key considerations driving trends in business
structures
Continuing “Trends”
Recent trends in cooperatives
Recent trends in non-cooperative business
structures
Disclaimer: This presentation was prepared for general
information purposes only, and is not offered or intended as
legal or other advice on any particular matter.
mweaver@lindquist.com
University of Wisconsin Center for Cooperatives
University of Wisconsin-Extension
Bioenergy: Trends in Finance
and Business Structures
Bioenergy: Trends in Finance
and Business Structures
Current Business Climate
Opportunity in handling and processing
commodities
Cargill most-recent quarterly earnings
report
Capital is the key to move beyond
production of agricultural commodities
only in a competitive, profitable manner
Volatility on input and output commodities
Historic lack of correlation between corn and
ethanol prices
Recent lack of correlation between ethanol
and unleaded gasoline prices
–
–
Infrastructure disconnect
Localized over-supply
Debt financing tightening
University of Wisconsin Center for Cooperatives
University of Wisconsin-Extension
Bioenergy: Trends in Finance
and Business Structures
Key Considerations Driving Trends
in Business Structures
We are back to capital formation and
access to equity capital as key
consideration
Tax considerations
Governance
Income vs. appreciation model
Liquidity of investment
Garden State Ethanol
University of Wisconsin Center for Cooperatives
University of Wisconsin-Extension
Bioenergy: Trends in Finance
and Business Structures
Continuing “Trends”
Tension between patron expectations
and business needs
Solution: CHS, Inc. Preferred Stock
Programs
Solution: Active equity revolvement
programs
Bioenergy: Trends in Finance
and Business Structures
Continuing “Trends” (cont.)
LLC Structures
Tax obligation savings
Increased regulatory/transparency
Readily tradeable exchange issues
Public Corporations
Public capital markets
Increased liquidity
Governance/loss of local control
Income vs. stock appreciation model
University of Wisconsin Center for Cooperatives
University of Wisconsin-Extension
Bioenergy: Trends in Finance
and Business Structures
Recent Trends in Cooperatives (cont.)
Farmland case held that long-term gain on
the sale of assets used in the patronage
business was properly treated as patronagesourced income
–
Bioenergy: Trends in Finance
and Business Structures
Continuing “Trends” (cont.)
Challenges with capital formation and
retention in Cooperatives
University of Wisconsin Center for Cooperatives
University of Wisconsin-Extension
University of Wisconsin Center for Cooperatives
University of Wisconsin-Extension
Schedule F income and self-employment tax
Understood that public corporations have no
reduced long-term capital gain rate
Nevertheless, there is an element of passthrough with a cooperative, both in
governance and formation principles, as well
as under tax law.
Value-Added Cooperatives
Patrons invest permanent equity
capital for right to deliver
LLC/Cooperative Structures
Disregarded entities
Joint ventures (% ownership vs.
patronage %)
Patronage-sourced income
University of Wisconsin Center for Cooperatives
University of Wisconsin-Extension
Bioenergy: Trends in Finance
and Business Structures
Recent Trends in Cooperatives
Recapitalizations (secondary offerings)
Matching all patronage entitlements to
current patronage rights
Revaluation
Disadvantageous long-term capital gain
treatment in cooperatives (vs. LLC)
University of Wisconsin Center for Cooperatives
University of Wisconsin-Extension
Bioenergy: Trends in Finance
and Business Structures
Recent Trends in Cooperatives (cont.)
Mergers and Acquisitions (have cake
and eat it too)
Tax-free merger
Taxable transactions
LLC/Corporation (Cooperatives) taxfree transaction
Conversions
Garden State Ethanol
University of Wisconsin Center for Cooperatives
University of Wisconsin-Extension
Bioenergy: Trends in Finance
and Business Structures
Recent Trends in Non-Cooperative
Business Structures
LLCs merging into corporations
Equity
Liquidity
Value-added cooperatives merging into LLCs
Patronage business methods
Equity
Traditional cooperatives
Redefining patrons
Nonpatronage business
Preferred stock
New-Generation cooperative statutes
Michael L. Weaver
Lindquist & Vennum PLLP
4200 IDS Center
80 South Eighth Street
Minneapolis, MN 55402
(612) 371-3987
mweaver@lindquist.com
University of Wisconsin Center for Cooperatives
University of Wisconsin-Extension
Lindquist & Vennum PLLP
190+ attorneys, offices in Minneapolis and Denver
Corporate Finance Group, representing both private and public
companies in equity and debt financing transactions
Mergers & Acquisitions Group, assisting clients buy and sell
companies in industry groups
Agribusiness and Energy Group, representing cooperatives and
businesses in the agricultural, food processing, manufacturing, and
energy industries
Formation, financing, and construction or acquisition of processing
and manufacturing facilities is a core competency
Our clients have been instrumental in ethanol industry, as well as
wind energy and bio-diesel production
We assist companies withy corporate and cooperative governance,
and are recognized nationally for our tax planning work with
cooperatives