Related Party Transactions

Equity Method Investments

The Company, directly or indirectly, holds investments in companies that are accounted for under the equity method ("the unconsolidated ethanol LLCs"). The Company’s equity in these entities is presented at cost plus its accumulated proportional share of income or loss, less any distributions it has received.

In January 2003, the Company became a minority investor in LTG, which focuses on grain merchandising as well as trading related to the energy and biofuels industry. Although the Company holds a slight majority of the outstanding shares, all major operating decisions of LTG are made by LTG's Board of Directors and the Company does not have a majority of the board seats. In addition, based on the terms of the operating agreement between LTG and its owners, the minority shareholders have substantive participating rights that allow them to effectively participate in the decisions made in the ordinary course of business that are significant to LTG. Due to these factors, the Company does not have control over LTG and therefore accounts for this investment under the equity method. The Company sells and purchases both grain and ethanol with LTG in the ordinary course of business on terms similar to sales and purchases with unrelated customers.

In 2005, the Company became a minority investor in The Andersons Albion Ethanol LLC (“TAAE”). TAAE is a producer of ethanol and its co-products distillers dried grains (“DDG”) and corn oil at its 55 million gallon-per-year ethanol production facility in Albion, Michigan. The Company operates the facility under a management contract and provides corn origination, ethanol, corn oil and DDG marketing and risk management services. The Company is separately compensated for all such services except corn oil marketing. The Company also leases its Albion, Michigan grain facility to TAAE. While the Company holds 50% of the outstanding units of TAAE, a super-majority vote is required for all major operating decisions of TAAE based on the terms of the Operating Agreement. The Company has concluded that the super-majority vote requirement gives the minority shareholders substantive participating rights and therefore consolidation for book purposes is not appropriate. The Company accounts for its investment in TAAE under the equity method of accounting.

In 2006, the Company became a minority investor in The Andersons Clymers Ethanol LLC (“TACE”). TACE is also a producer of ethanol and its co-products DDG and corn oil at a 110 million gallon-per-year ethanol production facility in Clymers, Indiana. The Company operates the facility under a management contract and provides corn origination, ethanol, corn oil and DDG marketing and risk management services for which it is separately compensated. The Company also leases its Clymers, Indiana grain facility to TACE.

In 2006, the Company became a minority investor in The Andersons Marathon Ethanol LLC (“TAME”). TAME is also a producer of ethanol and its co-products DDG and corn oil at a 110 million gallon-per-year ethanol production facility in Greenville, Ohio. In January 2007, the Company transferred its 50% share in TAME to The Andersons Ethanol Investment LLC (“TAEI”), a consolidated subsidiary of the Company, of which a third party owns 34% of the shares. The Company operates the facility under a management contract and provides corn origination, ethanol, corn oil and DDG marketing and risk management services for which it is separately compensated. In 2009 TAEI invested an additional $1.1 million in TAME, retaining a 50% ownership interest.

The Company has marketing agreements with the three unconsolidated ethanol LLCs under which the Company purchases and markets the ethanol produced to external customers. As compensation for these marketing services, the Company earns a fee on each gallon of ethanol sold. For two of the LLCs, the Company purchases all of the ethanol produced and then sells it to external parties. For the third LLC, the Company buys only a portion of the ethanol produced. The Company acts as the principal in these ethanol sales transactions to external parties as the Company has ultimate responsibility of performance to the external parties. Substantially all of these purchases and subsequent sales are executed through forward contracts on matching terms and, outside of the fee the Company earns for each gallon sold, the Company does not recognize any gross profit on the sales transactions. For the years ended December 31, 2012, 2011 and 2010, revenues recognized for the sale of ethanol purchased from related parties were $683.1 million, $678.8 million and $482.6 million, respectively. In addition to the ethanol marketing agreements, the Company holds corn origination agreements, under which the Company originates all of the corn used in production for each unconsolidated ethanol LLC. For this service, the Company receives a unit based fee. Similar to the ethanol sales described above, the Company acts as a principal in these transactions, and accordingly, records revenues on a gross basis. For the years ended December 31, 2012, 2011 and 2010, revenues recognized for the sale of corn under these agreements were $676.3 million, $706.6 million and $445.6 million, respectively. As part of the corn origination agreements, the Company also markets the ethanol DDG produced by the entities. For this service the Company receives a unit based fee. The Company does not purchase any of the DDG from the ethanol entities; however, as part of the agreement, the Company guarantees payment by the customer for DDG sales where the Company has identified the buyer. At December 31, 2012 and 2011, the three unconsolidated ethanol entities had a combined receivable balance for DDG of $9.4 million and $7.8 million, respectively, of which only $3,800 and $3,000, respectively, was more than thirty days past due. The Company has concluded that the fair value of this guarantee is inconsequential.

The following table presents aggregate summarized financial information of LTG, TAAE, TACE and TAME as they qualified as significant subsidiaries in the aggregate. LTG was the only equity method investment that qualified as a significant subsidiary individually for the years ended December 31, 2012 and 2011.



	December 31,
(in thousands)	2012		2011		2010
Sales	$	8,080,741	$	6,935,755	$	4,707,422
Gross profit	130,241		165,793		133,653
Income from continuing operations	34,161		90,510		59,046
Net income	32,451		87,673		57,691

Current assets	1,266,311		707,400
Non-current assets	326,776		336,554
Current liabilities	1,062,181		514,671
Non-current liabilities	123,991		100,315
Noncontrolling interest	22,745		26,799

The following table presents the Company’s investment balance in each of its equity method investees by entity:



	December 31,
(in thousands)	2012		2011
The Andersons Albion Ethanol LLC	$	30,227	$	32,829
The Andersons Clymers Ethanol LLC	33,119		40,001
The Andersons Marathon Ethanol LLC	32,996		43,019
Lansing Trade Group, LLC	92,094		81,209
Other	2,472		2,003
Total	$	190,908	$	199,061

The following table summarizes income (losses) earned from the Company’s equity method investments by entity:



	% ownership at December 31, 2012 (direct and indirect)	December 31,
(in thousands)		2012			2011		2010
The Andersons Albion Ethanol LLC	50%	$	(497	)	$	5,285	$	3,916
The Andersons Clymers Ethanol LLC	38%	(3,828		)	4,341		5,318
The Andersons Marathon Ethanol LLC	50%	(8,273		)	8,089		1,117
Lansing Trade Group, LLC	51% *	28,559			23,558		15,133
Other	7%-33%	526			177		523
Total		$	16,487		$	41,450	$	26,007

* This does not consider restricted management units which once vested will reduce the ownership percentage by approximately 2%.

Total distributions received from unconsolidated affiliates were $24.4 million for the year ended December 31, 2012. The balance in retained earnings at December 31, 2012 that represents undistributed earnings of the Company's equity method investments is $58.6 million.

Investment in Debt Securities

The Company owns 100% of the cumulative convertible preferred shares of Iowa Northern Railway Corporation (“IANR”), which operates a short-line railroad in Iowa. As a result of this investment, the Company has a 49.9% voting interest in IANR, with the remaining 50.1% voting interest held by the common shareholders. The preferred shares have certain rights associated with them, including voting, dividends, liquidation, redemption and conversion. Dividends accrue to the Company at a rate of 14% annually whether or not declared by IANR and are cumulative in nature. The Company can convert its preferred shares into common shares of IANR at any time, but the shares cannot be redeemed until May 2015. This investment is accounted for as “available-for-sale” debt securities in accordance with ASC 320 and is carried at estimated fair value in “Other noncurrent assets” on the Company’s Consolidated Balance Sheet. The estimated fair value of the Company’s investment in IANR as of December 31, 2012 was $17.2 million.

During the fourth quarter of 2012, the Company discovered that the estimated value of the investment in IANR was overstated by approximately $4.1 million since December 31, 2010 due to the inappropriate valuation of certain receivables held by IANR that are an input into the annual valuation which is prepared by an independent third party and reviewed by the Company. The Company has corrected for this valuation error during the fourth quarter of 2012 and, as of December 31, 2012, the investment in IANR is stated at the correct estimated fair value. The impact of this item on current and previously reported "other comprehensive income", "comprehensive income", and "accumulated other comprehensive income" was determined to be immaterial, and a correction of $4.1 million was made by the Company in the fourth quarter. The adjustment was not considered material to the current or previously reported Consolidated Financial Statements.

Based on the Company’s assessment, IANR is considered a variable interest entity (“VIE”). Since the Company does not possess the power to direct the activities of the VIE that most significantly impact the entity’s economic performance, it is not considered to be the primary beneficiary of IANR and therefore does not consolidate IANR. The decisions that most significantly impact the economic performance of IANR are made by IANR’s Board of Directors. The Board of Directors has five directors; two directors from the Company, two directors from the common shareholders and one independent director who is elected by unanimous decision of the other four directors. The vote of four of the five directors is required for all key decisions.

The Company’s current maximum exposure to loss related to IANR is $21.3 million, which represents the Company’s investment at fair value plus unpaid accrued dividends to date of $4.1 million. The Company does not have any obligation or commitments to provide additional financial support to IANR.

In the ordinary course of business, the Company will enter into related party transactions with each of the investments described above, along with other related parties. The following table sets forth the related party transactions entered into for the time periods presented:



	December 31,
(in thousands)	2012		2011		2010
Sales revenues	$	1,031,458	$	841,366	$	510,142
Service fee revenues (a)	22,165		22,850		21,310
Purchases of product	655,686		636,144		454,314
Lease income (b)	6,995		6,128		5,431
Labor and benefits reimbursement (c)	12,140		10,784		10,760
Other expenses (d)	1,093		192		—
Accounts receivable at December 31 (e)	28,610		14,730		14,991
Accounts payable at December 31 (f)	17,804		24,530		13,930


(a)	Service fee revenues include management fee, corn origination fee, ethanol and DDG marketing fees, and other commissions.


(b)	Lease income includes the lease of the Company’s Albion, Michigan and Clymers, Indiana grain facilities as well as certain railcars to the unconsolidated ethanol LLCs and IANR.


(c)	The Company provides all operational labor to the unconsolidated ethanol LLCs and charges them an amount equal to the Company’s costs of the related services.


(d)	Other expenses include payments to IANR for repair facility rent and use of their railroad reporting mark, payment to LTG for the lease of railcars and other various expenses.


(e)	Accounts receivable represents amounts due from related parties for sales of corn, leasing revenue and service fees.


(f)	Accounts payable represents amounts due to related parties for purchases of ethanol.

From time to time, the Company enters into derivative contracts with certain of its related parties, including the unconsolidated ethanol LLCs and LTG, for the purchase and sale of corn and ethanol, for similar price risk mitigation purposes and on similar terms as the purchase and sale derivative contracts it enters into with unrelated parties. The fair value of derivative contracts with related parties was a gross asset for the years ended December 31, 2012 and 2011 of $3.2 million and $0.6 million, respectively. The fair value of derivative contracts with related parties was a gross liability for the years ended December 31, 2012 and 2011 of $0.3 million and $1.9 million, respectively.