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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
                    
FORM 10-Q
                    
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
For the fiscal quarter ended September 30, 2012
 
o
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
Commission file number 000-53202
HOMELAND ENERGY SOLUTIONS, LLC
(Exact name of registrant as specified in its charter)
 
Iowa
 
20-3919356
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
2779 Highway 24, Lawler, Iowa
 
52154
(Address of principal executive offices)
 
(Zip Code)
 
(563) 238-5555
(Registrant's telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act: None
 
Securities registered pursuant to Section 12(g) of the Act: Membership Units

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.        x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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).
x Yes    o 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
o
 
Accelerated filer
o
Non-accelerated filer
x
 
Smaller Reporting Company
o
(Do not check if a smaller reporting company)
 
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes x No

As of November 9, 2012, we had 90,445 membership units outstanding.








2



PART I.        FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
Homeland Energy Solutions, LLC
Balance Sheets
 
September 30, 2012
 
December 31, 2011
 ASSETS
(Unaudited)
 
(Audited)
 
 
 
 
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
2,237,319

 
$
5,153,553

Accounts receivable
2,610,474

 
3,396,034

Inventory
10,598,678

 
10,501,434

Due from broker

 
1,912,131

Prepaid and other
1,546,136

 
2,247,124

Derivative instruments
673,063

 
109,600

Total current assets
17,665,670

 
23,319,876

 
 
 
 
PROPERTY AND EQUIPMENT
 
 
 
Land and improvements
22,474,880

 
22,471,580

Buildings
5,354,524

 
5,150,659

Equipment
136,684,107

 
135,455,256

Construction in progress
176,219

 
333,725

 
164,689,730

 
163,411,220

Less accumulated depreciation
41,374,710

 
32,192,770

Total property and equipment
123,315,020

 
131,218,450

 
 
 
 
OTHER ASSETS
 
 
 
Loan fees, net of amortization of $1,065,526 and $941,057
107,446

 
231,915

Utility rights, net of amortization of $739,568 and $618,038
1,568,461

 
1,689,991

Other assets
2,140,817

 
1,049,875

Total other assets
3,816,724

 
2,971,781

 
 
 
 
TOTAL ASSETS
$
144,797,414

 
$
157,510,107


See Notes to Unaudited Financial Statements.

3


Homeland Energy Solutions, LLC
Balance Sheets (continued)
 
September 30, 2012
 
December 31, 2011
LIABILITIES AND MEMBERS' EQUITY
(Unaudited)
 
(Audited)
 
 
 
 
CURRENT LIABILITIES
 
 
 
Accounts payable
$
7,013,787

 
$
8,296,875

Derivative instruments

 
421,013

Due to broker
721,959

 

Interest payable
17,356

 
12,967

Property tax payable
377,158

 
464,314

Payroll payable
124,230

 
592,690

Current maturities of long term debt
1,233,333

 
6,783,333

Total current liabilities
9,487,823

 
16,571,192

 
 
 
 
COMMITMENTS AND CONTINGENCIES
 
 
 
 
 
 
 
LONG-TERM LIABILITIES
 
 
 
Revolving line of credit
6,000,000

 

Other liabilities
246,488

 
246,488

Total long-term liabilities
6,246,488

 
246,488

 
 
 
 
MEMBERS' EQUITY, September 30, 2012 and December 31, 2011 90,445 units issued and outstanding
129,063,103

 
140,692,427

 
 
 
 
TOTAL LIABILITIES AND MEMBERS' EQUITY
$
144,797,414

 
$
157,510,107

 
 
 
 

See Notes to Unaudited Financial Statements.


4


Homeland Energy Solutions, LLC
Statements of Operations
(Unaudited)
 
Three Months Ended
 
Three Months Ended
 
Nine Months Ended
 
Nine Months Ended
 
September 30, 2012
 
September 30, 2011
 
September 30, 2012
 
September 30, 2011
 
 
 
 
 
 
 
 
Revenue
$
84,499,206

 
$
109,993,347

 
$
270,291,094

 
$
311,039,904

 
 
 
 
 
 
 
 
Costs of Goods Sold
86,269,126

 
99,853,635

 
267,797,786

 
284,776,346

 
 
 
 
 
 
 
 
Gross Profit/(Loss)
(1,769,920
)
 
10,139,712

 
2,493,308

 
26,263,558

 
 
 
 
 
 
 
 
Operating Expenses
646,389

 
722,292

 
2,074,842

 
2,072,988

 
 
 
 
 
 
 
 
Operating Income/(Loss)
(2,416,309
)
 
9,417,420

 
418,466

 
24,190,570

 
 
 
 
 
 
 
 
Other Income (Expense)
 
 
 
 
 
 
 
Interest expense
(91,111
)
 
(301,493
)
 
(204,362
)
 
(928,539
)
Interest income
328

 
17,143

 
610

 
24,921

Other income
39,799

 

 
185,147

 
340,489

Total Other Income (Expense)
(50,984
)
 
(284,350
)
 
(18,605
)
 
(563,129
)
 
 
 
 
 
 
 
 
Net Income/(Loss)
$
(2,467,293
)
 
$
9,133,070

 
$
399,861

 
$
23,627,441

 
 
 
 
 
 
 
 
Basic & diluted net income/(loss) per capital unit
$
(27.28
)
 
$
100.98

 
$
4.42

 
$
261.24

 
 
 
 
 
 
 
 
Weighted average number of units outstanding for the calculation of basic & diluted net income per capital unit
90,445

 
90,445

 
90,445

 
90,445

 
 
 
 
 
 
 
 


See Notes to Unaudited Financial Statements.


5


Homeland Energy Solutions, LLC
Statements of Cash Flows
(Unaudited)
 
Nine Months Ended
 
Nine Months Ended
 
September 30, 2012
 
September 30, 2011
 
 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
399,861

 
$
23,627,441

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
9,427,939

 
9,155,731

Unrealized (gain) on risk management activities
(984,476
)
 
(7,941,765
)
Change in working capital components:
 
 
 
Accounts receivable
785,560

 
2,963,457

Inventory
(97,244
)
 
267,383

Cash due to (from) broker
2,634,090

 
5,944,724

Prepaid expenses and other
700,988

 
184,432

Accounts payable and other accrued expenses
(1,834,315
)
 
2,498,915

Net cash provided by operating activities
11,032,403

 
36,700,318

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Payments for equipment and construction in progress
(1,278,510
)
 
(3,319,364
)
Investments

 
(605,000
)
Increase in other assets
(218,264
)
 

Net cash (used in) investing activities
(1,496,774
)
 
(3,924,364
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
(Decrease) in checks issued in excess of bank balance

 
(1,574,710
)
(Increase) decrease in restricted cash
(872,678
)
 
329,131

Distribution to members
(12,029,185
)
 
(6,150,260
)
Proceeds from long-term borrowings
6,000,000

 

Payments on long-term borrowings
(5,550,000
)
 
(10,039,309
)
Net cash (used in) financing activities
(12,451,863
)
 
(17,435,148
)
 
 
 
 
Net (decrease) increase in cash
(2,916,234
)
 
15,340,806

 
 
 
 
Cash and Cash Equivalents - Beginning
5,153,553

 

Cash and Cash Equivalents - Ending
$
2,237,319

 
$
15,340,806

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 
 
Cash paid for interest, net of capitalized interest of none and $59,654, respectively
$
199,973

 
$
827,816

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
 
 
 
Note issued for repurchase of member units
$

 
$
1,000,000

Distribution declared but unpaid

 
7,145,155


See Notes to Unaudited Financial Statements.

6

Homeland Energy Solutions, LLC
Notes to Unaudited Financial Statements


1.
Nature of Business and Significant Accounting Policies

The accompanying unaudited condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as permitted by such rules and regulations. These financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the Company's audited financial statements for the year ended December 31, 2011, contained in the Company's annual report on Form 10-K for 2011.

In the opinion of management, the interim condensed financial statements reflect all adjustments considered necessary for fair presentation. The adjustments made to these statements consist only of normal recurring adjustments.

Nature of Business
Homeland Energy Solutions, LLC (an Iowa Limited Liability Company) is located near Lawler, Iowa and was organized to pool investors for a 100 million gallon ethanol plant with distribution throughout the United States. The Company has capacity to produce in excess of 120 million gallons annually and sells distillers dried grains and corn oil as byproducts of ethanol production.

Accounting Estimates
Management uses estimates and assumptions in preparing these financial statements in accordance with United States Generally Accepted Accounting Principles. 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. Actual results could differ from those estimates.

Revenue Recognition
Revenue from the sale of the Company's products is recognized at the time title to the goods and all risks of ownership transfer to the customers.  This generally occurs upon shipment, loading of the goods or when the customer picks up the goods. Interest income is recognized as earned. Shipping costs incurred by the Company in the sale of ethanol and distiller grains are not specifically identifiable and as a result, revenue from the sale of ethanol and distiller grains is recorded based on the net selling price reported to the Company from the marketer.

Inventories
Inventories are generally valued at the lower of cost (first-in, first-out) or market.  In the valuation of inventories and purchase and sale commitments, market is based on current replacement values except that it does not exceed net realizable values and is not less than net realizable values reduced by allowances for approximate normal profit margin.

Long-Lived Assets
The Company reviews its property and equipment for impairment whenever events indicate that the carrying amount of the assets may not be recoverable. If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.
 
Derivative Instruments
The Company evaluates its contracts to determine whether the contracts are derivative instruments. Certain contracts that literally meet the definition of a derivative may be exempted from derivative accounting as normal purchases or normal sales. Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. Contracts that meet the requirements of normal purchases or sales are documented as normal and exempted from the accounting and reporting requirements of derivative accounting.
 
The Company enters into short-term cash, option and futures contracts as a means of securing purchases of corn, natural gas and sales of ethanol for the plant and managing exposure to changes in commodity and energy prices. All of the Company's derivatives are designated as non-hedge derivatives for accounting purposes, with changes in fair value recognized in net income. Although the contracts are economic hedges of specified risks, they are not designated as and accounted for as hedging instruments.

7

Homeland Energy Solutions, LLC
Notes to Unaudited Financial Statements

 
As part of its trading activity, the Company uses futures and option contracts through regulated commodity exchanges to manage its risk related to pricing of inventories. To reduce that risk, the Company generally takes positions using cash and futures contracts and options.
 
Realized and unrealized gains and losses related to derivative contracts related to corn and natural gas are included as a component of cost of goods sold and derivative contracts related to ethanol are included as a component of revenues in the accompanying financial statements. The fair values of contracts entered through commodity exchanges are presented on the accompanying balance sheet as derivative instruments.

Net Income per Unit
Basic and diluted net income per unit is computed by dividing net income by the weighted average number of members' units and members' unit equivalents outstanding during the period. There were no member unit equivalents outstanding during the periods presented; accordingly, the Company's basic and diluted net income per unit are the same.

Risks and Uncertainties
The Company has certain risks and uncertainties that it will experience during volatile market conditions, which can have a severe impact on operations. The Company's revenues are derived from the sale and distribution of ethanol and distiller grains to customers primarily located in the United States. Corn for the production process is supplied to the plant primarily from local agricultural producers and from purchases on the open market. For the nine months ended September 30, 2012, ethanol sales averaged approximately 77% of total revenues, while approximately 23% of revenues were generated from the sale of distiller grains and other co-products. For the nine months ended September 30, 2012, corn costs averaged approximately 82% of cost of goods sold. For the nine months ended September 30, 2011, corn costs averaged approximately 82% of cost of goods sold.

The Company's operating and financial performance is largely driven by the prices at which we sell ethanol and the net expense of corn. The price of ethanol is influenced by factors such as supply and demand, weather, government policies and programs, and unleaded gasoline and the petroleum markets, although since 2005 the prices of ethanol and gasoline began a divergence with ethanol selling, in general, for less than gasoline at the wholesale level. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol. The Company's largest cost of production is corn. The cost of corn is generally impacted by factors such as supply and demand, weather, and government policies and programs. Our risk management program is used to protect against the price volatility of these commodities.

2.    INVENTORY

Inventory consisted of the following as of September 30, 2012 and December 31, 2011.
 
 
September 30, 2012
 
December 31, 2011
Raw Materials
 
$
4,269,988

 
$
3,692,016

Work in Process
 
2,412,439

 
2,059,658

Finished Goods
 
3,916,251

 
4,749,760

Totals
 
$
10,598,678

 
$
10,501,434


3.    DEBT

Master Loan Agreement with Home Federal Savings Bank
On November 30, 2007, the Company entered into a Master Loan Agreement with Home Federal Savings Bank ("Home Federal") establishing a senior credit facility with Home Federal for the construction of a 100 million gallon per year natural gas powered dry mill ethanol plant. In return, the Company executed a mortgage in favor of Home Federal creating a senior lien on the real estate and plant and a security interest in all personal property located on Company property. The Company currently has three separate loans with Home Federal, a Term Loan, a Term Revolving Loan and a Short-Term Revolving Line of Credit (collectively referred to as the "Loans").


8

Homeland Energy Solutions, LLC
Notes to Unaudited Financial Statements

Term Loan
The initial principal amount of the Term Loan was $74,000,000. The Company is required to make equal monthly principal payments of $616,667 plus accrued interest on the Term Loan. All unpaid principal and accrued interest on the Term Loan will be due on July 1, 2014. The Company has the right to convert up to 50% of the Term Loan into a fixed rate loan with the consent of Home Federal. The fixed rate loan will bear interest at the one month London Interbank Offered Rate (LIBOR) rate that is in effect on the date of conversion plus 275 basis points, or another rate mutually agreed upon by the Company and Home Federal. If the Company elects this fixed rate option, the interest rate will not be subject to any adjustments otherwise provided for in the Master Loan Agreement. The remaining portion of the term loan will bear interest at a rate equal to the five year LIBOR swap rate plus 275 basis points, 2.981% on September 30, 2012. The balance outstanding on the Term Loan as of September 30, 2012 and December 31, 2011 was $1,233,333 and $6,783,333 respectively.

Term Revolving Loan
Under the terms of the Master Loan Agreement, the company has a $20 million Term Revolving Loan which has a maturity date of July 1, 2014. Interest on the Term Revolving Loan accrues at a rate equal to the one month LIBOR rate plus 275 basis points, 2.981% on September 30, 2012. The Company is required to make monthly payments of interest until the maturity date of the Term Revolving Loan on July 1, 2014, on which date the unpaid principal balance of the Term Revolving Loan becomes due. The balance outstanding on the Term Revolving Loan as of September 30, 2012 and December 31, 2011 was $6,000,000 and $0 respectively.

Short-Term Revolving Line of Credit
The Company has a $5 million Short-Term Revolving Line of Credit with Home Federal. This Short-Term Revolving Line of Credit has a maturity date of July 1, 2013. The Short-Term Revolving Line of Credit is subject to a restriction that limits the availability of the line of credit based on a borrowing base calculation. The Company can borrow up to the lesser of $5 million or an amount equal to 75% of the Company's eligible accounts receivable plus 75% of the Company's eligible inventory, as defined in the amended credit agreements. The Company agreed to pay interest on the Short-Term Revolving Line of Credit at the greater of 4% or 340 basis points above the one-month LIBOR. The balance outstanding on the Short-Term Revolving Line of Credit as of September 30, 2012 and December 31, 2011, was $0 and $0 respectively.

Covenants
In addition, during the term of the Loans, the Company is subject to certain financial covenants at various times calculated monthly, quarterly or annually, including restriction of the payment of dividends and capital expenditures and maintenance of certain financial ratios including the minimum working capital, tangible net worth, and a fixed charge ratio as defined by the Master Loan Agreement. Failure to comply with the protective loan covenants or maintain the required financial ratios may cause acceleration of the outstanding principal balances on the Loans and/or the imposition of fees, charges or penalties.

4.    RELATED PARTY TRANSACTIONS

Previously, the Company has purchased corn and materials from members of its Board of Directors who owned or managed elevators or were local producers of corn. Purchases during the three and nine months ended September 30, 2012 totaled $0 and $0 respectively, and during the three and nine months ended September 30, 2011 totaled approximately $9,582,000 and $16,927,000, respectively. Amounts due to these members was $0 as of September 30, 2012 and $0 as of December 31, 2011.
    
The Company has an agreement with Golden Grain Energy, LLC, a member of the Company, for management services. Pursuant to the agreement, Homeland Energy and Golden Grain have agreed to share management services in an effort to reduce the costs of administrative overhead. Homeland Energy and Golden Grain have agreed to split the compensation costs associated with each of the employees covered by the agreement. For the three and nine months ending September 30, 2012 the Company incurred net costs of approximately $22,000 and $126,500 related to this agreement. The cost for the same periods of 2011 related to this agreement were approximately $36,000 and $205,000.

5.    COMMITMENTS, CONTINGENCIES AND AGREEMENTS

Ethanol, corn oil, and distiller grains marketing agreements and major customers

Prior to May 1, 2011, the Company had entered into a marketing agreement to sell all ethanol produced at the plant to an unrelated entity at a mutually agreed on price, less commission and transportation charges. This agreement was terminated effective April

9

Homeland Energy Solutions, LLC
Notes to Unaudited Financial Statements

30, 2011.

Effective May 1, 2011, the Company entered into a marketing agreement with RPMG, a related party, to sell all ethanol produced at the plant to an entity in which the Company invests in at a mutually agreed on price, less commission and transportation charges. As of September 30, 2012, the Company had commitments to sell approximately 2,300,000 gallons at various fixed prices and 6,900,000 gallons at basis price levels indexed against exchanges for delivery through October 31, 2012.

Effective July 28, 2011, the Company entered into a marketing agreement with RPMG to sell all corn oil produced at the plant at a mutually agreed on price, less marketing fees and transportation charges. As of September 30, 2012, the Company had commitments to sell approximately 2,000,000 pounds at various fixed and basis price levels indexed against exchanges for delivery through October 31, 2012.

The Company also has an investment in RPMG, included in other assets, totaling approximately $697,000 as of September 30, 2012.

The Company has entered into a marketing agreement to sell all distiller grains produced at the plant to CHS, an unrelated party, at a mutually agreed on price, less commission and transportation charges. The agreement was renewed for another one year term on April 1, 2012. The agreement calls for automatic renewal for successive one-year terms unless 120-day prior written notice is given before the current term expires. As of September 30, 2012, the Company had approximately 25,000 tons of distiller grains commitments for delivery through November 2012 at various fixed prices.

Sales and marketing fees related to the agreements in place for the three and nine months ended September 30, 2012 and 2011 were as follows:

 
 
Three Months Ended
 
Nine Months Ended
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2012
 
September 30, 2012
 
September 30, 2011
 
September 30, 2011
Sales ethanol - unrelated parties
 
$

 
$

 
$

 
$
103,973,042

Sales ethanol - RPMG
 
64,332,698

 
209,285,509

 
91,629,476

 
154,557,022

Sales distiller grains
 
17,572,312

 
52,409,639

 
17,733,990

 
52,076,056

Sales corn oil - RPMG
 
2,591,328

 
8,590,712

 

 

 
 
 
 
 
 
 
 
 
Marketing fees ethanol - unrelated parties
 

 

 

 
558,318

Marketing fees ethanol - RPMG
 
121,849

 
396,649

 
161,089

 
274,030

Marketing fees distiller grains
 
168,524

 
568,128

 
193,923

 
701,815

Marketing fees corn oil - RPMG
 
20,387

 
65,186

 

 

 
 
 
 
 
 
 
 
 
 
 
As of September 30, 2012
 
As of September 30, 2011
 
 
 
 
Amount due from RPMG
 
$
42,250

 
$
8,272,294

 
 
 
 
Amount due from CHS
 
2,449,634

 
1,806,549

 
 
 
 


At September 30, 2012, the Company had approximately $22,000,000 in outstanding corn purchase commitments for bushels at various prices and approximately 450,000 bushels of unpriced corn through June 2013 accounted for under the normal purchase exclusion.

The Company has commitments for minimum purchases of various utilities such as natural gas and electricity over the next 7

10

Homeland Energy Solutions, LLC
Notes to Unaudited Financial Statements

years, accounted for under the normal purchase exclusion, which are anticipated to approximate the following for the twelve month periods ending September 30:

2013
 
$
3,949,000

2014
 
3,868,000

2015
 
3,787,000

2016
 
3,787,000

Thereafter
 
9,469,000

Total anticipated commitments
 
$
24,860,000


6.     SELF-INSURANCE

The Company participates in a captive reinsurance company (Captive). The Captive reinsures losses related to workman's compensation, commercial property and general liability. Premiums are accrued by a charge to income for the period to which the premium relates and is remitted by our insurer to the captive reinsurer. The Captive reinsures catastrophic losses in excess of a predetermined amount. The Company's premiums are structured such that the Company has made a prepaid collateral deposit estimated for losses related to the above coverage. The Captive insurer has estimated and collected an amount in excess of the estimated losses but less than the catastrophic loss limit insured by the Captive. The Company can not be assessed over the amount in the collateral fund.

7.    LEASE OBLIGATIONS

The Company leases rail cars and rail moving equipment with original terms up to 5 years. The Company is obligated to pay costs of insurance, taxes, repairs and maintenance pursuant to terms of the leases. Rent expense incurred for the operating leases during the three and nine months ended September 30, 2012, was approximately $379,000 and $955,000 and for the same periods in 2011 was approximately $624,000 and $2,130,000.
 
At September 30, 2012, the Company had the following approximate minimum rental commitments under non-cancelable operating leases for the twelve month periods ended September 30:
2013
 
1,372,000

2014
 
482,000

2015
 
419,000

2016
 
419,000

Thereafter
 
663,000

         Total lease commitments
 
$
3,355,000


8.    DERIVATIVE INSTRUMENTS

The Company's activities expose it to a variety of market risks, including the effects of changes in commodity prices. These financial exposures are monitored and managed by the Company as an integral part of its overall risk-management program. The Company's risk management program focuses on the unpredictability of financial and commodities markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on its operating results.

To reduce price risk caused by market fluctuations, the Company generally follows a policy of using exchange traded futures and options contracts to reduce its net position of merchandisable agricultural commodity inventories and forward cash purchase and sales contracts and uses exchange traded futures and options contracts to reduce price risk. Exchange-traded futures contracts are valued at market price. Changes in market price of exchange traded futures and options contracts related to corn and natural gas are recorded in costs of goods sold and changes in market prices of contracts related to the sale of ethanol, if applicable, are recorded in revenues.


11

Homeland Energy Solutions, LLC
Notes to Unaudited Financial Statements

The Company uses futures or options contracts to fix the purchase price of anticipated volumes of corn to be purchased and processed in a future month.    The Company's plant will grind approximately 40 million bushels of corn per year.  During the previous period and over the next 12 months, the Company has hedged and anticipates hedging between 5% and 60% of its anticipated monthly grind.  At September 30, 2012, the Company has hedged portions of its anticipated monthly purchases for corn averaging approximately 11% of its anticipated monthly grind over the next twelve months.
  
Unrealized gains and losses on non-exchange traded forward contracts are deemed "normal purchases or sales" under authoritative accounting guidance, as amended and, therefore, are not marked to market in the Company's financial statements. The fair value of the Company's open derivative positions are summarized in the following table as of September 30, 2012 and December 31, 2011.
 
Balance Sheet Classification
 
Asset Fair Value
 
Liability Fair Value
Derivatives not designated as hedging instruments:
 
 
 
 
 
Commodity Contracts - corn at 09/30/12
Derivative Instruments
 
$
673,063

 
$

Derivatives not designated as hedging instruments:
 
 
 
 
 
Commodity contracts - corn at 12/31/11
Derivative Instruments
 
$
109,600

 
$
421,013


The following table represents the amount of realized/unrealized gains (losses) and changes in fair value recognized in earnings on commodity contracts for the three and nine months ending September 30, 2012 and 2011:
 
Income Statement Classification
 
Realized Gain (Loss)
 
Unrealized Gain (Loss)
 
Total Gain (Loss)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Commodity Contracts for the three months ended 9/30/2012, corn
Cost of Goods Sold
 
$
(9,644,569
)
 
$
4,441,188

 
$
(5,203,381
)
 
 
 
 
 
 
 
 
Commodity Contracts for the nine months ended 9/30/2012, corn
Cost of Goods Sold
 
$
(6,157,090
)
 
$
(253,525
)
 
$
(6,410,615
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Commodity Contracts for the three months ended 9/30/2011, corn
Cost of Goods Sold
 
$
144,355

 
$
(102,518
)
 
$
41,837

 
 
 
 
 
 
 
 
Commodity Contracts for the nine months ended 9/30/2011, ethanol
Revenue
 
$
(4,830
)
 
$
429,588

 
$
424,758

Commodity Contracts for the nine months ended 9/30/2011, corn
Cost of Goods Sold
 
$
(7,114,014
)
 
$
7,512,177

 
$
398,163


9.    FAIR VALUE MEASUREMENTS

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market-corroborated, or generally unobservable inputs. The Company utilizes valuation

12

Homeland Energy Solutions, LLC
Notes to Unaudited Financial Statements

techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

Level 1: Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2: Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities.

Level 3: Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

A description of the valuation methodologies used for instruments measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy, is set forth below:

Derivative financial instruments: Commodity futures and exchange-traded commodity options contracts are reported at fair value utilizing Level 1 inputs. For these contracts, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the CBOT and NYMEX markets. 

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2012 and December 31, 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 
Total
 
Level 1
 
Level 2
 
Level 3
Current Asset, derivative financial instruments - corn as of 9/30/12
$
673,063

 
$
673,063

 

 

Current Asset, derivative financial instruments - corn as of 12/31/11
$
109,600

 
$
109,600

 

 

Current Liability, derivative financial instruments - ethanol as of 12/31/11
$
421,013

 
$
421,013

 

 

Total Current Liability as of 12/31/11
$
311,413

 
$
311,413

 

 


Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, for example, when there is evidence of impairment.

The Company considers the carrying amount of significant classes of financial instruments on the balance sheets including cash, accounts receivable, due from broker, restricted cash, other assets, accounts payable, accrued liabilities and variable rate long-term debt to be reasonable estimates of fair value either due to their length of maturity or the existence of variable interest rates underlying such financial instruments that approximate prevailing market rates at September 30, 2012.

All of the Company's financial instruments were valued based on Level 2 inputs except long-term debt which was estimated using Level 3 inputs based on the current anticipated interest rates available to the Company.


13


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
This report contains forward-looking statements that involve future events, our future performance and our expected future operations and actions. In some cases you can identify forward-looking statements by the use of words such as "may," "will," "should," "anticipate," "believe," "expect," "plan," "future," "intend," "could," "estimate," "predict," "hope," "potential," "continue," or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions 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 or in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011. We are not under any duty to update the forward-looking statements contained in this report. We cannot guarantee future results, 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

Homeland Energy Solutions, LLC (referred to herein as "we," "us," the "Company," or "Homeland") is an Iowa limited liability company. Homeland was formed on December 7, 2005 for the purpose of pooling investors for the development, construction and operation of a 100 million gallon per year ethanol plant located near Lawler, Iowa. We began producing ethanol and distiller grains at the plant in April 2009. We completed installation of corn oil extraction equipment and commenced selling corn oil during our fourth quarter of 2011. The ethanol plant is currently capable of operating at a rate in excess of 120 million gallons of ethanol per year year.

During our third quarter of 2012, we continued to experience unfavorable operating margins which negatively impacted our financial performance. We experienced higher corn costs and increased corn price volatility which was not completely offset by increased ethanol prices. Further, we have experienced increased ethanol imports and lower gasoline demand which have both led to relatively lower ethanol prices. Due to the drought conditions in many parts of the corn producing areas of the United States, management anticipates that corn prices will remain high and that corn supplies will have to be rationed through these higher prices into our 2013 fiscal year and potentially beyond. These higher corn prices may continue depending on weather conditions and corn production during the 2013 growing season. As a result, management's primary objective is to operate the ethanol plant in the most efficient manner possible in order to maximize the amount of ethanol that we can produce per bushel of corn.

In the past, the ethanol industry was impacted by the Volumetric Ethanol Tax Credit ("VEETC") which is frequently referred to as the blenders' credit. The blenders' credit expired on December 31, 2011 and was not renewed. The blenders' credit provided a tax credit of 45 cents per gallon of ethanol that is blended with gasoline. The VEETC may have resulted in fuel blenders using more ethanol than was required pursuant to the Renewable Fuels Standard ("RFS") which may have increased demand for ethanol. Management believes that despite the expiration of VEETC, ethanol demand will be maintained provided the ethanol use requirement of the RFS continues.

In August 2012, governors from eight states filed formal requests with the EPA to waive the requirements of the RFS. These waiver requests are subject to a public comment period which expired on October 11, 2012. Currently, the EPA is considering the waiver requests and the comments that it received. If the waiver request is approved by the EPA, it could lead to a significant decrease in demand for ethanol which could negatively impact our operations and profitability.

Many in the ethanol industry believe that it will be difficult to meet the RFS requirement in future years without an increase in the percentage of ethanol that can be blended with gasoline for use in standard (non-flex fuel) vehicles. Most ethanol that is used in the United States is sold in a blend called E10. E10 is a blend of 10% ethanol and 90% gasoline. E10 is approved for use in all standard vehicles. The United States Environmental Protection Agency (the "EPA") has approved the use of E15, gasoline which is blended at a rate of 15% ethanol and 85% gasoline, in vehicles manufactured in the model year 2001 and later. However, there were still significant federal and state regulatory hurdles that needed to be addressed. The EPA has made recent gains towards clearing those federal regulatory hurdles. In February, the EPA approved health effects and emissions testing on E15 which was required by the Clean Air Act before E15 can be sold into the market. In March, the EPA approved a model Misfueling Mitigation Plan and fuel survey which must be submitted by applicants before E15 registrations can be approved. Finally, in June 2012, the EPA issued its final approval for sales of E15. Although management believes that these developments are significant steps towards introduction of E15 in the marketplace, there are still obstacles to meaningful market penetration by E15. Many states still have regulatory issues that prevent the sale of E15. In addition, sales of E15 may be limited because it is not approved for use in all vehicles; the EPA requires a label for E15 that management believes may discourage consumers from

14


using E15, and retailers may choose not to sell E15 due to concerns regarding liability. As a result, management believes that E15 may not have an immediate impact on ethanol demand in the United States.

United States ethanol production was benefited by a 54 cent per gallon tariff imposed on ethanol imported into the United States. On December 31, 2011, this tariff expired. Due to higher ethanol prices and the elimination of the tariff imposed on ethanol imported into the United States, ethanol imports have increased during our 2012 fiscal year. These ethanol imports have increased the ethanol supply in the United States which has negatively impacted ethanol prices. Further, these ethanol imports have come at a time when ethanol demand has been lower which has magnified the negative impact of these ethanol imports.

We have a marketing agreement with Renewable Products Marketing Group, Inc. ("RPMG"), a professional third party marketer, which is the sole marketer of our ethanol. We are an equity owner of RPMG, LLC which allows us to realize favorable marketing fees in the sale of our ethanol, distiller grains and corn oil. On August 27, 2012, we executed an amended ethanol marketing agreement with RPMG. The Member Amended and Restated Ethanol Marketing Agreement (the "RPMG Agreement") was effective starting on October 1, 2012. Prior to October 1, 2012, we continued to market our ethanol through RPMG pursuant to our previous ethanol marketing agreement. The RPMG Agreement changes the manner in which certain costs and capital requirements are allocated between the owners of RPMG. Further, the RPMG Agreement provides that we can sell our ethanol either through an index arrangement or at a fixed price agreed to between us and RPMG. The term of the RPMG Agreement is perpetual, until it is terminated according to the RPMG Agreement. The primary reasons the RPMG Agreement would terminate are if we cease to be an owner of RPMG, if there is a breach of the RPMG Agreement which is not cured, or if we give advance notice to RPMG that we wish to terminate the RPMG Agreement. Notwithstanding our right to terminate the RPMG Agreement, we may be obligated to continue to market our ethanol through RPMG for a period of time after the termination. Further, following the termination we would accept an assignment of certain railcar leases which RPMG has secured to service our ethanol sales. If the RPMG Agreement is terminated, it would trigger a redemption by RPMG of our ownership interest in RPMG.

On May 14, 2012, we executed amended credit agreements with our primary lender, Home Federal Savings Bank ("Home Federal"). These amended credit agreements were effective as of May 1, 2012. Specifically, we executed an Amended and Restated Third Supplement to Master Loan Agreement and Amended and Restated Revolving Line of Credit Note. The purpose of these amended credit agreements was to reinstate our short-term revolving line of credit which we allowed to expire in June 2010. Following the effective date of these amended credit agreements, we have a $5 million short-term revolving line of credit which has a maturity date of July 1, 2013. Our ability to draw funds on the short-term revolving line of credit is limited by a borrowing base calculation. We agreed to pay interest on this short-term revolving line of credit at the greater of 4% or 340 basis points above the one month London Interbank Offered Rate ("LIBOR").

In June 2012, following eighteen months of investigation, the Chinese dropped their anti-dumping complaint with respect to distiller grains produced in the United States. While the United States ethanol industry did not expect the Chinese to adopt a significant tariff on distillers grains due to China's rising demand for animal feed, the uncertainty that resulted from the anti-dumping investigation may have reduced distillers grains exports to China. Management anticipates that due to the termination of the anti-dumping investigation, distillers grains exports to China will increase, especially due to recent increases in corn prices. Rising distiller grains demand from China may lead to higher market prices for distiller grains in the United States.


15


Results of Operations

Comparison of Fiscal Quarters Ended September 30, 2012 and 2011
    
 
 
2012
 
2011
Income Statement Data
 
Amount
 
%
 
Amount
 
%
Revenue
 
$
84,499,206

 
100.0

 
$
109,993,347

 
100.0

 
 
 
 
 
 
 
 
 
Cost of Goods Sold
 
86,269,126

 
102.1

 
99,853,635

 
90.8

 
 
 
 
 
 
 
 
 
Gross Profit (Loss)
 
(1,769,920
)
 
(2.1
)
 
10,139,712

 
9.2

 
 
 
 
 
 
 
 
 
Operating Expenses
 
646,389

 
0.8

 
722,292

 
0.7

 
 
 
 
 
 
 
 
 
Operating Income (Loss)
 
(2,416,309
)
 
(2.9
)
 
9,417,420

 
8.6

 
 
 
 
 
 
 
 
 
Other (Expense)
 
(50,984
)
 
(0.1
)
 
(284,350
)
 
(0.3
)
 
 
 
 
 
 
 
 
 
Net Income (Loss)
 
$
(2,467,293
)
 
(2.9
)
 
$
9,133,070

 
8.3


Revenue

Our total revenue for our third quarter of 2012 was approximately 23% less than our total revenue for our third quarter of 2011. Management attributes this decrease in revenue with lower ethanol prices and lower ethanol production during the 2012 period. Management believes that ethanol prices were lower during our third quarter of 2012 due to excess ethanol supply in the market. Management attributes this excess ethanol supply to lower gasoline demand during the summer driving season due to higher gasoline prices along with continued high ethanol stocks which have persisted since the beginning of 2012. Management believes that a significant amount of excess ethanol was produced during the fourth quarter of 2011 which allowed fuel blenders to take advantage of the expiring VEETC blenders' credit. This additional production led to higher ethanol stocks, which together with lower gasoline demand in 2012, have negatively impacted ethanol prices throughout our 2012 fiscal year. Due to unfavorable margins in the ethanol industry, this surplus of ethanol is just starting to decrease. Further, gasoline prices have recently decreased significantly which management believes will positively impact demand for ethanol.

For our third quarter of 2012, our total ethanol revenue decreased by approximately 30% compared to our third quarter of 2011 due to lower ethanol prices and decreased ethanol production. The average price we received for our ethanol during our third quarter of 2012 was approximately 16% less than during our third quarter of 2011. In addition, we sold approximately 18% less gallons of ethanol during our third quarter of 2012 compared to the same period of 2011. Due to the poor weather conditions during the 2012 growing season, securing corn at prices that would allow us to operate profitably has been difficult. As a result, we reduced production at our ethanol plant and focused on operating as efficiently as possible in order to maximize the amount of ethanol that we could produce per bushel of corn. In addition, we had a longer scheduled maintenance shutdown during our third quarter of 2012 compared to the same period of 2011, which further reduced our ethanol production. Management anticipates that ethanol prices will remain at their current levels into the foreseeable future. Management anticipates that the ethanol industry will experience unfavorable operating margins during the rest of our 2012 fiscal year and likely into our 2013 fiscal year. As a result, management anticipates continuing to operate the ethanol plant in the most efficient manner possible which will likely lead to less total ethanol production compared to previous years for our last quarter of 2012 and into our 2013 fiscal year.
    
Our total distiller grains revenue was comparable during our third quarter of 2012 and the same period of 2011. We sold less tons of distiller grains during the 2012 period due to the fact that we were separating the corn oil from our distiller grains during the 2012 period which results in decreased tons of distiller grains produced and because we had less ethanol production during the 2012 period. We sold approximately 27% less tons of distiller grains during our third quarter of 2012 compared to the same period of 2011, however, the average price we received per ton of dried distiller grains sold increased by approximately 37% during our third quarter of 2012 compared to the same period of 2011 and the average price we received per ton of modified/wet distiller grains sold increased by approximately 50% during our third quarter of 2012 compared to the same period of 2011. Management attributes these higher distiller grains prices to higher corn prices. Since distiller grains are typically used as an animal feed substitute for corn, when corn prices increase, the market price of distiller grains typically increase. Management anticipates continued strong distiller grains demand due to higher market corn prices and tight corn supplies which management believes could continue into the foreseeable future.


16


We had revenue from corn oil sales during our third quarter of 2012 but had not yet started producing corn oil during the comparable period of 2011. Management believes that the revenue we received from corn oil sales more than offset the decreased revenue we experienced due to selling less tons of distiller grains. Management anticipates that corn oil demand will decrease during the winter months due to decreased biodiesel production. One of the primary uses for our corn oil is as feedstock for biodiesel production. However, biodiesel production has slowed dramatically recently due to the fact that the 2012 RFS for biodiesel was reached in late September or early October 2012. This decreased corn oil demand may lead to lower corn oil prices during our fourth quarter of 2012.

Cost of Goods Sold

Our two primary costs of producing ethanol, distiller grains and corn oil are corn costs and natural gas costs. Our total cost of goods sold was approximately 14% less during our third quarter of 2012 compared to the same period of 2011. The average price we paid per bushel of corn, without taking into account derivative instruments, was approximately the same during our third quarter of 2012 compared to our third quarter of 2011. However, we had a significant realized loss on our derivative instruments during our third quarter of 2012 compared to a gain through the same period of 2011. Management attributes this increase in realized loss on our derivative instruments to the significant volatility in the corn market that we experienced during our third quarter of 2012. Further, we experienced a significant price jump for corn in the last couple of days of our third quarter of 2012 which had a significant negative impact on our corn derivative instruments and our net income for the quarter. Management believes that due to tight corn supplies and unfavorable weather during the 2012 growing season, the corn market was extremely volatile as it tried to ration the corn supply until the 2012 harvest. Further, due to the poor condition of the 2012 corn crop in certain parts of the country, some producers held on to corn that was harvested in the fall of 2011 in order to meet delivery obligations related to the 2012 harvest. Management anticipates battling higher corn prices and tight corn supplies for the rest of our 2012 fiscal year and likely through our 2013 fiscal year. Following the end of our third quarter of 2012, corn prices have continued to be volatile. Without a significant increase in corn supplies or a significant decrease in corn demand, management anticipates continued high corn prices and a volatile corn market into the foreseeable future.

We purchased approximately 18% less bushels of corn during our third quarter of 2012 compared to our third quarter of 2011. Management attributes this decrease in corn consumption with decreased production during the 2012 period along with the fact that we are operating the ethanol plant in a manner than maximizes the amount of ethanol that we can produce from each bushel of corn used.

Despite the recent increases in commodity prices, natural gas prices have fallen. During our third quarter of 2012, the average price we paid per MMBtu of natural gas was approximately 30% lower compared to our third quarter of 2011. Management attributes this decrease in natural gas prices to large natural gas supplies and continued increases in natural gas production. Management anticipates that natural gas prices will remain relatively stable during the rest of our 2012 fiscal year due to fundamental supply and demand conditions in the natural gas market. We expect higher natural gas prices during winter months due to annual increases in natural gas transportation costs. In addition to the decrease in natural gas prices was a decrease in our total natural gas consumption of approximately 22% during our third quarter of 2012 compared to the same period of 2011. This decrease in natural gas consumption was due to greater plant efficiencies and less tons of distiller grains produced.

In an attempt to minimize the effects of the volatility of corn costs on operating profits, we opened commodities trading accounts. In addition, we have a commodities manager who manages our corn procurement activities. Our risk management activities are intended to fix the purchase price of the corn we require to produce ethanol, distiller grains and corn oil. During our third quarter of 2012, we had a realized loss of approximately $9,645,000 and an unrealized gain of approximately $4,441,000 related to our corn derivative instruments. During our third quarter of 2011, we had a realized gain of approximately $144,000 and an unrealized loss of approximately $103,000 related to our corn derivative instruments. We recognize the gains or losses that result from changes in the value of our corn derivative instruments in cost of goods sold as the changes occur. Our plant is expected to use approximately 40 million bushels of corn per year. As of September 30, 2012, we had risk management positions in place for approximately 11% of our corn needs for the next 12 months.

Operating Expenses

Our operating expenses were lower during our third quarter of 2012 compared to our third quarter of 2011 due to a decrease in computer and software expenses, the upkeep of our building and grounds, office expenses, and the amount of our bonus accrual for management.

Other Income (Expense)

Our other expense was significantly lower during our third quarter of 2012 compared to the same period of 2011 due to

17


having less interest expense during the 2012 period because of our reduced debt load. We also had other revenue of approximately $40,000 due to a patronage dividend we received from CHS during the 2012 period. We had less interest income during our third quarter of 2012 compared to the same period of 2011 due to having less cash on hand during 2012.

Comparison of Nine Months Ended September 30, 2012 and 2011
    
 
 
2012
 
2011
Income Statement Data
 
Amount
 
%
 
Amount
 
%
Revenue
 
$
270,291,094

 
100.0

 
$
311,039,904

 
100.0

 
 
 
 
 
 
 
 
 
Cost of Goods Sold
 
267,797,786

 
99.1

 
284,776,346

 
91.6

 
 
 
 
 
 
 
 
 
Gross Profit
 
2,493,308

 
0.9

 
26,263,558

 
8.4

 
 
 
 
 
 
 
 
 
Operating Expenses
 
2,074,842

 
0.8

 
2,072,988

 
0.7

 
 
 
 
 
 
 
 
 
Operating Income
 
418,466

 
0.2

 
24,190,570

 
7.8

 
 
 
 
 
 
 
 
 
Other Income (Expense)
 
(18,605
)
 

 
(563,129
)
 
(0.2
)
 
 
 
 
 
 
 
 
 
Net Income
 
$
399,861

 
0.1

 
$
23,627,441

 
7.6


Revenue

Our total revenue for our first nine months of 2012 was approximately 13% less than our total revenue for our first nine months of 2011. For our first nine months of 2012, our total ethanol revenue decreased by approximately 19% compared to our first nine months of 2011. The average price we received for our ethanol during our first nine months of 2012 was approximately 15% less than during our first nine months of 2011. In addition to lower ethanol prices, we had decreased ethanol production which led to a decrease in the number of gallons of ethanol we sold by approximately 4% during our first nine months of 2012 compared to the same period of 2011.

For our first nine months of 2012, our total distiller grains revenue increased by approximately 1% compared to our first nine months of 2011, primarily due to higher distiller grains prices. The average price we received for our dried distiller grains was approximately 14% greater for our first nine months of 2012 compared to the same period of 2011. The average price we received for our modified/wet distiller grains was approximately 29% greater for our first nine months of 2012 compared to the same period of 2011. Due to the fact that we started extracting corn oil from our distillers grains during the 2012 period and we had decreased ethanol production, we sold approximately 11% less tons of distiller grains during our first nine months of 2012 compared to our first nine months of 2011.

Cost of Goods Sold

Our total cost of goods sold decreased by approximately 6% for our first nine months of 2012 compared to our first nine months of 2011. Management attributes this decrease in our total cost of goods sold to slightly lower corn prices during the 2012 period, mainly from our first two fiscal quarters of 2012, along with a decrease in our corn consumption during the 2012 period compared to the 2011 period. The average price we paid per bushel of corn, not including derivative instrument costs, was approximately 2% less during our first nine months of 2012 compared to our first nine months of 2011. We consumed approximately 4% less bushels of corn during our first nine months of 2012 compared to our first nine months of 2011. This decreased consumption was due to our increased operating efficiency and decreased production.

During our first nine months of 2012, the average price we paid per MMBtu of natural gas was approximately 32% lower compared to our first nine months of 2011. Our natural gas consumption was approximately 8% less during our first nine months of 2012 compared to the same period of 2011.

During our first nine months of 2012, we had a realized loss of approximately $6,157,000 and an unrealized loss of approximately $254,000 related to our corn derivative instruments. During our first nine months of 2011, we had a realized loss of approximately $7,119,000 and an unrealized gain of approximately $7,942,000 related to our corn and ethanol derivative instruments. We recognize the gains or losses that result from changes in our ethanol derivative instruments in revenue.


18


Operating Expenses

Our operating expenses were comparable during our first nine months of 2012 and our first nine months of 2011.

Other Income (Expense)

Our other expense was significantly lower during our first nine months of 2012 compared to the same period of 2011 due to having less interest expense during the 2012 period because of our reduced debt load. Our other income was less during our first nine months of 2012 compared to the same period of 2011 due to a lower CHS patronage dividend during the 2012 period.

Changes in Financial Condition for the Nine Months Ended September 30, 2012.

Balance Sheet Data
 
September 30, 2012
 
December 31, 2011
Total current assets
 
$
17,665,670

 
$
23,319,876

Total property and equipment
 
123,315,020

 
131,218,450

Total other assets
 
3,816,724

 
2,971,781

Total Assets
 
$
144,797,414

 
$
157,510,107

 
 
 
 
 
Total current liabilities
 
$
9,487,823

 
$
16,571,192

Total long-term liabilities
 
6,246,488

 
246,488

Total members' equity
 
129,063,103

 
140,692,427

Total Liabilities and Members' Equity
 
$
144,797,414

 
$
157,510,107


We had less cash on hand at September 30, 2012 compared to December 31, 2011. Our accounts receivable was lower at September 30, 2012 compared to December 31, 2011 due to a reduction in our ethanol netback and the timing of unit train shipments and payments. We had no cash due from our commodities broker at September 30, 2012 compared to December 31, 2011 due to a reduction in the cash value of our corn hedging accounts. We had less prepaid and other assets at September 30, 2012 compared to December 31, 2011 primarily because our natural gas supplier refunded a $400,000 deposit it was holding for us.

Our net property and equipment was lower at September 30, 2012 compared to December 31, 2011 due to depreciation. We had approximately $176,000 in construction in progress at September 30, 2012 related to several small plant upgrade and maintenance projects.

Our other assets were higher at September 30, 2012 compared to December 31, 2011 due to the investment we made in RPMG, our ethanol and corn oil marketer. We continue to amortize our loan fees related to our Home Federal loan as well as certain utility rights associated with our construction of the ethanol plant which reduced the value of our other assets.

Our accounts payable was lower at September 30, 2012 compared to December 31, 2011 primarily due to deferred corn payments that we had outstanding at the end of our 2011 fiscal year which were paid in early January 2012. Our corn related accounts payable typically increases at the end of the year since our corn suppliers frequently seek to defer corn payments until their next tax year. We had a current liability at September 30, 2012 related to cash that we had due to our commodities broker due to cash that we were required to pay into our margin account to offset certain derivative instrument positions we had outstanding. Our current maturities of long-term debt was lower at September 30, 2012 compared to December 31, 2011 because we only had approximately two months of principal payments included in the current portion of our long-term debt at September 30, 2012 compared to approximately eleven months of principal payments at December 31, 2011. We made our final principal payment on our long-term debt on November 1, 2012.

We had significantly higher long-term liabilities at September 30, 2012 compared to December 31, 2011 due to funds we had outstanding on our term revolving line of credit at September 30, 2012.

Liquidity and Capital Resources

Our primary sources of liquidity are cash from our operations, our $20 million long-term revolving loan and our $5 million short-term revolving line of credit. Our credit facilities are described in greater detail below under "Short-Term and Long-

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Term Debt Sources." As of September 30, 2012, we had $19 million available pursuant to our revolving loans and approximately $2.2 million in cash. Based on financial forecasts performed by our management, we anticipate that we will have sufficient cash from our revolving loans and cash from our operations to continue to operate the ethanol plant at capacity for the next 12 months and beyond. We do not anticipate seeking additional equity or debt financing in the next 12 months. However, should we experience unfavorable operating conditions in the future, we may have to secure additional debt or equity financing for working capital or other purposes.

The following table shows cash flows for the nine months ended September 30, 2012 and 2011:
 
 
2012
 
2011
Net cash provided by operating activities
 
$
11,032,403

 
$
36,700,318

Net cash (used in) investing activities
 
(1,496,774
)
 
(3,924,364
)
Net cash (used in) financing activities
 
(12,451,863
)
 
(17,435,148
)
Cash at beginning of period
 
5,153,553

 

Cash at end of period
 
2,237,319

 
15,340,806


Cash Flow From Operations

Our operations generated less cash during our first nine months of 2012 compared to the same period of 2011 primarily due to having less net income during the 2012 period along with changes in our accounts payable which used cash during the 2012 period.

Cash Flow From Investing Activities

We used less cash for equipment and construction purchases during our first nine months of 2012 compared to the first nine months of 2011. We used cash in 2011 primarily to install our corn oil extraction equipment. Our capital expenditures during the 2012 period were mainly related to the final payment we made on our corn oil system and installation of second generation relief valves on our fermentation tanks. We also used cash for investments during the 2011 period related to our capital contribution to RPMG. We paid this capital contribution through a small portion of our marketing revenue which was paid to RPMG over time.

Cash Flow From Financing Activities

We used less cash for financing activities during our first nine months of 2012 compared to the same period of 2011. We paid a larger distribution during the 2012 period offset by proceeds we received from our long-term debt. We also made fewer payments on our long-term debt during the 2012 period compared to the same period of 2011. We paid a distribution of more than $12 million during our first nine months of 2012 compared to a distribution of approximately $6.2 million during the comparable period of 2011. We received $6,000,000 in net proceeds from our long-term revolving line of credit which provided us with additional cash. We made $5,550,000 in payments on our long-term debt during the first nine months of 2012 compared to more than $10 million during the same period of 2011.

Short-Term and Long-Term Debt Sources

Master Loan Agreement with Home Federal Savings Bank

On November 30, 2007, we entered into a Master Loan Agreement with Home Federal Savings Bank ("Home Federal") establishing a senior credit facility with Home Federal. In return, we executed a mortgage and a security agreement in favor of Home Federal creating a senior lien on substantially all of our assets. We have three loans with Home Federal, (i) a term loan; (ii) a $20 million term revolving loan; and (iii) a $5 million short-term line of credit.

On May 14, 2012, we executed amended credit agreements with our primary lender, Home Federal Savings Bank ("Home Federal"). These amended credit agreements were effective as of May 1, 2012. Specifically, we executed an Amended and Restated Third Supplement to Master Loan Agreement and Amended and Restated Revolving Line of Credit Note. Following the effective date of these amended credit agreements, we have a $5 million short-term revolving line of credit which has a maturity date of July 1, 2013.


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Term Loan

Our term loan was used for the construction and start-up of our ethanol plant. We make equal monthly principal payments in the amount of $616,667 plus accrued interest pursuant to the term loan. All unpaid principal and accrued interest on the term loan was scheduled to be due on July 1, 2014, however, we repaid the balance of this loan early. We have the right to convert up to 50% of the term loan into a fixed rate loan with the consent of Home Federal. The fixed rate loan will bear interest at the one-month London Interbank Offered Rate (LIBOR) that is in effect on the date of conversion plus 275 basis points, or another rate mutually agreed upon by Homeland Energy and Home Federal. If we elect this fixed rate option, the interest rate will not be subject to any adjustments otherwise provided for in the Master Loan Agreement. The remaining portion will bear interest at a rate equal to the one month LIBOR swap rate plus 275 basis points. As of September 30, 2012, we had approximately $1,233,000 outstanding on our term loan which accrued interest at a rate of 2.981% per year. We made our final payment on our term loan on November 1, 2012.

Long-Term Revolving Loan

We have a $20 million term revolving loan which has a maturity date of July 1, 2014. Interest on the term revolving loan accrues at a rate equal to the one month LIBOR plus 275 basis points. We are required to make monthly payments of interest until the maturity date of the term revolving loan on July 1, 2014, on which date the unpaid principal balance of the term revolving loan becomes due. As of September 30, 2012, we had $6,000,000 outstanding on our term revolving loan and $19 million available to be drawn. Interest accrued on our term revolving loan as of September 30, 2012 at a rate of 2.981% per year.

Short-Term Revolving Line of Credit

We have a $5 million short-term revolving line of credit with Home Federal. This short-term line of credit has a maturity date of July 1, 2013. Our ability to draw funds on the short-term revolving line of credit is limited by a borrowing base calculation. We can borrow up to the lesser of $5 million or an amount equal to 75% of our eligible accounts receivable plus 75% of our eligible inventory, as defined in our amended credit agreements. We agreed to pay interest on this short-term revolving line of credit at the greater of 4% or 340 basis points above the one month LIBOR. As of September 30, 2012, we had $0 outstanding on our short-term line of credit and $5 million available to be drawn. If we had an amount outstanding on our short-term line of credit, it would have accrued interest at the minimum interest rate of 4% per year.

If we fail to make a payment of principal or interest on any loan within 10 days of the due date, there will be a late charge equal to 5% of the amount of the payment.

Covenants

In connection with the Master Loan Agreement, we are required to comply with certain debt covenants and financial ratios. As of September 30, 2012, we were in compliance with all of our debt covenants and financial ratios. Our primary financial covenant is our tangible net worth requirement. Tangible net worth is calculated as the excess of our total assets, including the debt reserve account, (with certain exclusions, such as intangible assets) over total liabilities (except subordinated debt if applicable). Our tangible net worth requirement as of December 31, 2011 was $100 million. Our tangible net worth requirement increases by $5 million annually until 2012 when we are required to have tangible net worth of $105 million. We are required to maintain this $105 tangible net worth until the maturity date of our loans. As of September 30, 2012, we had tangible net worth of approximately $129 million.

In addition to the tangible net worth covenant discussed above, we are subject to certain financial covenants at various times calculated monthly, quarterly or annually. We were required to have working capital of at least $12 million by May 1, 2010 and annually thereafter. As of September 30, 2012, we had working capital of approximately $28 million. Management anticipates that we will be in compliance with all of our debt covenants and financial ratios for at least the next 12 months.

Failure to comply with the loan covenants or to maintain the required financial ratios may cause acceleration of the outstanding principal balances on the loans and/or the imposition of fees, charges or penalties. Any acceleration of the debt financing or imposition of the fees, charges or penalties may restrict or limit our access to the capital resources necessary to continue plant operations.

Should we default on any of our obligations pursuant to the Home Federal loans, Home Federal may terminate its commitment to provide us funds and declare the entire unpaid principal balance of the loans, plus accrued interest, immediately due and payable. Events of default include the failure to make payments when due, our insolvency, any material adverse change in our financial condition or the breach of any of the covenants, representations or warranties we have made in the loan agreements.

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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.  Of the significant accounting policies described in the notes to our financial statements, we believe that the following are the most critical:

Derivative Instruments

The Company enters into derivative instruments to hedge our exposure to price risk related to forecasted corn and forward corn purchase contracts through our commodities accounts with ADM Investor Services, Inc. ("ADMIS"). We may also occasionally enter into derivative contracts to hedge our exposure to price risk as it relates to ethanol sales.  We do not plan to enter into derivative instruments other than for hedging purposes.  Changes in the fair value of our derivatives are recorded in current period earnings.  Although certain derivative instruments are not designated as, and accounted for, as a cash flow hedge, we believe our derivative instruments will be effective economic hedges of specified risks.

Revenue recognition

Revenue from the sale of the Company's products is recognized at the time title to the goods and all risks of ownership transfer to the customers. This generally occurs upon shipment, loading of the goods or when the customer picks up the goods. Interest income is recognized as earned. Shipping costs incurred by the Company in the sale of ethanol and distiller grains are not specifically identifiable and as a result, revenue from the sale of ethanol and distiller grains is recorded based on the net selling price reported to the Company from the marketer.

Long-Lived Assets

The Company reviews its property and equipment for impairment whenever events indicate that the carrying amount of the assets may not be recoverable. If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. The Company has concluded no impairment existed at September 30, 2012 and December 31, 2011.

Inventory Valuation

Inventories are generally valued at the lower of cost (first-in, first-out) or market. In the valuation of inventories and purchase and sale commitments, market is based on current replacement values except that it does not exceed net realizable values and is not less than net realizable values reduced by allowances for approximate normal profit margin.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to the impact of market fluctuations associated with commodity prices and interest rates 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.

Interest Rate Risk

We are exposed to market risk from changes in interest rates. Exposure to interest rate risk results primarily from holding a revolving line of credit and term loan which bear variable interest rates. As of September 30, 2012, we had approximately $7,233,000 outstanding on our variable interest rate loans and interest accrued at a rate of 2.981%. Our variable interest rates are calculated by adding 275 basis points to the one month LIBOR. If we were to experience a 10% adverse change in LIBOR, the annual effect such change would have on our income statement, based on the amount we had outstanding on our variable interest

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rate loans as of September 30, 2012, would be approximately $17,000.

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 distiller 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 of September 30, 2012, we had price protection in place for approximately 11% of our anticipated corn needs for the next 12 months. 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 average cost of our corn and natural gas prices and average ethanol price as of September 30, 2012, net of the forward and future 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 these commodities for a one year period from September 30, 2012. 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
 
Approximate Adverse Change to income
Natural Gas
 
3,200,000

 
MMBTU
 
10%
 
$
(992,000
)
Ethanol
 
120,000,000

 
Gallons
 
10%
 
(25,680,000
)
Corn
 
40,000,000

 
Bushels
 
10%
 
(31,600,000
)

ITEM 4. CONTROLS AND PROCEDURES.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit pursuant to the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosures.

Our management, including our President and Chief Executive Officer (the principal executive officer),Walter Wendland, along with our Chief Financial Officer, (the principal financial officer), David Finke, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2012. Based on this review and evaluation, these officers believe that our disclosure controls and procedures are effective in ensuring that material information related to us is recorded, processed, summarized and reported within the time periods required by the forms and rules of the Securities and Exchange Commission.

For the fiscal quarter ended September 30, 2012, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

ITEM 1. LEGAL PROCEEDINGS.

From time to time in the ordinary course of business, Homeland Energy Solutions, LLC may be named as a defendant in legal proceedings related to various issues, including workers' compensation claims, tort claims, or contractual disputes. We are not currently involved in any material legal proceedings.

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

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Management's Discussion and Analysis section for the fiscal year ended December 31, 2011, included in our annual report on Form 10-K.

Recent increases in corn prices have led to tight operating margins which may make ethanol production unprofitable. Due to unfavorable weather conditions, corn prices have recently increased significantly. These unfavorable weather conditions have led to a smaller than expected corn harvest in the fall of 2012. This, along with smaller corn carryover in the last two crop years and higher export demand for corn has led to higher corn prices and increased price volatility. The price of ethanol has not kept pace with rising corn prices which has resulted in tighter operating margins in the ethanol industry. These tighter operating margins have caused some ethanol producers to reduce production or cease operating altogether. We are also facing tighter operating margins which have reduced our net income. While management believes that it is still favorable for us to operate the ethanol plant, if conditions in the ethanol industry deteriorate, we may be forced to reduce production or cease operating altogether. This could negatively impact the value of our units.

We may be forced to reduce production or cease production altogether if we are unable to secure the corn we require to operate the ethanol plant. Due to tighter corn supplies, many ethanol producers are experiencing difficulty securing the corn they require to operate. This may result in some ethanol producers reducing or terminating production, even if operating margins are favorable due to the lack of corn availability. Due to our proximity to the Mississippi river, many corn producers in our area are selling corn into the export market and shipping the corn by barge down the Mississippi river. This has increased the price we have to pay for corn and may reduce the number of bushels that we can purchase. If we are unable to secure the corn we require to continue to operate the ethanol plant, we may have to reduce production or cease operating altogether which may negatively impact the value of our units.     

If the ethanol use requirement of the Federal Renewable Fuels Standard ("RFS") is reduced or eliminated, it may negatively impact our profitability. The RFS requires that an increasing amount of renewable fuels must be used each year in the United States. Corn based ethanol, such as the ethanol we produce, can be used to meet a portion of the RFS requirement. In August 2012, governors from eight states petitioned the EPA for a waiver of the RFS requirement. The EPA is currently considering this waiver request. If the EPA decides to waive the RFS requirement, it may lead to a significant decrease in ethanol demand which could negatively impact our profitability and the value of our units.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION.

None.


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ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

(a)    The following exhibits are filed as part of this report.

Exhibit No.
Exhibit
10.1
Member Amended and Restated Marketing Agreement between RPMG, Inc. and Homeland Energy Solutions, LLC dated August 27, 2012. *+
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*
101
The following financial information from Homeland Energy Solutions, LLC's Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Balance Sheets as of September 30, 2012 and December 31, 2011, (ii) Statements of Operations for the three and nine months ended September 30, 2012 and 2011, (iii) Statements of Cash Flows for the nine months ended September 30, 2012 and 2011, and (iv) the Notes to Unaudited Financial Statements.**
________________________________
(*) Filed herewith.
(**) Furnished herewith.
(+) Confidential Treatment Requested.


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

 
HOMELAND ENERGY SOLUTIONS, LLC
 
 
Date:
November 9, 2012
 
  /s/ Walter Wendland
 
Walter Wendland
 
President and Chief Executive Officer
(Principal Executive Officer)
 
 
Date:
November 9, 2012
 
/s/ David A. Finke
 
David A. Finke
 
Treasurer/Chief Financial Officer
(Principal Financial Officer)

    

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