HOMELAND ENERGY SOLUTIONS LLC - FORM 10-Q - May 15, 2013

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EXCEL - IDEA: XBRL DOCUMENT - HOMELAND ENERGY SOLUTIONS LLCFinancial_Report.xls
EX-3.1 - EXHIBIT - HOMELAND ENERGY SOLUTIONS LLCa31-amendedandrestatedoper.htm
EX-32.2 - CERTIFICATION - HOMELAND ENERGY SOLUTIONS LLCexhibit322-certification33.htm
EX-10.1 - EXHIBIT - HOMELAND ENERGY SOLUTIONS LLCa101changeincontrolagmt-fi.htm
EX-31.2 - CERTIFICATION - HOMELAND ENERGY SOLUTIONS LLCexhibit312-certification33.htm
EX-31.1 - CERTIFICATION - HOMELAND ENERGY SOLUTIONS LLCexhibit311-certification33.htm
EX-10.3 - EXHIBIT - HOMELAND ENERGY SOLUTIONS LLCa103-changeincontrolagmtxh.htm
EX-32.1 - CERTIFICATION - HOMELAND ENERGY SOLUTIONS LLCexhibit321-certification33.htm
EX-10.2 - EXHIBIT - HOMELAND ENERGY SOLUTIONS LLCa102-changeincontrolagmtxw.htm

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 March 31, 2013
 
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 May 15, 2013, we had 90,445 membership units outstanding.







2


PART I.        FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
Homeland Energy Solutions, LLC
Balance Sheets
 
March 31, 2013
 
December 31, 2012
 ASSETS
(Unaudited)
 
(Audited)
 
 
 
 
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
287,018

 
$
2,081,779

Accounts receivable
3,766,014

 
2,385,638

Inventory
13,088,744

 
9,655,732

Prepaid and other
1,678,191

 
1,937,966

Derivative instruments
3,375,909

 
1,341,281

Total current assets
22,195,876

 
17,402,396

 
 
 
 
PROPERTY AND EQUIPMENT
 
 
 
Land and improvements
22,474,880

 
22,474,880

Buildings
5,366,168

 
5,366,168

Equipment
136,867,806

 
136,867,806

Construction in progress
145,969

 
139,736

 
164,854,823

 
164,848,590

Less accumulated depreciation
46,371,371

 
43,698,125

Total property and equipment
118,483,452

 
121,150,465

 
 
 
 
OTHER ASSETS
 
 
 
Loan fees, net of amortization of $1,109,143 and $1,097,175
63,829

 
75,797

Utility rights, net of amortization of $807,762 and $773,665
1,500,267

 
1,534,364

Other assets
1,924,019

 
1,684,146

Total other assets
3,488,115

 
3,294,307

 
 
 
 
TOTAL ASSETS
$
144,167,443

 
$
141,847,168


See Notes to Unaudited Financial Statements.

3

Homeland Energy Solutions, LLC
Balance Sheets (continued)
 
March 31, 2013
 
December 31, 2012
LIABILITIES AND MEMBERS' EQUITY
(Unaudited)
 
(Audited)
 
 
 
 
CURRENT LIABILITIES
 
 
 
Accounts payable
$
4,213,425

 
$
10,547,541

Interest payable
12,144

 
2,512

Property tax payable
355,164

 
441,114

Accrued payroll
132,375

 
213,591

Total current liabilities
4,713,108

 
11,204,758

 
 
 
 
COMMITMENTS AND CONTINGENCIES

 

 
 
 
 
LONG-TERM LIABILITIES
 
 
 
Revolving line of credit
7,500,000

 
1,000,000

Other liabilities
102,421

 
268,793

Total long-term liabilities
7,602,421

 
1,268,793

 
 
 
 
MEMBERS' EQUITY, March 31, 2013 and December 31, 2012 90,445 units issued and outstanding
131,851,914

 
129,373,617

 
 
 
 
TOTAL LIABILITIES AND MEMBERS' EQUITY
$
144,167,443

 
$
141,847,168

 
 
 
 

See Notes to Unaudited Financial Statements.


4

Homeland Energy Solutions, LLC
Statements of Operations
(Unaudited)
 
Three Months Ended
 
Three Months Ended
 
March 31, 2013
 
March 31, 2012
 
 
 
 
Revenue
$
97,975,795

 
$
92,011,614

 
 
 
 
Costs of goods sold
94,817,826

 
89,644,605

 
 
 
 
Gross profit
3,157,969

 
2,367,009

 
 
 
 
Selling, general and administrative expenses
717,414

 
772,408

 
 
 
 
Operating income
2,440,555

 
1,594,601

 
 
 
 
Other income (expense)
 
 
 
Interest (expense)
(40,540
)
 
(45,867
)
Interest income
9

 
79

Other income
78,273

 
96,846

Total other income
37,742

 
51,058

 
 
 
 
Net income
$
2,478,297

 
$
1,645,659

 
 
 
 
Basic & diluted net income per capital unit
$
27.40

 
$
18.20

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

 
90,445

 
 
 
 


See Notes to Unaudited Financial Statements.


5

Homeland Energy Solutions, LLC
Statements of Cash Flows
(Unaudited)
 
Three Months Ended
 
Three Months Ended
 
March 31, 2013
 
March 31, 2012
 
 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
2,478,297

 
$
1,645,659

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
2,719,311

 
3,147,659

Unrealized (gain) loss on risk management activities
(2,034,628
)
 
1,666,991

Change in working capital components:
 
 
 
Accounts receivable
(1,380,376
)
 
(445,639
)
Inventory
(3,433,012
)
 
(467,495
)
Prepaid expenses and other
259,775

 
117,370

Accounts payable and other accrued expenses
(6,658,022
)
 
(2,983,759
)
Net cash provided by (used in) operating activities
(8,048,655
)
 
2,680,786

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Payments for equipment and construction in progress
(6,233
)
 
(334,814
)
Increase in other assets
(239,873
)
 
(129,963
)
Net cash (used in) investing activities
(246,106
)
 
(464,777
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Increase in restricted cash
—

 
(179,709
)
Proceeds from long-term borrowings
55,750,000

 
—

Payments on long-term borrowings
(49,250,000
)
 
(1,850,000
)
Net cash provided by (used in) financing activities
6,500,000

 
(2,029,709
)
 
 
 
 
Net (decrease) increase in cash
(1,794,761
)
 
186,300

 
 
 
 
Cash and Cash Equivalents - Beginning
2,081,779

 
5,153,553

Cash and Cash Equivalents - Ending
$
287,018

 
$
5,339,853

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 
 
Cash paid for interest
$
30,908

 
$
45,055

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
 
 
 
Distribution declared but unpaid
$
—

 
$
12,029,185


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, 2012, contained in the Company's annual report on Form 10-K for 2012.

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 per year 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.

Organization
Homeland Energy Solutions, LLC is organized as an Iowa limited liability company. The members' liability is limited as specified in Homeland Energy Solutions' operating agreement and pursuant to the Iowa Revised Uniform Limited Liability Company Act.

Significant Accounting Policies:

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.

Cash & Cash Equivalents
The Company maintains its accounts primarily at one financial institution. At various times, the Company's cash balances may exceed amounts insured by the Federal Deposit Insurance Corporation. The Company has not experienced losses in such accounts.

Receivables
Credit sales are made primarily to one customer and no collateral is required. The Company carries these accounts receivable at face amount with no allowance for doubtful accounts due to the historical collection rates on these accounts.

Investments
The Company has a less than 20% investment interest in Renewable Products Marketing Group, LLC. This investment is being accounted for under the equity method of accounting under which the Company's share of net income is recognized as income in the Company's net income statement and added to the investment account. The investment balance is included in other assets and the income recognized as other income. The investment is evaluated for indications of impairment on a regular basis, a loss would be recognized when the fair value is determined to be less than the carrying value.

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.

7
Homeland Energy Solutions, LLC
Notes to Unaudited Financial Statements


Property & Equipment
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.
 
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 three months ended March 31, 2013, ethanol sales averaged approximately 75% of total revenues, while approximately 25% of revenues were generated from the sale of distiller grains and other co-products. For the three months ended March 31, 2013, corn costs averaged approximately 92% 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.


8
Homeland Energy Solutions, LLC
Notes to Unaudited Financial Statements

Reclassification
Certain items in the statements of cash flows for the three months ended March 2012 have been reclassified to conform to the 2013 classifications. The changes do not affect net assets or net income but were changed to agree with the classifications used in the March 31, 2013 financial statements.

2.    INVENTORY

Inventory consisted of the following as of March 31, 2013 and December 31, 2012.
 
 
March 31, 2013
 
December 31, 2012
Raw Materials
 
$
3,171,532

 
$
4,634,704

Work in Process
 
2,484,302

 
2,350,304

Finished Goods
 
7,432,910

 
2,670,724

Totals
 
$
13,088,744

 
$
9,655,732


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 of the Company's personal property. The Company currently has two separate loans with Home Federal, a term revolving loan and a revolving line of credit (collectively referred to as the "Loans").

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, 2.954% on March 31, 2013. 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 March 31, 2013 and December 31, 2012 was $7,500,000 and $1,000,000 respectively.

Revolving Line of Credit
The Company has a $5 million revolving line of credit with Home Federal. This revolving line of credit has a maturity date of July 1, 2013. The 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 revolving line of credit at the greater of 4% or 340 basis points above the one-month LIBOR. The balance outstanding on the revolving line of credit as of March 31, 2013 and December 31, 2012, was $0 and $0 respectively, with the balance of $5 million available for use by the Company.

Covenants
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

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

9
Homeland Energy Solutions, LLC
Notes to Unaudited Financial Statements

of the employees covered by the agreement. For the three months ending March 31, 2013 and 2012, the Company incurred net costs of approximately $36,000 and $66,000 related to this agreement.

5.    COMMITMENTS, CONTINGENCIES AND AGREEMENTS

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

The Company has 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 March 31, 2013, the Company had commitments to sell approximately 6,900,000 gallons at various fixed prices and 4,600,000 gallons at basis price levels indexed against exchanges for delivery through April 30, 2013.

The Company has also 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 March 31, 2013, the Company had commitments to sell approximately 2,000,000 pounds at various fixed and basis price levels indexed against exchanges for delivery through April 30, 2013.

The Company also has an investment in RPMG, included in other assets, totaling approximately $1,533,000 as of March 31, 2013.

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, 2013. 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 March 31, 2013, the Company had approximately 25,000 tons of distiller grains commitments for delivery through December 2013 at various fixed prices.

Sales and marketing fees related to the agreements in place for the three months ended March 31, 2013 and 2012 were as follows:

 
 
Three Months Ended
 
Three Months Ended
 
 
March 31, 2013
 
March 31, 2012
Sales ethanol - RPMG
 
$
73,316,000

 
$
72,459,000

Sales distiller grains
 
21,493,000

 
16,782,000

Sales corn oil - RPMG
 
3,016,000

 
2,770,000

 
 
 
 
 
Marketing fees ethanol - RPMG
 
$
64,000

 
$
136,000

Marketing fees distiller grains
 
182,000

 
196,000

Marketing fees corn oil - RPMG
 
21,000

 
22,000

 
 
 
 
 
 
 
As of March 31, 2013
 
As of December 31, 2012
Amount due from RPMG
 
$
1,603,000

 
$
199,000

Amount due from CHS
 
2,050,000

 
2,077,000



At March 31, 2013, the Company had approximately $36,000,000 in outstanding corn purchase commitments for bushels at various prices and approximately 4,325,000 bushels of unpriced corn through March 2014 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 6 years, accounted for under the normal purchase exclusion, which are anticipated to approximate the following for the twelve month periods ending March 31:


10
Homeland Energy Solutions, LLC
Notes to Unaudited Financial Statements

2014
 
$
3,949,000

2015
 
3,787,000

2016
 
3,787,000

2017
 
3,787,000

Thereafter
 
7,575,000

Total anticipated commitments
 
$
22,885,000


6.    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 months ended March 31, 2013 and 2012, was approximately $418,000, and $218,000, respectively.
 
At March 31, 2013, the Company had the following approximate minimum rental commitments under non-cancelable operating leases for the twelve month periods ended March 31:
2014
 
$
1,676,000

2015
 
1,576,000

2016
 
1,567,000

2017
 
1,567,000

Thereafter
 
513,000

         Total lease commitments
 
$
6,899,000


7.    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.

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.  In the past and going forward, the Company has hedged and anticipates hedging between 5% and 20% of its anticipated total annual corn purchases. At March 31, 2013, the Company has hedged positions for approximately 10% of its anticipated total annual corn purchases.
  
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 following table represents the amount of realized/unrealized gains (losses) and changes in fair value recognized in earnings on commodity contracts for the three months ending March 31, 2013 and 2012 and the fair value of derivatives as of March 31, 2013 and December 31, 2012:

11
Homeland Energy Solutions, LLC
Notes to Unaudited Financial Statements

 
Income Statement Classification
 
Realized Gain
 
 Change In Unrealized Gain (Loss)
 
Total Gain
Derivatives not designated as hedging instruments, for the three months ended March 31, 2013:
 
 
 
 
 
 
 
Commodity Contracts - corn
Cost of Goods Sold
 
$
213,698

 
$
865,850

 
$
1,079,548

Commodity Contracts - ethanol
Revenue
 
—

 
150,780

 
150,780

 
Total
 
$
213,698

 
$
1,016,630

 
$
1,230,328

 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments, for the three months ended March 31, 2012:
 
 
 
 
 
 
 
Commodity Contracts - corn
Cost of Goods Sold
 
$
1,601,596

 
$
(926,588
)
 
$
675,008


 
Balance Sheet Classification
 
March 31, 2013
 
December 31, 2012
Futures and option contracts through March 2014
 
 
 
 
 
In gain position
 
 
$
1,261,745

 
$
893,800

In loss position
 
 
(245,115
)
 
(206,475
)
Cash held by broker
 
 
2,359,279

 
653,956

 
Current Asset
 
$
3,375,909

 
$
1,341,281


8.    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 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

12
Homeland Energy Solutions, LLC
Notes to Unaudited Financial Statements

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 March 31, 2013 and December 31, 2012, 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
Derivative financial instruments


 


 


 


March 31, 2013
 
 
 
 
 
 
 
Assets
$
1,261,745

 
$
—

 
$
1,261,745

 
$
—

Liabilities
(245,115
)
 
—

 
(245,115
)
 
—

December 31, 2012
 
 
 
 
 
 
 
Assets
$
893,800

 
$
—

 
$
893,000

 
$
—

Liabilities
(206,475
)
 
—

 
(206,475
)
 
—


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, 2012. 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.

Results of Operations

Comparison of Fiscal Quarters Ended March 31, 2013 and 2012
    
 
 
Three Months Ended
 
 
March 31, 2013
 
March 31, 2012
Income Statement Data
 
Amount
 
%
 
Amount
 
%
Revenue
 
$
97,975,795

 
100.0

 
$
92,011,614

 
100.0

 
 
 
 
 
 
 
 
 
Cost of Goods Sold
 
94,817,826

 
96.8

 
89,644,605

 
97.4

 
 
 
 
 
 
 
 
 
Gross Profit
 
3,157,969

 
3.2

 
2,367,009

 
2.6

 
 
 
 
 
 
 
 
 
Operating Expenses
 
717,414

 
0.7

 
772,408

 
0.8

 
 
 
 
 
 
 
 
 
Operating Income
 
2,440,555

 
2.5

 
1,594,601

 
1.7

 
 
 
 
 
 
 
 
 
Other Income
 
37,742

 
—

 
51,058

 
0.1

 
 
 
 
 
 
 
 
 
Net Income
 
$
2,478,297

 
2.5

 
$
1,645,659

 
1.8


Revenue

Our total revenue for our first quarter of 2013 was approximately 6% more than our total revenue for our first quarter of 2012. Management attributes this increase in revenue primarily with higher ethanol and distiller grains prices which more than offset the decrease in quantity of finished goods sold that we experienced during our first quarter of 2013 compared to the same period of 2012. Commodity prices generally were higher during our first quarter of 2013 compared to the same period of 2012 which management believes positively impacted our ethanol and distiller grains prices. Our production was lower during our first quarter of 2013 compared to the same period of 2012 because we operated the plant at a lower production rate in order to maximize the amount of ethanol that we could produce per bushel of corn. Further, due to the timing of the end of our fiscal quarter in 2013, we had additional finished product inventory which reduced the total gallons of ethanol we sold during our first quarter of 2013.


14

For our first quarter of 2013, our total ethanol revenue increased by approximately 1% compared to our first quarter of 2012 due to higher ethanol prices which offset a decrease in the total gallons of ethanol we sold. The average price we received for our ethanol during our first quarter of 2013 was approximately 9% greater than during our first quarter of 2012. We sold approximately 7% less gallons of ethanol during our first quarter of 2013 compared to the same period of 2012. Following the end of our first quarter of 2013, we have experienced improved operating margins which we anticipate will continue until our third quarter of 2013. Management anticipates that ethanol imports from Brazil will increase during our third quarter of 2013 which may result in lower ethanol prices and less favorable operating margins during that time. Further, management anticipates that we may experience increased difficulty securing the corn we need to operate at the end of the summer which may result in less favorable operating margins during our third quarter of 2013.
    
Our total distiller grains revenue was approximately 28% greater during our first quarter of 2013 compared to the same period of 2012. We sold approximately 11% less tons of distiller grains during our first quarter of 2013 compared to the same period of 2012 due to decreased production, however, the average price we received per ton of dried distiller grains sold increased by approximately 44% during our first quarter of 2013 compared to the same period of 2012 and the average price we received per ton of modified/wet distiller grains sold increased by approximately 36% during our first quarter of 2013 compared to the same period of 2012. Management attributes these higher distiller grains prices to higher corn prices and reduced production nationwide of distiller grains. Since distiller grains are typically used as an animal feed substitute for corn, when corn prices increase, the market price of distiller grains typically increases. Further, the discount between the price of a ton of distiller grains compared to a ton of corn was less during our first quarter of 2013 compared to the same period of 2012, which management believes was due to tighter corn supplies during the 2013 period. 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.

Our total corn oil revenue was approximately 9% higher for our first quarter of 2013 compared to the same period of 2012 due to increased corn oil production and slightly lower corn oil prices. We sold approximately 12% more pounds of corn oil during our first quarter of 2013 compared to the same period of 2012 because of improved efficiency in operating our corn oil extraction equipment. This increase in corn oil production occurred at a time when our total production was lower. Partially offsetting this increase in corn oil production was a decrease in the average price we received per pound of corn oil of approximately 3% during our first quarter of 2013 compared to the same period of 2012. Management anticipates that corn oil demand will increase in our upcoming quarters due to increased demand from the biodiesel industry. Certain federal biodiesel production incentives were recently reinstated and the biodiesel industry is just starting to ramp up production which may lead to increased corn oil demand and prices. In addition, more biodiesel producers have added the capacity to use corn oil as a biodiesel production feedstock which may increase corn oil demand and prices. Further, management anticipates somewhat increased corn oil production next quarter due to anticipated increases in ethanol production. However, management does not anticipate that our corn oil extraction efficiency will increase significantly from its current levels in the near term.

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 6% more during our first quarter of 2013 compared to the same period of 2012. The average price we paid per bushel of corn, without taking into account derivative instruments, was approximately 18% more during our first quarter of 2013 compared to our first quarter of 2012. Management attributes this increase in corn prices with tight corn supplies and increasing commodity prices generally during our first quarter of 2013. While corn prices decreased after the end of our first quarter of 2013, management anticipates that corn prices will remain volatile during the rest of our 2013 fiscal year, particularly if we experience any unfavorable weather conditions that could negatively impact corn production in the United States or abroad. Further, management anticipates that local tight corn supplies may lead to increased prices we have to pay to purchase corn, particularly during our third quarter of 2013, which may negatively impact our operating margins.

We used approximately 2% less bushels of corn during our first quarter of 2013 compared to our first quarter of 2012. Management attributes this decrease in corn consumption with decreased production during the 2013 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.

Due to a colder and longer winter, we experienced increasing natural gas prices during our first quarter of 2013 compared to our first quarter of 2012. During our first quarter of 2013, the average price we paid per MMBtu of natural gas was approximately 14% higher compared to our first quarter of 2012. Management anticipates that natural gas prices will remain relatively stable during the rest of our 2013 fiscal year due to fundamental supply and demand conditions in the natural gas market, especially into the summer months when natural gas demand is expected to return to recent levels. We expect higher natural gas prices during winter months due to annual increases in natural gas transportation costs and increased demand. Partially offsetting the increase in natural gas prices was a decrease in our total natural gas consumption of approximately 2% during our first quarter of 20

15

13 compared to the same period of 2012. This decrease in natural gas consumption was due to greater plant efficiencies and less tons of distiller grains produced.

We engage in risk management activities that are intended to fix the purchase price of the corn we require to produce ethanol, distiller grains and corn oil. During our first quarter of 2013, we had a realized gain of approximately $214,000 and an unrealized gain of approximately $1,017,000 related to our corn and ethanol derivative instruments. During our first quarter of 2012, we had a realized gain of approximately $1,602,000 and an unrealized loss of approximately $927,000 related to our corn derivative instruments. We recognize the gains or losses that result from changes in the value of our corn and ethanol derivative instruments in cost of goods sold and revenue, respectively, as the changes occur. Our plant is expected to use approximately 40 million bushels of corn per year. As of March 31, 2013, we had risk management positions in place for approximately 10% of our corn needs for the next 12 months.

Operating Expenses

Our operating expenses were lower during our first quarter of 2013 compared to our first quarter of 2012 due to decreases in business promotion and amortization expenses.

Other Income (Expense)

Our other income was lower during our first quarter of 2013 compared to the same period of 2012 due to having less interest expense during the 2013 period because of our reduced debt load. We also had less other income during our first quarter of 2013 compared to the same period of 2012 due to a smaller patronage dividend we received from CHS during the 2013 period. We had less interest income during our first quarter of 2013 compared to the same period of 2012 due to having less cash on hand during 2013.

Changes in Financial Condition for the Three Months Ended March 31, 2013.

Balance Sheet Data
 
March 31, 2013
 
December 31, 2012
Total current assets
 
$
22,195,876

 
$
17,402,396

Total property and equipment
 
118,483,452

 
121,150,465

Total other assets
 
3,488,115

 
3,294,307

Total Assets
 
$
144,167,443

 
$
141,847,168

 
 
 
 
 
Total current liabilities
 
$
4,713,108

 
$
11,204,758

Total long-term liabilities
 
7,602,421

 
1,268,793

Total members' equity
 
131,851,914

 
129,373,617

Total Liabilities and Members' Equity
 
$
144,167,443

 
$
141,847,168


We had less cash on hand at March 31, 2013 compared to December 31, 2012 due to the fact that many of our corn suppliers defer payments for their corn deliveries until after the end of the year for tax purposes which typically results in increased accounts payable at the end of our fiscal year along with us having more cash on hand. Our accounts receivable was higher at March 31, 2013 compared to December 31, 2012 due to timing issues related to when we receive payments from our product marketers. Our derivative instruments represented a larger asset on our balance sheet at March 31, 2013 compared to December 31, 2012 due to a larger unrealized gain on our derivative instruments and more cash that was being held by commodities broker in our margin account at March 31, 2013. We had less prepaid and other assets at March 31, 2013 compared to December 31, 2012 primarily due to a decrease in spare parts inventory on hand and the receipt of motor fuel tax receivables.

Our net property and equipment was lower at March 31, 2013 compared to December 31, 2012 due to depreciation. We had approximately $146,000 in construction in progress at March 31, 2013 related to several small plant upgrade and maintenance projects.

Our other assets were higher at March 31, 2013 compared to December 31, 2012 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.


16

Our accounts payable was lower at March 31, 2013 compared to December 31, 2012 primarily due to deferred corn payments that we had outstanding at the end of our 2012 fiscal year which were paid in early January 2013. 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 less property tax payable at March 31, 2013 compared to December 31, 2012 due to regularly scheduled property and replacement tax payments.

We had higher long-term liabilities at March 31, 2013 compared to December 31, 2012 due to funds we had outstanding on our term revolving line of credit at March 31, 2013.

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 revolving line of credit. Our credit facilities are described in greater detail below under "Short-Term and Long-Term Debt Sources." As of March 31, 2013, we had $17.5 million available pursuant to our revolving loans and approximately $287,000 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 three months ended March 31, 2013 and 2012:
 
 
Three Months Ended
 
 
March 31, 2013
 
March 31, 2012
Net cash provided by (used in) operating activities
 
$
(8,048,655
)
 
$
2,680,786

Net cash (used in) investing activities
 
(246,106
)
 
(464,777
)
Net cash provided by (used in) financing activities
 
6,500,000

 
(2,029,709
)
Cash at beginning of period
 
2,081,779

 
5,153,553

Cash at end of period
 
$
287,018

 
$
5,339,853


Cash Flow From Operations

Our operations generated less cash during our first three months of 2013 compared to the same period of 2012 primarily due to cash that we had tied to increases in accounts receivable, inventory and deferred corn payments we made during our first three months of 2013. In addition, we had a significant unrealized gain on our derivative instruments during our first three months of 2013 which increased our net income but did not provide us with any cash.

Cash Flow From Investing Activities

We used significantly less cash for equipment and construction purchases during our first three months of 2013 compared to the first three months of 2012. However, we had a larger investment in our other assets during our first three months of 2013 compared to the first three months of 2012 primarily related to our investment in Renewable Products Marketing Group (RPMG).

Cash Flow From Financing Activities

Our financing activities provided us cash during our first three months of 2013 due to funds we received from our long-term revolving loan which was used primarily to make deferred corn payments during the 2013 period. We had more payments on our long-term debt during our first three months of 2012 due to the fact that we were making payments on our term loan during the 2012 period and we had no payments on our term loan during the 2013 period.

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 revolving line of credit.

17


On May 14, 2012, we executed amended credit agreements with 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 revolving line of credit which has a maturity date of July 1, 2013.

Term Loan

Our term loan was used for the construction and start-up of our ethanol plant. We made our final payment on our term loan on November 1, 2012.

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 March 31, 2013, we had $7,500,000 outstanding on our term revolving loan and $12,500,000 available to be drawn. Interest accrued on our term revolving loan as of March 31, 2013 at a rate of 2.954% per year.

Revolving Line of Credit

We have a $5 million revolving line of credit with Home Federal. This line of credit has a maturity date of July 1, 2013. Our ability to draw funds on the 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 revolving line of credit at the greater of 4% or 340 basis points above the one month LIBOR. As of March 31, 2013, we had $0 outstanding on our line of credit and $5,000,000 available to be drawn. If we had an amount outstanding on our 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 March 31, 2013, 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 is $105 million. As of March 31, 2013, we had tangible net worth of approximately $132 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 are required to maintain working capital of at least $12 million annually. As of March 31, 2013, we had working capital of approximately $37 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.


18

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 March 31, 2013 and December 31, 2012.

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 lines of credit and term loan which bear variable interest rates. As of March 31, 2013, we had $7,500,000 outstanding on our variable interest rate loans and interest accrued at a rate of 2.954%. 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

19

change would have on our income statement, based on the amount we had outstanding on our variable interest rate loans as of March 31, 2013, would be approximately $1,500.

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 March 31, 2013, we had price protection in place for approximately 10% 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 March 31, 2013, 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 March 31, 2013. 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%
 
$
(1,536,000
)
Ethanol
 
120,000,000

 
Gallons
 
10%
 
(28,800,000
)
Corn
 
40,000,000

 
Bushels
 
10%
 
(28,000,000
)

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 March 31, 2013. 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 March 31, 2013, 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.


20

ITEM 1A. RISK FACTORS.

There have not been any material changes to the risk factors that were previously disclosed on our annual report on Form 10-K for the fiscal year ended December 31, 2012.

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.

ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

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

Exhibit No.
Exhibit
3.1
Amended and Restated Operating Agreement dated April 4, 2013. *
10.1
Change in Control Agreement between David Finke and Homeland Energy Solutions, LLC dated January 1, 2013. *
10.2
Change in Control Agreement between Stan Wubbena and Homeland Energy Solutions, LLC dated January 1, 2013.*
10.3
Change in Control Agreement between Kevin Howes and Homeland Energy Solutions, LLC dated January 1, 2013.*
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 March 31, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) Balance Sheets as of March 31, 2013 and December 31, 2012, (ii) Statements of Operations for the three months ended March 31, 2013 and 2012, (iii) Statements of Cash Flows for the three months ended March 31, 2013 and 2012, and (iv) the Notes to Unaudited Financial Statements.**
________________________________
(*) Filed herewith.
(**) Furnished herewith.



21

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:
May 15, 2013
 
  /s/ Walter Wendland
 
Walter Wendland
 
President and Chief Executive Officer
(Principal Executive Officer)
 
 
Date:
May 15, 2013
 
/s/ David A. Finke
 
David A. Finke
 
Treasurer/Chief Financial Officer
(Principal Financial Officer)

    

22

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