Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

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

 

**For the quarterly period ended September 30, 2010**

 

**OR**

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

 

**For the transition period from               to               .**

 

**Commission File Number: 000-53202**

** **

**HOMELANDENERGY 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)

 

**(563) 238-5555**

(Registrant’s telephone number, including area code)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. x Yes   ̈ No

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  ̈ Yes   ̈ No

 

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

 
| Large  Accelerated Filer  ̈ |   | Accelerated  Filer  ̈    |
|--------------------------------------|--------|------------------------------|
|                                 |   |                         |
| Non-Accelerated  Filer  ̈        |   | Smaller  Reporting Company x |

 

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

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date: As of November 12, 2010, there were 91,445 membership unitsoutstanding.

 

 

 

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Table of Contents

 

**INDEX**

 

 
| ** **                                                                                               | **Page No.** |
|----------------------------------------------------------------------------------------------------------|-------------------|
| ** **                                                                                               | ** **        |
| **PART I. FINANCIAL  INFORMATION**                                                             | **3**             |
| ** **                                                                                               | ** **        |
| **Item 1. Financial Statements**                                                                         | **3**             |
| **Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations** | **15**            |
| **Item 3.  Quantitative and Qualitative Disclosures About Market Risk**                                  | **26**            |
| **Item 4. Controls  and Procedures**                                                                     | **26**            |
| ** **                                                                                               | ** **        |
| **PART II. OTHER  INFORMATION**                                                                     | **27**            |
| ** **                                                                                               | ** **        |
| **Item 1. Legal  Proceedings**                                                                           | **27**            |
| **Item 1A. Risk Factors**                                                                                | **27**            |
| **Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds**                                 | **27**            |
| **Item 3.  Defaults Upon Senior Securities**                                                             | **27**            |
| **Item 4. (Removed and  Reserved)**                                                                      | **27**            |
| **Item 5. Other  Information**                                                                           | **27**            |
| **Item 6. Exhibits**                                                                                     | **28**            |
| ** **                                                                                               | ** **        |
| **SIGNATURES**                                                                                           | **28**            |

 

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**PART I.     FINANCIALINFORMATION**

**Item 1.  Financial Statements**

 

**Homeland Energy Solutions, LLC**

 

**Balance Sheets**

**September 30, 2010 and December 31, 2009**

 
| ** **                                                        | ** ** | **9/30/2010** | ** **  | **12/31/2009** | ** ** |
|-------------------------------------------------------------------|------------|---------------|-------------|----------------|------------|
| ** **                                                        | ** ** | **Unaudited** | ** **  | ** **     | ** ** |
| **ASSETS**                                                        |       |          |        |           |       |
|                                                              |       |          |        |           |       |
| CURRENT ASSETS                                                    |       |          |        |           |       |
| Cash and cash equivalents                                         |       | $             | 1,289,980   |           | $          | 832,040 |   |
| Accounts receivable                                               |       | 6,450,334     |        | 9,347,223      |       |
| Inventory                                                         |       | 5,726,352     |        | 6,273,488      |       |
| Due from broker                                                   |       | 4,061,272     |        | 870,059        |       |
| Prepaid expenses                                                  |       | 44,126        |        | 1,889,834      |       |
| Other current assets                                              |       | 923,878       |        | 599,134        |       |
| Total current assets                                              |       | 18,495,942    |        | 19,811,778     |       |
|                                                              |       |          |        |           |       |
| PROPERTY AND EQUIPMENT                                            |       |          |        |           |       |
| Land and improvements                                             |       | 22,471,580    |        | 22,471,580     |       |
| Buildings                                                         |       | 4,870,412     |        | 4,863,070      |       |
| Equipment                                                         |       | 129,943,388   |        | 129,209,097    |       |
| Construction in progress                                          |       | 1,843,125     |        | 1,230,695      |       |
|                                                              |       | 159,128,505   |        | 157,774,442    |       |
| Less accumulated depreciation                                     |       | 17,369,213    |        | 8,667,290      |       |
| Total property and equipment                                      |       | 141,759,292   |        | 149,107,152    |       |
|                                                              |       |          |        |           |       |
| OTHER ASSETS                                                      |       |          |        |           |       |
| Loan fees, net of amortization 2010 $538,997; 2009  $406,305      |       | 633,975       |        | 766,667        |       |
| Restricted cash                                                   |       | 354,017       |        | 10,256,026     |       |
| Utility rights, net of amortization 2010 $351,355;  2009 $184,293 |       | 1,956,674     |        | 2,578,065      |       |
| Total other assets                                                |       | 2,944,666     |        | 13,600,758     |       |
|                                                              |       |          |        |           |       |
| TOTAL ASSETS                                                      |       | $             | 163,199,900 |           | $          | 182,519,688 |   |
|                                                              |       |          |        |           |       |
| **LIABILITIES AND MEMBERS’ EQUITY**                          |       |          |        |           |       |
|                                                              |       |          |        |           |       |
| CURRENT LIABILITIES                                               |       |          |        |           |       |
| Accounts payable and accrued expenses                             |       | $             | 4,501,547   |           | $          | 5,619,270 |   |
| Derivative instruments                                            |       | 2,527,288     |        | 238,125        |       |
| Current maturities of long term liabilities                       |       | 7,412,324     |        | 6,795,116      |       |
| Total current liabilities                                         |       | 14,441,159    |        | 12,652,511     |       |
|                                                              |       |          |        |           |       |
| COMMITMENTS AND CONTINGENCIES                                     |       |          |        |           |       |
|                                                              |       |          |        |           |       |
| LONG-TERM DEBT, less current maturities                           |       | 31,704,602    |        | 62,263,911     |       |
|                                                              |       |          |        |           |       |
| MEMBERS’ EQUITY                                              |       |          |        |           |       |
| Capital units, less syndication costs                             |       | 89,572,744    |        | 89,572,744     |       |
| Retained earnings                                                 |       | 27,481,395    |        | 18,030,522     |       |
| Total members’ equity                                        |       | 117,054,139   |        | 107,603,266    |       |
|                                                              |       |          |        |           |       |
| TOTAL LIABILITIES AND MEMBERS’ EQUITY                        |       | $             | 163,199,900 |           | $          | 182,519,688 |   |

 

See Notes to Unaudited Financial Statements.

 

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**Homeland Energy Solutions, LLC**

**Statements of Operations (Unaudited)**

 
| ** **                                                                                                 | ** ** | **Three Months**  | ** ** | **Three Months**  | ** ** | **Nine Months**   | ** ** | **Nine Months**   | ** **  |
|------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|------------------------|-------------|
| ** **                                                                                                 | ** ** | **Ended 9/30/10** | ** ** | **Ended 9/30/09** | ** ** | **Ended 9/30/10** | ** ** | **Ended 9/30/09** | ** **  |
|                                                                                                       |       |                   |       |                   |       |                   |       |                   |        |
| REVENUE, NET OF SHIPPING COSTS                                                                             |       | $                      | 62,731,797 |                   | $          | 52,934,845             |       | $                      | 175,375,199 |   | $ | 92,497,563 |   |
|                                                                                                       |       |                   |       |                   |       |                   |       |                   |        |
| COSTS OF GOODS SOLD                                                                                        |       | 60,382,414             |       | 47,307,748             |       | 162,739,328            |       | 85,441,326             |        |
|                                                                                                       |       |                   |       |                   |       |                   |       |                   |        |
| GROSS PROFIT                                                                                               |       | 2,349,383              |       | 5,627,097              |       | 12,635,871             |       | 7,056,237              |        |
|                                                                                                       |       |                   |       |                   |       |                   |       |                   |        |
| SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                                                               |       | 513,280                |       | 578,274                |       | 1,446,319              |       | 1,854,899              |        |
|                                                                                                       |       |                   |       |                   |       |                   |       |                   |        |
| OPERATING INCOME                                                                                           |       | 1,836,103              |       | 5,048,823              |       | 11,189,552             |       | 5,201,338              |        |
|                                                                                                       |       |                   |       |                   |       |                   |       |                   |        |
| OTHER INCOME (EXPENSE)                                                                                     |       |                   |       |                   |       |                   |       |                   |        |
| Interest expense                                                                                           |       | (585,043               | )          | (865,059               | )          | (1,918,866             | )          | (1,549,368             | )           |
| Interest income                                                                                            |       | 52,865                 |       | 46,009                 |       | 180,187                |       | 185,157                |        |
| Grant income                                                                                               |       | —                 |       | —                 |       | —                 |       | 300,000                |        |
|                                                                                                       |       | (532,178               | )          | (819,050               | )          | (1,738,679             | )          | 1,064,211              |        |
|                                                                                                       |       |                   |       |                   |       |                   |       |                   |        |
| **Net income**                                                                                             |       | $                      | 1,303,925  |                   | $          | 4,229,773              |       | $                      | 9,450,873   |   | $ | 4,137,127 |   |
|                                                                                                       |       |                   |       |                   |       |                   |       |                   |        |
| Basic & diluted net income per unit                                                               |       | $                      | 14.26      |                   | $          | 46.25                  |       | $                      | 103.35      |   | $ | 45.24 |   |
|                                                                                                       |       |                   |       |                   |       |                   |       |                   |        |
| Weighted average of units outstanding for the calculation  of basic & diluted net income per unit |       | 91,445                 |       | 91,445                 |       | 91,445                 |       | 91,445                 |        |

 

See Notes to Unaudited Financial Statements.

 

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**Homeland Energy Solutions, LLC**

 

**Statements of Cash Flows (Unaudited)**

 
| ** **                                                                                   | ** ** | **Nine Months** | ** ** | **Nine Months** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                                                   | ** ** | **Ended**            | ** ** | **Ended**            | ** ** |
| ** **                                                                                   | ** ** | **9/30/10**          | ** ** | **9/30/09**          | ** ** |
| ** **                                                                                   | ** ** | ** **           | ** ** | ** **           | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES                                                         |       |                 |       |                 |       |
| Net income                                                                                   |       | $                    | 9,450,873  |                 | $          | 4,137,127 |   |
| Adjustments to reconcile net income to net cash provided  by (used in) operating activities: |       |                 |       |                 |       |
| Depreciation and amortization                                                                |       | 9,001,677            |       | 5,972,682            |       |
| Unrealized loss on risk management activities                                                |       | 2,289,163            |       | 450,670              |       |
| Asset impairment                                                                             |       | —               |       | 480,875              |       |
| Change in working capital components:                                                        |       |                 |       |                 |       |
| Accounts receivable                                                                          |       | 2,896,889            |       | (5,309,399           | )          |
| Inventory                                                                                    |       | 547,136              |       | (6,156,291           | )          |
| Due from broker                                                                              |       | (3,191,213           | )          | (900,532             | )          |
| Prepaid expenses and other assets                                                            |       | 1,520,964            |       | (1,295,285           | )          |
| Accounts payable and accrued expenses                                                        |       | (117,017             | )          | 1,914,368            |       |
| **Net cash provided by (used in)  operating activities**                                     |       | 22,398,472           |       | (705,785             | )          |
|                                                                                         |       |                 |       |                 |       |
| CASH FLOWS FROM INVESTING ACTIVITIES                                                         |       |                 |       |                 |       |
| Refund of utility rights                                                                     |       | 454,329              |       | —               |       |
| Payments for equipment and construction in  progress                                         |       | (2,354,769           | )          | (26,633,118          | )          |
| Payments for other assets                                                                    |       | —               |       | (480,558             | )          |
| **Net cash (used in) investing  activities**                                                 |       | (1,900,440           | )          | (27,113,676          | )          |
|                                                                                         |       |                 |       |                 |       |
| CASH FLOWS FROM FINANCING ACTIVITIES                                                         |       |                 |       |                 |       |
| Increase in outstanding checks in excess of bank  balance                                    |       | —               |       | 1,540,162            |       |
| (Increase) decrease in restricted cash                                                       |       | 9,902,009            |       | (170,356             | )          |
| Proceeds from long-term borrowing                                                            |       | —               |       | 26,592,850           |       |
| Payments on long-term borrowing                                                              |       | (29,942,101          | )          | (187,794             | )          |
| **Net cash provided by (used in)  financing activities**                                     |       | (20,040,092          | )          | 27,774,862           |       |
|                                                                                         |       |                 |       |                 |       |
| **Net increase (decrease) in cash**                                                          |       | $                    | 457,940    |                 | $          | (44,599 | ) |
|                                                                                         |       |                 |       |                 |       |
| CASH AND CASH EQUIVALENTS                                                                    |       |                 |       |                 |       |
| Beginning                                                                                    |       | 832,040              |       | 44,599               |       |
| Ending                                                                                       |       | $                    | 1,289,980  |                 | $          | — |   |
|                                                                                         |       |                 |       |                 |       |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                                            |       |                 |       |                 |       |
| Cash paid for interest                                                                       |       | $                    | 1,690,538  |                 | $          | 1,933,918 |   |
|                                                                                         |       |                 |       |                 |       |
| SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND  FINANCING ACTIVITIES                         |       |                 |       |                 |       |
| Accounts payable related to construction in  progress                                        |       | $                    | —     |                 | $          | 50,350 |   |
| Retainage payable related to construction in  progress                                       |       | —               |       | 607,856              |       |
| Interest capitalized                                                                         |       | —               |       | 817,183              |       |
| Insurance costs capitalized                                                                  |       | —               |       | 83,423               |       |
| Loan fee amortization capitalized                                                            |       | —               |       | 58,974               |       |

 

See Notes to Unaudited Financial Statements.

 

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HOMELANDENERGY SOLUTIONS, LLC

Notes to Condensed UnauditedFinancial Statements

 

September 30, 2010

 

**1.****             ****NATUREOF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES**

 

Nature of business:  Homeland Energy Solutions, LLC (an IowaLimited Liability Company) is located near Lawler, Iowa and was organizedto pool investors for a 100 million gallon ethanol plant with distributionthroughout the United States.  Inaddition, the company produces and sells distillers dried grains as byproductsof ethanol production.  Site preparationwas completed and construction began in November 2007.  Prior to commencing operations on April 4,2009, the Company was a development stage entity with its efforts beingprincipally devoted to organizational and construction activities.

 

Significant Accounting Policies:

 

Basis of Presentation:  The accompanying unaudited condensedfinancial statements have been prepared pursuant to the rules and regulationsof the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annualfinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America have been condensed oromitted as permitted by such rules and regulations.  These financial statements and related notesshould be read in conjunction with the financial statements and notes theretoincluded in the company’s audited financial statements for the year ended December 31,2009, contained in the Company’s annual report on Form 10-K for 2009.  In the opinion of management, the interimcondensed financial statements reflect all adjustments considered necessary forfair presentation.  The adjustments madeto these statements consist only of normal recurring adjustments.

 

Accounting Estimates:  Management uses estimates and assumptions inpreparing these financial statements in accordance with United States GenerallyAccepted Accounting Principles.  Thoseestimates and assumptions affect the reported amounts of assets andliabilities, the disclosure of contingent assets and liabilities, and thereported revenues and expenses.  Actualresults could differ from those estimates.

 

Revenue Recognition: Revenue from the sale ofthe Company’s products is recognized at the time title to the goods and allrisks of ownership transfer to the customers.  This generally occurs uponshipment, 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 anddistiller grains are not specifically identifiable and as a result, revenuefrom the sale of ethanol and distiller grains is recorded based on the netselling price reported to the Company from the marketer.

 

Inventories:  Inventoriesare generally valued at the lower of cost (first-in, first-out) ormarket.  In the valuation of inventories and purchase and salecommitments, market is based on current replacement values except that it doesnot exceed net realizable values and is not less than net realizable valuesreduced by allowances for approximate normal profit margin.

 

Long-Lived Assets: The Company reviews itsproperty and equipment for impairment whenever events indicate that thecarrying amount of the assets may not be recoverable.  If circumstances require a long-lived assetbe tested for possible impairment, the Company first compares undiscounted cashflows 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 anundiscounted cash flow basis, an impairment is recognized to the extent thatthe carrying value exceeds its fair value. Fair value is determined throughvarious valuation techniques including discounted cash flow models, quotedmarket values and third-party independent appraisals, as considered necessary.

 

Derivative Instruments: The Company evaluates itscontracts to determine whether the contracts are derivative instruments.  Certain contracts that literally meet thedefinition of a derivative may be exempted from derivative accounting as normalpurchases or normal sales.  Normalpurchases and normal sales are contracts that provide for the purchase or saleof something other than a financial instrument or derivative instrument thatwill be delivered in quantities expected to be used or sold over a reasonableperiod in the normal course of business. Contracts that meet the requirements of normal purchases or sales are documentedas normal and exempted from the accounting and reporting requirements ofderivative accounting.

 

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HOMELANDENERGY SOLUTIONS, LLC

Notes to Condensed UnauditedFinancial Statements

 

September 30, 2010

 

TheCompany enters into short-term cash, option and futures contracts as a means ofsecuring purchases of corn, natural gas and sales of ethanol for the plant andmanaging exposure to changes in commodity and energy prices.  All of the Company’s derivatives aredesignated as non-hedge derivatives for accounting purposes, with changes infair value recognized in net income. Although the contracts are economic hedges of specified risks, they arenot designated as and accounted for as hedging instruments.

 

Aspart of its trading activity, the Company uses futures and option contractsthrough regulated commodity exchanges to manage its risk related to pricing ofinventories.  To reduce that risk, theCompany generally takes positions using cash and futures contracts and options.

 

Realizedand unrealized gains and losses related to derivative contracts related to cornand natural gas are included as a component of cost of goods sold andderivative contracts related to ethanol are included as a component of revenuesin the accompanying financial statements. The fair values of contracts entered through commodity exchanges are presentedon the accompanying balance sheet as derivative instruments.

 

Intangible Assets:  Intangible assets consist of loan fees andutility rights.  Utility rights consistof payments to electric and natural gas companies for construction in aid ofelectric and gas lines to the facility but the Company retains no ownershiprights to the assets.  The loan fees areamortized over the term of the loan and utility rights are amortized over 15years or the anticipated useful life utilizing the effective interest methodand straight-line method, respectively. The useful life was determined in partby the length of service agreements the Company has with the utility companiesas well as normal usage of such infrastructure.

 

Restricted Cash:  The Company has a restriction on a specificaccount with a bank that is restricted in use for the repayment of long-termdebt.  The balance in this account hasbeen treated as a non-current asset due to this restriction.

 

Net Income per Unit:  Basic and diluted net income per unit iscomputed by dividing net income by the weighted average number of members’units and members’ unit equivalents outstanding during the period. There wereno member unit equivalents outstanding during the periods presented;accordingly, the Company’s basic and diluted net income per unit are the same.

 

Reclassification: Certain items on the 2009 financial statements have been reclassifiedwith no effect on net income or members’ equity to be consistent with thecurrent classifications.

 

Risks and Uncertainties:  The Company has certain risks anduncertainties that it will experience during volatile market conditions, whichcan have a severe impact on operations. The Company’s revenues are derived from the sale and distribution ofethanol and distiller grains to customers primarily located in the UnitedStates. Corn for the production process is supplied to the plant primarily fromlocal agricultural producers and from purchases on the open market. Ethanolsales average approximately 85% of total revenues, while approximately 15% ofrevenues is generated from the sale of distiller grains and otherby-products.  Corn costs averageapproximately 67% of cost of revenues.

 

TheCompany’s operating and financial performance is largely driven by the pricesat which we sell ethanol and the net expense of corn. The price of ethanol isinfluenced by factors such as supply and demand, weather, government policiesand programs, and unleaded gasoline and the petroleum markets, although since2005 the prices of ethanol and gasoline began a divergence with ethanol sellingfor less than gasoline at the wholesale level. Excess ethanol supply in themarket, in particular, puts downward pressure on the price of ethanol. Ourlargest cost of production is corn. The cost of corn is generally impacted byfactors such as supply and demand, weather, government policies and programs,and our risk management program used to protect against the price volatility ofthese commodities.

 

Thecurrent U.S. economic condition has reduced the nation’s demand forenergy.  In addition, the VEETC credit of$0.45 is set to expire in December 2010, creating additional uncertaintyto the future of ethanol production.  Theethanol boom of recent years has spurred overcapacity in the industry andproduction capacity is currently 

 

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HOMELANDENERGY SOLUTIONS, LLC

Notes to Condensed UnauditedFinancial Statements

 

September 30, 2010

 

exceedingthe RFS mandates.  As such, the Companymay need to evaluate whether crush margins will be sufficient to operate theplant and generate enough debt service. In the event crush margins become negative for an extended period oftime, the Company may be required to reduce capacity or shut down theplant.  The Company will continue toevaluate crush margins on a regular basis. Based on the Company’s operating plan and the borrowing capacity,management believes it has the capital to meet its obligations throughout thenext twelve month period.

 

**2.****             ****INVENTORY**

 

Inventoryconsisted of the following as of September 30, 2010 and December 31,2009.

 
| ** **      | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|-----------------|------------|----------------------------------|------------|---------------------------------|------------|
| Raw Materials   |       | $                                | 3,131,024  |                            | $          | 3,152,894 |   |
| Work in Process |       | 1,177,868                        |       | 1,191,732                       |       |
| Finished Goods  |       | 1,417,460                        |       | 1,928,862                       |       |
| Totals          |       | $                                | 5,726,352  |                            | $          | 6,273,488 |   |

 

**3.****             ****DEBT**

 

MasterLoan Agreement with Home Federal Savings Bank

 

OnNovember 30, 2007, the Company entered into a Master Loan Agreement withHome Federal Savings Bank (“Home Federal”) establishing a senior creditfacility with Home Federal for the construction of a 100 million gallonper year natural gas powered dry mill ethanol plant.  In return, the Company executed a mortgage infavor of Home Federal creating a senior lien on the real estate and plant and asecurity interest in all personal property located on Company property.  The Master Loan Agreement provides for(i) a construction loan in an amount not to exceed $94,000,000 (of whichup to $20,000,000 may be converted to a term revolving loan upon start-up ofoperations), and (ii)  a revolving line of credit loan in an amount not toexceed $6,000,000 (the foregoing collectively referred to as the “Loans”).

 

OnJuly 1, 2009 the Company converted the $94,000,000 construction loan with HomeFederal Savings Bank into a $74,000,000 term loan and a $20,000,000 termrevolving loan under the terms of the Master Loan Agreement and supplementsthereto.  The Company made monthlypayments of accrued interest on the Term Loan from the date of conversion untilseven months later.  Beginning in theseventh month after conversion, or on February 1, 2010, equal monthlyprincipal payments in the amount of $616,667 plus accrued interest aremade.  All unpaid principal and accruedinterest on the term loan will be due on the fifth anniversary of suchconversion.  The Company will have theright to convert up to 50% of the term loan into a Fixed Rate Loan with theconsent of Home Federal.  The Fixed RateLoan will bear interest at the five year LIBOR swap rate that is in effect onthe date of conversion plus 300 basis points, or another rate mutually agreedupon by Homeland Energy and Home Federal. If the Company elects this fixed rate option, the interest rate will notbe subject to any adjustments otherwise provided for in the Master LoanAgreement.  As of September 30, 2010$0 of the unpaid principal has been converted to the fixed rate option.  The remaining portion will bear interest at arate equal to the LIBOR Rate plus 300 basis points.

 

TheCompany agreed to the terms of a $20,000,000 Term Revolving Loan which wasconverted on July 1, 2009 from the construction loan and has a maturitydate of five years from the conversion date or July 2014.  Interest on the Revolving Term Loan shallaccrue at a rate equal to the LIBOR Rate plus 300 basis points.  The Company will be required to make monthlypayments of interest until the maturity date of July 2014, on which datethe unpaid principal amount of the Revolving Term Loan will become due andpayable.

 

RevolvingLine of Credit Loan

 

Underthe terms of the Master Loan Agreement and the third supplement thereto, theCompany agreed to the terms of a Revolving Line of Credit Loan consisting of amaximum $6,000,000 revolving line of credit. The Revolving 

 

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HOMELANDENERGY SOLUTIONS, LLC

Notes to Condensed UnauditedFinancial Statements

 

September 30, 2010

 

Lineof Credit Loan became available on July 1, 2009 and expired on June 30,2010.  The Company did not renew thisRevolving Line of Credit Loan.

 

Ifthe Company fails to make a payment of principal or interest on any loan within10 days of the due date, there will be a late charge equal to 5% of theamount of the payment.  In September 2010,we entered into an amendment of our loan agreement with Home Federal whichallowed us to release $10 million from our restricted cash account early inorder to prepay a portion of our term loan. In order to release this restricted cash early, we were required to makean additional $10 million prepayment to Home Federal.  Balances outstanding on the term loan, termrevolving loan and revolving line of credit as of September 30, 2010 and December 31,2009, were $39,066,667, $0 and $0, and $69,000,000, $0 and $0,respectively.  Amounts available on theterm loan, term revolving loan and revolving line of credit as of September 30,2010 were $0, $20,000,000 and $0.

 

Covenants

 

Inaddition, during the term of the loans, the Company will be subject to certainfinancial covenants at various times calculated monthly, quarterly orannually.  Failure to comply with theprotective loan covenants or maintain the required financial ratios may causeacceleration of the outstanding principal balances on the loans and/or theimposition of fees, charges or penalties. Any acceleration of the debt financing or imposition of the significantfees, charges or penalties may restrict or limit the access to the capitalresources necessary to continue plant operations.   The Company made a $5,000,000 free cash flowpayment on the term loan on April 22, 2010 and a $20,000,000 payment on September 21,2010.

 

Uponan occurrence of an event of default or an event which will lead to thedefault, Home Federal may, upon notice, terminate its commitment to loan fundsand declare the entire unpaid principal balance of the loans, plus accruedinterest, immediately due and payable.  Eventsof default include, but are not limited to, the failure to make payments whendue, insolvency, any material adverse change in the financial condition or thebreach of any of the covenants, representations or warranties the Company hasgiven in connection with the transaction.

 

**4.****             ****RELATEDPARTY TRANSACTIONS**

 

TheCompany purchased corn and materials from members of its Board of Directors whoown or manage elevators or are local producers of corn.  Purchases during the three and nine monthsended September 30, 2010, totaled approximately $19,000 and $6,327,000,respectively, and during the three and nine months ended September 30,2009 totaled approximately $5,127,000 and $9,638,000, respectively.

 

OnDecember 15, 2008, the Company entered into an agreement with Golden GrainEnergy, LLC, a member of the Company, for management services.  Pursuant to the Agreement, Homeland Energyand Golden Grain have agreed to share management services in an effort toreduce the costs of administrative overhead. Homeland Energy and Golden Grainhave agreed to split the compensation costs associated with each of theemployees covered by the Agreement. For the three and nine months ending September 30,2010, the Company incurred net costs of approximately $61,000 and $244,000related to this agreement.  The costs forthe same period of 2009 related to this agreement were approximately  $129,000 and $354,000.

 

**5.****             ****COMMITMENTS,CONTINGENCIES AND AGREEMENTS**

 

*Ethanol, Distiller’s grain, marketing agreements and major customers*

 

TheCompany has entered into a marketing agreement to sell all ethanol produced atthe plant to an unrelated party at a mutually agreed on price, less commissionand transportation charges.  As of September 30,2010, the Company has commitments to sell approximately 22,765,000 gallons ofethanol at various fixed and basis price levels indexed against exchanges fordelivery through March 2011. We had approximately 8,555,000 gallons ofethanol at a fixed price level and approximately 14,210,000 at a basis pricelevel.  Should the Company not be able tomeet delivery on these gallons in the future, the Company will be responsiblefor purchasing gallons in the open market. The Company has not incurred any losses due to non-delivery of productand anticipates that all contracts will be sufficient to cover costs in thefuture.

 

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HOMELANDENERGY SOLUTIONS, LLC

Notes to Condensed UnauditedFinancial Statements

 

September 30, 2010

 

TheCompany has entered into a marketing agreement to sell all distiller grainsproduced at the plant to an unrelated party at a mutually agreed on price, lesscommission and transportation charges. The agreement was renewed for another one year term on April 1,2010.  The agreement calls for automaticrenewal for successive one-year terms unless 120-day prior written notice isgiven before the current term expires. As of September 30, 2010, theCompany had approximately 18,000 tons of distiller grains commitments fordelivery through December 2011 at various fixed prices. Should the Companynot be able to meet delivery on these tons in the future, the Company will beresponsible for fulfilling the commitment in the open market.  The Companyhas not incurred any losses due to non-delivery of product.

 

Approximate sales and marketing fees related to the agreements in placefor the three and nine month periods ending September 30, 2010 and 2009are as follows below.

 
| ** **                      | ** ** | **Three Months  ended** | ** ** | **Nine**          | ** ** | **Three Months  Ended** | ** ** | ** **                  | ** ** |
|---------------------------------|------------|------------------------------|------------|-------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                      | ** ** | **September 30,  2010** | ** ** | **Months  ended** | ** ** | **September 30,  2009** | ** ** | **Nine Months  Ended** | ** ** |
|                            |       |                         |       |              |       |                         |       |                        |       |
| Sales ethanol                   |       | $                            | 53,653,000 |              | $          | 148,760,000                  |       | $                           | 45,038,000 |   | $ | 77,875,000 |   |
| Sales distiller grains          |       | 8,972,000                    |       | 26,315,000        |       | 7,896,000                    |       | 14,623,000                  |       |
|                            |       |                         |       |              |       |                         |       |                        |       |
| Marketing fees ethanol          |       | 405,000                      |       | 1,172,000         |       | 365,000                      |       | 626,000                     |       |
| Marketing fees distiller grains |       | 178,000                      |       | 459,000           |       | 166,000                      |       | 286,000                     |       |
|                                 |            |                              |            |                   |            |                              |            |                             |            |  |  |  |  |

 
|                               |   | **As of  September 30,  2010** |   | **As of  September 30,  2009** |   |   |   |   |   |
|------------------------------------|--------|------------------------------------------|--------|--------------------------------|--------|--------|--------|--------|--------|
| Amount due from ethanol marketer   |   | $3,341,000                               |   | $4,518,000                     |   |   |   |   |   |
| Amount due from distiller marketer |   | 896,000                                  |   | 746,000                        |   |   |   |   |   |

 

At September 30, 2010, the Company had outstanding commitments forpurchases of approximately 7,736,000 bushels of corn at various prices through June 2011.

 

TheCompany has commitments for minimum purchases of various utilities such asnatural gas and electricity over the next 10 years which are anticipated toapproximate the following:

 
| 2010                          |   | $          | 987,000    |   |
|-------------------------------|--------|------------|------------|--------|
| 2011                          |   | 3,950,000  |       |
| 2012                          |   | 3,950,000  |       |
| 2013                          |   | 3,950,000  |       |
| 2014                          |   | 3,828,000  |       |
| Thereafter                    |   | 16,097,000 |       |
| Total anticipated commitments |   | $          | 32,762,000 |   |

 

**6.****             ****LEASEOBLIGATIONS**

 

During fiscal years 2009 and 2010 the Company entered into leases forrail cars, rail moving equipment and loading equipment with original terms upto 5 years.  The Company is obligated topay costs of insurance, taxes, repairs and maintenance pursuant to terms of theleases.  Rent expense incurred for theoperating leases during the three and 

 

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HOMELANDENERGY SOLUTIONS, LLC

Notes to Condensed UnauditedFinancial Statements

 

September 30, 2010

 

nine months ended September 30, 2010, was approximately $530,000and $1,409,000 and for the same periods in 2009 was approximately $523,000 and$982,000.

 

At September 30, 2010 the Company had the following approximateminimum rental commitments under non-cancelable operating leases.

 
| 2010                    |   | $         | 530,000   |   |
|-------------------------|--------|-----------|-----------|--------|
| 2011                    |   | 2,012,000 |      |
| 2012                    |   | 556,000   |      |
| 2013                    |   | 118,000   |      |
| 2014                    |   | 118,000   |      |
| Thereafter              |   | 33,000    |      |
| Total lease commitments |   | $         | 3,367,000 |   |

 

**7.****             ****DERIVATIVEINSTRUMENTS**

 

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 andmanaged by the Company as an integral part of its overall risk-managementprogram.  The Company’s risk managementprogram focuses on the unpredictability of financial and commodities marketsand seeks to reduce the potentially adverse effects that the volatility ofthese markets may have on its operating results.

 

To reduce price risk caused by market fluctuations, the Companygenerally follows a policy of using exchange traded futures and optionscontracts to reduce its net position of merchandisable agricultural commodityinventories and forward cash purchase and sales contracts and uses exchangetraded futures and options contracts to reduce price risk.  Exchange-traded futures contracts are valuedat market price.  Changes in market priceof exchange traded futures and options contracts related to corn and naturalgas are recorded in costs of goods sold and changes in market prices ofcontracts related to sale of ethanol, if applicable, are recorded in revenues.

 

The Company uses futures or options contracts to fix the purchase priceof anticipated volumes of corn to be purchased and processed in a futuremonth.    The Company’s plant will grind approximately 40million bushels of corn per year.  During the previous period andover the next 12 months, the Company has hedged and anticipates hedging between5% and 60% of its anticipated monthly grind.  At September 30,2010, the Company has hedged portions of its anticipated monthly purchases forcorn averaging approximately 19% of its anticipated monthly grind over the nexttwelve months.

 

Unrealized gains and losses on non-exchange traded forward contractsare deemed “normal purchases or sales” under authoritative accounting guidanceand, as amended and, therefore, are not marked to market in the Company’sfinancial statements. The fair value of the Company’s open derivative positionsare summarized in the following table as of September 30, 2010 and December 31,2009.

 

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HOMELANDENERGY SOLUTIONS, LLC

Notes to Condensed UnauditedFinancial Statements

 

September 30, 2010

 
| ** **                                                                     | ** ** | **Balance Sheet  Classification** | ** ** | **Asset Fair  Value** | ** ** | **Liability Fair  Value** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------------|------------|----------------------------|------------|--------------------------------|------------|
| Derivatives not designated as hedging instruments  at September 30, 2010: |       |                                   |       |                       |       |                           |       |
| Commodity Contracts-corn                                                       |       |                                   |       | $                          | —     |                           | $          | 2,401,713 |   |
|                                                                           |       |                                   |       |                       |       |                           |       |   |   |
| Commodity Contracts-ethanol                                                    |       |                                   |       | —                     |       | 10,875                         |       |
|                                                                           |       |                                   |       |                       |       |                           |       |
| Commodity Contracts-natural gas                                                |       |                                   |       | —                     |       | 114,700                        |       |
|                                                                           |       |                                   |       |                       |       |                           |       |
| Total                                                                          |       | Derivative Instruments                 |       | —                     |       | 2,527,288                      |       |
|                                                                           |       |                                   |       |                       |       |                           |       |
| Derivatives not designated as hedging instruments  at December 31, 2009:  |       |                                   |       |                       |       |                           |       |
| Commodity Contracts-corn                                                       |       | Derivative Instruments                 |       | $                          | —     |                           | $          | 238,125 |   |

 

The following table represents the amount of realized gains (losses)and changes in fair value recognized in earnings on commodity contracts for thethree and nine months ending September 30, 2010 and for the same periodsending September 30, 2009:

 
| ** **                                             | ** ** | **Income Statement** | ** ** | **Realized **   | ** ** | **Unrealized**       | ** ** | **Total Gain** | ** ** |
|--------------------------------------------------------|------------|---------------------------|------------|----------------------|------------|----------------------|------------|---------------------|------------|
| ** **                                             | ** ** | **Classification**        | ** ** | **Gain (Loss)** | ** ** | **Gain (Loss)** | ** ** | **(Loss)**          | ** ** |
|                                                   |       |                      |       |                 |       |                 |       |                |       |
| Derivatives not designated as hedging instruments:     |       |                      |       |                 |       |                 |       |                |       |
| Commodity Contracts for the three months ended 9/30/10 |       | Cost  of Goods Sold       |       | $                    | (2,644,302 | )                    | $          | (2,527,288          | )          | $ | (5,171,590 | ) |
|                                                   |       |                      |       |                 |       |                 |       |                |       |
| Commodity Contracts for the nine months ended 9/30/10  |       | Cost  of Goods Sold       |       | $                    | 289,684    |                 | (2,527,288 | )                   | (2,237,604 | ) |
|                                                   |       |                      |       |                 |       |                 |       |                |       |
| Derivatives not designated as hedging instruments:     |       |                      |       |                 |       |                 |       |                |       |
| Commodity Contracts for the three months ended 9/30/09 |       | Cost  of Goods Sold       |       | $                    | 1,301,057  |                 | (450,670   | )                   | 850,387    |   |
|                                                   |       |                      |       |                 |       |                 |       |                |       |
| Commodity Contracts for the nine months ended 9/30/09  |       | Cost  of Goods Sold       |       | $                    | 3,111,531  |                 | (450,670   | )                   | 2,660,861  |   |
|                                                        |            |                           |            |                      |            |                      |            |                     |            |  |  |  |

 

**8.****             ****FAIRVALUE MEASUREMENTS**

 

Fair value is the price that would be received to sell an asset or paidto transfer a liability in an orderly transaction between market participantsat the measurement date.  In determiningfair value, the Company uses various methods including market, income and costapproaches.  Based on these approaches,the Company often utilizes certain assumptions that market participants woulduse in pricing the asset or liability, including assumptions about risk

 

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HOMELANDENERGY SOLUTIONS, LLC

Notes to Condensed UnauditedFinancial Statements

 

September 30, 2010

 

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 techniquesthat maximize the use of observable inputs and minimize the use of unobservableinputs.  Based on the observability ofthe inputs used in the valuation techniques, the Company is required to providethe following information according to the fair value hierarchy.  The fair value hierarchy ranks the qualityand reliability of the information used to determine fair values.  Financial assets and liabilities carried atfair value will be classified and disclosed in one of the following threecategories:

 

Level 1: Valuations for assets and liabilities traded in active marketsfrom readily available pricing sources for market transactions involvingidentical assets or liabilities.

 

Level 2: Valuations for assets and liabilities traded in less activedealer or broker markets.  Valuations areobtained from third-party pricing services for identical or similar assets orliabilities.

 

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

 

A description of the valuation methodologies used for instrumentsmeasured at fair value, including the general classification of suchinstruments pursuant to the valuation hierarchy, is set forth below

 

Derivative financial instruments:  Commodity futures and exchange-tradedcommodity options contracts are reported at fair value utilizing Level 1inputs.  For these contracts, the Companyobtains fair value measurements from an independent pricing service.  The fair value measurements considerobservable data that may include dealer quotes and live trading levels from theCBOT and NYMEX markets.

 

The following table summarizes financial assets and financialliabilities measured at fair value on a recurring basis as of September 30,2010 and December 31, 2009, segregated by the level of the valuationinputs within the fair value hierarchy utilized to measure fair value:

 
| ** **                                                            | ** ** | **Total** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|-----------------------------------------------------------------------|------------|-----------|------------|------------------|------------|------------------|------------|------------------|------------|
| As of September 30, 2010:                                             |       |      |       |             |       |             |       |             |       |
| Derivative financial instruments-corn                                 |       | $         | 2,401,713  |             | $          | 2,401,713        |       | —           |       | — |   |
|                                                                  |       |      |       |             |       |             |       |             |       |
| Derivative financial instruments-ethanol                              |       | 10,875    |       | 10,875           |       | —           |       | —           |       |
|                                                                  |       |      |       |             |       |             |       |             |       |
| Derivative financial instruments-natural gas                          |       | 114,700   |       | 114,700          |       | —           |       | —           |       |
|                                                                  |       |      |       |             |       |             |       |             |       |
| Total current liability, derivative financial instruments  at 9/30/10 |       | 2,527,288 |       | 2,527,288        |       | —           |       | —           |       |
| As of December 31, 2009:                                              |       |      |       |             |       |             |       |             |       |
|                                                                  |       |      |       |             |       |             |       |             |       |
| Current Liability, derivative financial instruments-corn              |       | 238,125   |       | 238,125          |       | —           |       | —           |       |
|                                                                       |            |           |            |                  |            |                  |            |                  |            |  |  |

 

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

 

The Company considers the carrying amount of significant classes offinancial instruments on the balance sheets including cash, accountsreceivable, due from broker, restricted cash, other assets, accounts payable,accrued liabilities and variable rate long-term debt to be reasonable estimatesof fair value either due to their length of 

 

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HOMELANDENERGY SOLUTIONS, LLC

Notes to Condensed UnauditedFinancial Statements

 

September 30, 2010

 

maturity or the existence of variable interest rates underlying suchfinancial instruments that approximate prevailing market rates at September 30,2010.

 

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

 

**CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKINGSTATEMENTS**

 

Thisreport contains forward-looking statements that involve future events, ourfuture performance and our expected future operations and actions.  In some cases, you can identifyforward-looking statements by the use of words such as “may,” “should,” “expect,”“plan,” “anticipate,” “believe,” “estimate,” “future,” “intend,” “could,” “will,”“hope,” “predict,” “target,” “potential,” or “continue” or the negative ofthese terms or other similar expressions.

 

Theseforward-looking statements are only our predictions and involve numerousassumptions, risks and uncertainties, including, but not limited to thoselisted below and those business risks and factors described elsewhere in thisreport and our other filings with the Securities and Exchange Commission.

 

·                  Our ability to operate the ethanol plant profitably and maintain apositive spread between the price at which we sell our products and our rawmaterials costs;

·                  Our ability to generate free cash flow to invest in our business andservice our debt;

·                  Our ability to satisfy the financial covenants contained in our creditagreements with our senior lender;

·                  Volatility of corn, natural gas, ethanol, unleaded gasoline, distillersgrains and other commodities prices and availability;

·                  Changes in general economic conditions or the occurrence of certainevents causing an economic impact in the agriculture, oil or automobileindustries;

·                  Elimination of the tariff on imported ethanol;

·                  Changes in interest rates or the lack of credit availability;

·                  Changes in our business strategy, capital improvements or developmentplans;

·                  The results of our hedging transactions and other risk managementstrategies;

·                  Our inelastic demand for and the availability of corn, as it is the onlyavailable feedstock for our plant;

·                  Changes in the environmental regulations or in our ability to comply withthe environmental regulations that apply to our plant site and our operations;

·                  The effects of mergers, bankruptcies or consolidations in the ethanolindustry;

·                  Changes in federal and/or state laws including the Renewable FuelsStandard and VEETC, or the elimination of any federal and/or state ethanol taxincentives;

·                  Overcapacity within the ethanol industry;

·                  Changes in plant production capacity or technical difficulties in operatingthe plant;

·                  Changes and advances in ethanol production technology that may make itmore difficult for us to compete with other ethanol plants utilizing suchtechnology;

·                  Our ability to retain key employees and maintain labor relations;

·                  The development of infrastructure related to the sale and distribution ofethanol; and

·                  Competition in the ethanol industry and from alternative fuel additives.

 

Ouractual results or actions could and likely will differ materially from thoseanticipated in the forward-looking statements for many reasons, including butnot limited to the reasons described in this report.  We are not under any duty to update theforward-looking statements contained in this report.  We cannot guarantee future results, levels ofactivity, performance or achievements. We caution you not to put undue reliance on any forward-lookingstatements, which speak only as of the date of this report.  You should read this report and the documentsthat we reference in this report completely and with the understanding that ouractual future results may be materially different from what we currentlyexpect.  We qualify all of ourforward-looking statements by these cautionary statements.

 

**Available Information**

 

Informationabout us is also available at our website at*www.homelandenergysolutions.com*, under “Investor Relations — SECFilings,” which includes links to reports we have filed with the Securities andExchange Commission. The contents of our website are not incorporated byreference in this Quarterly Report on Form 10-Q.

 

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**Overview**

 

HomelandEnergy Solutions, LLC (referred to herein as “we,” “us,” the “Company,” “Homeland”or “Homeland Energy”) is an Iowa limited liability company.  Homeland was formed on December 7, 2005for the purpose of pooling investors for the development, construction andoperation of a 100 million gallon per year ethanol plant located near Lawler, Iowa.   We began producing ethanol and distillersgrains at the plant in April 2009. The ethanol plant is currently operating at a rate in excess of itsnameplate capacity of 100 million gallons per year.

 

Prior to April 2009, we installed theinfrastructure necessary to support plant operations and began operations.  We also obtained the permits required toconstruct and operate the plant. The total project cost was approximately $176million, which included construction of our ethanol plant and start-up ofoperations.  We financed the constructionand start-up of the ethanol plant with a combination of equity and debt.  We currently have 42 employees.

 

Our revenues are derived primarily from the sale ofour ethanol and distillers grains.  Wemarket and sell our products primarily in the continental United States throughthird party marketers.  We have anEthanol Marketing Agreement with Green Plains Trade Group LLC (“GPTG”), whichis the ethanol marketing and distribution subsidiary of Green Plains RenewableEnergy, LLC (“GPRE”).  We have alsoentered into a Distillers Grains Marketing Agreement with CHS, Inc. (“CHS”),pursuant to which CHS purchases the distillers grains produced at our plant andsells them to its customers.

 

On September 20, 2010, we executed the ThirdAmendment to our Master Loan Agreement with Home Federal Savings Bank, ourprimary lender.  The purpose of theamendment was to allow us to release the $10 million that Home Federal washolding in our debt service reserve account earlier than as provided by theterms of our loan agreements with Home Federal. We agreed to use cash from our reserves to make a prepayment of $10million on our term loan in order for Home Federal to release the $10 millionit was holding in the reserve account. Home Federal applied the $10 million from the reserve account to ourterm loan.  Therefore, the total amountwe prepaid on the Home Federal term loan as a result of the amendment was $20million.  Home Federal continues to holdapproximately $354,000 in accrued interest in the reserve account.

 

United States ethanol production is currentlybenefited by a 54 cent per gallon tariff imposed on ethanol imported into theUnited States.  However, the 54 cent pergallon tariff is set to expire at the end of the 2010 calendar year.  Elimination of the tariffcould lead to the importation of ethanol produced in other countries,especially in areas of the United States that are easily accessible byinternational shipping ports.  Ethanolimported from other countries may be a less expensive alternative todomestically produced ethanol and may affect our ability to sell our ethanolprofitably.

 

Ethanol production in the United States is alsobenefited by various tax incentives.  Themost significant of these tax incentives is the federal Volumetric EthanolExcise Tax Credit (VEETC).  VEETCprovides a volumetric ethanol excise tax credit of 4.5 cents per gallon ofgasoline that contains at least 10% ethanol (total credit of 45 cents pergallon of ethanol blended which is 4.5 divided by the 10% blend).  VEETC is scheduled to expire on December 31,2010.  If this tax credit is not renewed,it likely would have a negative impact on the price of ethanol and demand forethanol in the marketplace.

 

Demand for ethanol has been negatively affected bywhat is commonly referred to as the “blending wall.” The blending wall is anartificial cap on ethanol demand at approximately 13.5 billion gallons.  Currently, ethanol is blended withconventional gasoline for use in standard vehicles to create a blend which is10% ethanol and 90% gasoline.  Estimatesindicate that approximately 135 billion gallons of gasoline are sold in theUnited States each year.  Assuming thatall gasoline in the United States is blended at a rate of 10% ethanol and 90%gasoline, the maximum demand for ethanol is 13.5 billion gallons per year.

 

In order to expand demand for ethanol and meet therequirements of the Federal Renewable Fuels Standard (RFS), the ethanolindustry has been pushing for an increase in the percentage of ethanol that canbe used in standard (non-flex fuel) vehicles. Recently, the EPA allowed the use of E15, gasoline which is blended at arate of 

 

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15% ethanol and 85% gasoline, in vehiclesmanufactured in the model year 2007 and later. The EPA is expected to make a ruling on allowing E15 for use in vehiclesproduced in model year 2001 and later by the end of 2010.  However, management believes that manygasoline retailers will refuse to provide E15 due to the fact that not allstandard vehicles will be allowed to use E15 and due to the labeling requirementsthe EPA may impose.  The EPA isconsidering instituting labeling requirements associated with E15 which mayunfairly discourage consumers from purchasing E15.  As a result, the approval of E15 may notsignificantly increase demand for ethanol. In addition to E15, the ethanol industry is pushing the use of anintermediate blend of 12% ethanol and 88% gasoline called E12.  Management believes that E12 may be morebeneficial to the ethanol industry than E15 because many believe that E12 couldbe approved for use in all standard vehicles. Management believes this will make it easier for retailers to supply E12compared to E15, unless E15 is approved for use in all standard vehicles.  Two lawsuits were filed on November 9,2010 by representatives of the food industry and the petroleum industrychallenging the EPA’s approval of E15. It is unclear what effect these lawsuits will have on the implementationof E15 in the United States retail gasoline market.

 

The USDA recently announced that it will providefinancial assistance to help implement more “blender pumps” in the UnitedStates in order to increase demand for ethanol and to help offset the cost ofintroducing mid-level ethanol blends into the United States retail gasolinemarket.  A blender pump is a gasolinepump that can dispense a variety of different ethanol/gasoline blends.  Blender pumps typically can dispense E10, E20, E30,E40, E50 and E85.  These blender pump accomplish these different ethanol/gasoline blends byinternally mixing ethanol and gasoline which are held in separate tanks at theretail gas stations.  Many in the ethanolindustry believe that increased use of blender pumps will increase demand forethanol by allowing gasoline retailers to provide various mid-level ethanolblends in a cost effective manner and allowing consumers with flex-fuelvehicles to purchase more ethanol through these mid-level blends.  However, blender pumps cost approximately$25,000 each, so it may take time before they become widely available in theretail gasoline market.

 

In February 2010, the EPA issued newregulations governing the Renewable Fuels Standard (RFS), which new regulationsare commonly referred to as RFS2.  Themost controversial part of RFS2 involves the lifecycle analysis of greenhouse gasemissions.  Specifically, the EPA adoptedrules to determine which renewable fuels provided sufficient reductions ingreenhouse gases, compared to conventional gasoline, to qualify under the RFSprogram.  RFS2 establishes a tieredapproach, where regular renewable fuels are required to accomplish a 20%greenhouse gas reduction compared to gasoline, advanced biofuels andbiomass-based biodiesel must accomplish a 50% reduction in greenhouse gases,and cellulosic biofuels must accomplish a 60% reduction in greenhouse gases.  Any fuels that fail to meet this standardcannot be used by fuel blenders to satisfy their obligations under the RFSprogram.  The scientific method ofcalculating these greenhouse gas reductions has been a contentious issue.  Many in the ethanol industry were concernedthat corn based ethanol would not meet the 20% greenhouse gas reductionrequirement based on certain parts of the environmental impact model that manyin the ethanol industry believe is scientifically suspect.  However, RFS2 as adopted by the EPA providesthat corn-based ethanol from modern ethanol production processes does meet thedefinition of a renewable fuel under the RFS program.  Our ethanol plant was grandfathered into theRFS due to the fact that it was constructed prior to the effective date of thelifecycle greenhouse gas requirement and is not required to prove compliancewith the lifecycle greenhouse gas reductions. In addition, certain provisions of RFS2 as adopted by the EPA maydisproportionately benefit ethanol produced from sugarcane.  This could make sugarcane based ethanol,which is primarily produced in Brazil, more competitive in the United Statesethanol market.  If this were to occur,it could reduce demand for the corn based ethanol that we produce.

 

In addition to RFS2 which included greenhouse gasreduction requirements, in 2009, California passed a Low Carbon Fuels Standard(LCFS).  The California LCFS requiresthat renewable fuels used in California must accomplish certain reductions ingreenhouse gases, measured using a lifecycle analysis similar to RFS2.  Management believes that this lifecycleanalysis is based on unsound scientific principles that unfairly disadvantagescorn based ethanol.  Management believesthat these new regulations may preclude corn based ethanol from being used inCalifornia.  California represents asignificant ethanol demand market.  If weare unable to supply ethanol to California, it could significantly reducedemand for the ethanol we produce. Several lawsuits have been filed challenging the California LCFS.

 

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**Results of Operations for the Three Months Ended September 30,2010 and 2009**

 

The following table shows the results of ouroperations and the percentage of revenues, cost of goods sold, operatingexpenses and other items to total revenues in our statement of operations forthe three months ended September 30, 2010 and 2009.

 
| ** **                                   | ** ** | **Three Months Ended  September 30, 2010  (Unaudited)** | ** ** | **Three Months Ended  September 30, 2009  (Unaudited)** | ** ** |
|----------------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                   | ** ** | **Amount**                                              | ** ** | **%**                                                   | ** ** | **Amount** | ** ** | **%** | ** ** |
| **Income Statement Data**                    |       |                                                    |       |                                                    |       |   |   |   |   |
| Revenues                                     |       | $                                                       | 62,731,797 |                                                    | 100.0      |   | $ | 52,934,845 |   | 100.0 |   |
|                                         |       |                                                    |       |                                                    |       |   |   |   |   |
| Cost of Goods Sold                           |       | 60,382,414                                              |       | 96.3                                                    |       | 47,307,748 |   | 89.4 |   |
|                                         |       |                                                    |       |                                                    |       |   |   |   |   |
| Gross Profit                                 |       | 2,349,383                                               |       | 3.7                                                     |       | 5,627,097 |   | 10.6 |   |
|                                         |       |                                                    |       |                                                    |       |   |   |   |   |
| Selling, General and Administrative Expenses |       | 513,280                                                 |       | 0.8                                                     |       | 578,274 |   | 1.1 |   |
|                                         |       |                                                    |       |                                                    |       |   |   |   |   |
| Operating Income                             |       | 1,836,103                                               |       | 2.9                                                     |       | 5,048,823 |   | 9.5 |   |
|                                         |       |                                                    |       |                                                    |       |   |   |   |   |
| Other (Expense)                              |       | (532,178                                                | )          | 0.8                                                     |       | (819,050 | ) | 1.5 |   |
|                                         |       |                                                    |       |                                                    |       |   |   |   |   |
| Net Income                                   |       | 1,303,925                                               |       | 2.1                                                     |       | 4,229,773 |   | 8.0 |   |
|                                              |            |                                                         |            |                                                         |            |  |  |  |  |  |  |

 

***Revenues***

 

We generated significantly more revenue for thethird quarter of 2010 compared to the third quarter of 2009, primarily as aresult of an increase in the amount of ethanol and distillers grains that wesold during the 2010 period and due to an increase in the average price wereceived for our ethanol and distillers grains. The sale of ethanol and distillers grains is our only source of revenue.  For the third quarter of 2010, revenue fromethanol sales accounted for approximately 86% of our total revenue anddistillers grains sales accounted for approximately 14% of our totalrevenue.  For the third quarter of 2009,revenue from ethanol sales accounted for approximately 86% of our total revenueand distillers grains sales accounted for approximately 14% of our totalrevenue.  Our revenue is presented in ourfinancial statements net of the shipping costs that are incurred intransporting our ethanol and distillers grains to the end customer.  These shipping charges are deducted by ourethanol and distillers grains marketers from the amounts realized on the saleof our ethanol and distillers grains.

 

During the third quarter of 2010, the average pricewe received for our ethanol was approximately 9% greater than the average pricewe received during the third quarter of 2009. Management attributes this increase in the average price we received forour ethanol during the third quarter of 2010 compared to the same period of2009 with higher corn prices and increased ethanol exports which decreased thedomestic supply of ethanol.  Ethanolprices tend to shift in relation to changes in the price of corn and on generalsupply and demand factors in the ethanol industry.

 

Management anticipates that ethanol prices willremain steady in the next six months provided that corn prices do not increasesignificantly and provided that the VEETC blenders credit is renewed.  The blenders credit is scheduled to expire onDecember 31, 2010.  If this blenderscredit expires, we expect that gasoline blenders will only use as much ethanolas is required by the Federal RFS.  Thiscould eliminate ethanol demand for discretionary blending.  Some gasoline blenders voluntarily useethanol to increase the octane ratings of fuels they produce as well as toprovide price advantages compared to using 100% gasoline.  Since ethanol typically sells at a discountcompared to gasoline (including the blenders credit) discretionary blending ofethanol can be favorable to fuel blenders. In the event the VEETC blenders credit expires, the price of ethanolcould decrease and the industry may experience ethanol producers reducingproduction or ceasing production altogether. However, due to the RFS, we anticipate that there will continue to bedemand for ethanol, even if the blenders credit is not renewed.

 

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Management believes that in order to support demandfor ethanol and maintain ethanol prices, the United States must expand the useof mid-level blends of ethanol such as E15 and make these blends available foruse in all vehicles.  Many in the ethanolindustry believe that there is no scientific basis for excluding the use ofethanol blends up to 15% in all standard vehicles.  If these mid-level blends are not approvedfor use in all vehicles, management believes that it will not be possible tomeet the RFS requirements in future years.

 

The average price we received for both our drieddistillers grains and wet distillers grains was greater for the third quarterof 2010 compared to the third quarter of 2009. The average price we received per ton of dried distillers grains duringthe third quarter of 2010 was approximately 19% higher compared to the thirdquarter of 2009.  The average price wereceived per ton of wet distillers grains during the third quarter of 2010 wasapproximately 19% higher compared to the third quarter of 2009.  Management attributes this increase indistillers grains prices with higher corn prices during the 2010 period andincreased exports of distillers grains. The ethanol industry primarily exports distillers grains to Mexico,China and Canada.  Recently China hassignificantly increased its distillers grains imports and management believesthat China will continue to be a major importer of distillers grains from theUnited States.  Management anticipatesthat distillers grains prices will continue to follow corn prices.  However, management believes that distillersgrains exports will continue to have a major effect on market distillers grainsprices.

 

The ethanol plant continues to produce ethanol anddistillers grains at a rate that is in excess of our nameplate productioncapacity of 100 million gallons per year. Management continues to fine tune the operation of the ethanol plant inan effort to increase the amount of ethanol and distillers grains that we canproduce and to increase production efficiency.

 

***Cost of Goods Sold***

 

Our two primary costs of producing ethanol anddistillers grains are corn costs and natural gas costs.   Our cost of goods sold was approximately96.3% of our total revenues for the third quarter of 2010.  Our cost of goods sold was approximately 89.4%of our total revenues for the third quarter of 2009.  The average price we paid per bushel of cornduring the third quarter of 2010 increased by approximately 4% compared to thethird quarter of 2009.  Managementattributes this increase to anticipated decreases in corn yields and carryoverduring 2010 that has increased market corn prices during our third quarter of2010.

 

Management anticipates that corn prices willcontinue to increase in the fourth quarter of 2010 due to reduced corn yieldsand increases in corn exports.  Thesecorn price increases could be sustained if the actual number of bushels of cornharvested in the fall of 2010 is lower than initially anticipated, furthertightening corn supplies.

 

The average price we paid per MMbtu of natural gaswas approximately 28% higher for the third quarter of 2010 compared to thethird quarter of 2009.  Managementattributes this increase in natural gas prices with a more positive economicoutlook.  However, natural gas suppliesare comparable to last year so the increased natural gas prices are notnecessarily related to actual increased natural gas demand.  Management anticipates that natural gasprices will be higher in the fourth quarter of 2010 and the first quarter of2011 due to premium pricing we experience during the winter months.  Further, our guaranteed natural gas deliverycosts increase during the winter months so we can assure an adequate supply ofnatural gas is delivered to the ethanol plant.  The United States is continuing to locate anddevelop new natural gas supplies which has maintained lower natural gascosts.  We anticipate that supplies ofnatural gas will continue to be adequate to maintain lower natural gas pricesthan we experienced several years ago. However, management anticipates that natural gas prices could increaseif global economic conditions continue to improve which may result in increasednatural gas demand.

 

During the third quarter of 2010, we experienced anapproximately $(2,644,000) realized (loss) and an unrealized (loss) ofapproximately $(2,527,000) related to our corn, ethanol and natural gasderivative instruments.  During the thirdquarter of 2009, we experienced an approximately $1,301,000 realized gain andan unrealized (loss) of approximately $(451,000) related to our corn, ethanoland natural gas derivative instruments. For accounting purposes, we recognize the gains and losses that resultfrom changes in the value of our derivative instruments in cost of goods soldas the changes occur.  Our plant isexpected to grind over 40 million bushels of corn per year.  We anticipate entering into risk managementpositions with respect to approximately 5 to 60% of our annual corn

 

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needs.  As of September30, 2010, we had risk management positions in place for approximately 12% ofour corn needs for the next 12 months. In addition, we anticipate entering into derivative instrument positionswith respect to approximately 2 to 5% of our annual natural gas needs.  As of September 30, 2010, we had riskmanagement positions in place for approximately 8% of our natural gas needs forthe next 12 months.

 

***Selling, General and Administrative Expenses***

 

Our selling, general and administrative expenseswere less during the third quarter of 2010 compared to the third quarter of2009.  Management attributes thisdecrease with decreased bank fees due to our non-renewal of the $6 millionseasonal line of credit and significantly decreased accounting and legal feesduring the third quarter of 2010 compared to the third quarter of 2009.

 

***Other (Expense)***

 

Our other expense was less for the third quarter of2010 compared to the third quarter of 2009. We had less interest expense during our third quarter of 2010 as aresult of payments we made on our long-term debt, including a significantprepayment we made in September 2010.  Wealso experienced more interest income during the third quarter of 2010 comparedto the same period of 2009 as a result of having more cash on hand during the2010 period.

 

**Results of Operations for the Nine Months Ended September 30,2010 and 2009**

 

The following table shows the results of ouroperations and the percentage of revenues, cost of goods sold, operatingexpenses and other items to total revenues in our statement of operations forthe nine months ended September 30, 2010 and 2009.  The ethanol plant commenced operations inearly April 2009.  Therefore, the resultsof our operations for the nine months ended September 30, 2009 only representapproximately six months of operations compared to nine months during the 2010period.

 
| ** **                                   | ** ** | **Nine Months Ended********September 30,****2010  (Unaudited)** | ** **  | **Nine Months Ended********September 30,****2009  (Unaudited)** | ** ** |
|----------------------------------------------|------------|-----------------------------------------------------------------|-------------|-----------------------------------------------------------------|------------|
| ** **                                   | ** ** | **Amount**                                                      | ** **  | **%**                                                           | ** ** | **Amount** | ** ** | **%** | ** ** |
| **Income Statement Data**                    |       |                                                            |        |                                                            |       |   |   |   |   |
| Revenues                                     |       | $                                                               | 175,375,199 |                                                            | 100.0      |   | $ | 92,497,563 |   | 100.0 |   |
|                                         |       |                                                            |        |                                                            |       |   |   |   |   |
| Cost of Goods Sold                           |       | 162,739,328                                                     |        | 92.8                                                            |       | 85,441,326 |   | 92.4 |   |
|                                         |       |                                                            |        |                                                            |       |   |   |   |   |
| Gross Profit                                 |       | 12,635,871                                                      |        | 7.2                                                             |       | 7,056,237 |   | 7.6 |   |
|                                         |       |                                                            |        |                                                            |       |   |   |   |   |
| Selling, General and Administrative Expenses |       | 1,446,319                                                       |        | 0.8                                                             |       | 1,854,899 |   | 2.0 |   |
|                                         |       |                                                            |        |                                                            |       |   |   |   |   |
| Operating Income                             |       | 11,189,552                                                      |        | 6.4                                                             |       | 5,201,338 |   | 5.6 |   |
|                                         |       |                                                            |        |                                                            |       |   |   |   |   |
| Other (Expense)                              |       | (1,738,679                                                      | )           | 1.0                                                             |       | (1,064,211 | ) | 1.2 |   |
|                                         |       |                                                            |        |                                                            |       |   |   |   |   |
| Net Income                                   |       | 9,450,873                                                       |        | 5.4                                                             |       | 4,137,127 |   | 4.5 |   |
|                                              |            |                                                                 |             |                                                                 |            |  |  |  |  |  |  |

 

***Revenues***

 

Our revenue increased significantly for the ninemonth period ended September 30, 2010 compared to the same period of 2009.  This increase in revenue was primarily theresult of a significant increase in the amount of ethanol and distillers grainswe sold during the 2010 period.  Ourethanol plant was only operational for approximately six of the nine monthsduring the 2009 period.  In addition tothe increased production of ethanol and distillers grains, we experienced asmall increase in the average price we received per gallon of ethanol we soldduring the nine month period ended September 30, 2010 compared to the sameperiod of 2009.  For the nine monthsended September 30, 2010, revenue from ethanol sales accounted forapproximately 86% of our total revenue and distillers grains sales accountedfor approximately 14% of our total revenue. For the nine month period ended

 

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September 30, 2009, revenue from ethanol salesaccounted for approximately 84% of our total revenue and distillers grainssales accounted for approximately 16% of our total revenue.  The average price we received per gallon ofethanol sold increased by approximately 4% during the nine months ended September30, 2010 compared to the same period of 2009. However, the average price we received per ton of dried distillersgrains decreased by approximately 3% for the nine month period ended September 30,2010 compared to the same period of 2009. The average price we received per ton of modified/wet distillers grainsincreased by approximately 3% for the nine month period ended September 30,2010 compared to the same period of 2009. We sell significantly more tons of dried distillers grains compared tomodified/wet distillers grains due to supply and demand factors in thedistillers grains market.

 

***Cost of Goods Sold***

 

Our cost of goods sold increased significantly forthe nine month period ended September 30, 2010 compared to the same nine monthperiod of 2009.  Due to the fact that wesignificantly increased our production of ethanol and distillers grains duringthe 2010 period, the cost of our raw materials increased significantly aswell.  Partially offsetting the increasedquantity of corn and natural gas we purchased in order to increase our ethanoland distillers grains production, the average price we paid per bushel of corndecreased by approximately 4% for the nine month period ended September 30,2010 compared to the same period of 2009 due to market factors affecting thecorn market.  Further, our average priceper MMbtu of natural gas during the 2010 period was approximately 39% highercompared to the 2009 period.  Due to thefact that our production of ethanol and distillers grains increased sosignificantly, a comparison of the relative costs of goods sold during the twoperiods is not indicative of our expectations for future periods.

 

During the nine month period ended September 30,2010, we experienced an approximately $290,000 realized gain and an unrealized(loss) of approximately $(2,527,000) related to our corn, ethanol and naturalgas derivative instruments.  During the ninemonth period ended September 30, 2009, we experienced an approximately$3,112,000 realized gain and an unrealized (loss) of approximately $(451,000)related to our corn, ethanol and natural gas derivative instruments.

 

***Selling, General and Administrative Expenses***

 

We experienced a significant decrease in ourselling, general and administrative expenses during the nine month period endedSeptember 30, 2010 compared to the same period of 2009.  Management attributes this decrease withdecreased bank fees due to our non-renewal of the $6 million seasonal line ofcredit and decreased accounting and legal fees during the 2010 period comparedto the 2009 period.  In addition, we hadan asset impairment of approximately $481,000 which was included in our selling,general and administrative expenses during the 2009 period.

 

***Other (Expense)***

 

We experienced an increase in other expense for thenine month period ended September 30, 2010 compared to the same period of2009.  This increase was primarily theresult of an increase in interest expense during the 2010 period along with thefact that we had other grant income of $300,000 during the 2009 period whichdecreased our other expense during that period. We experienced an increase in our interest expense during the 2010period due to the fact that we were paying interest on our Home Federal loansduring the entire nine month period. During the first nine months of 2009, we were only required to payinterest on our Home Federal loans once the ethanol plant became operational inearly April 2009.  Prior to that time,any interest that accrued on our Home Federal loans was capitalized.  Therefore, we included only approximately sixmonths of interest during the 2009 period in our other expense.

 

**Changes in Financial Condition for the Nine Months Ended September 30,2010**

 

Ourcurrent assets were lower as of September 30, 2010 compared to December 31,2009, primarily due to decreased accounts receivable, inventory and prepaidexpenses.  These decreases were offset byincreases in the amount we had due from our commodities broker, cash that wehad on hand and other current assets at September 30, 2010 compared to December31, 2009.  The value of our accountsreceivable was lower at September 30, 2010

 

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comparedto December 31, 2009 as a result of the timing of our payments from ourfinished products marketers.  The valueof our inventory was also lower at September 30, 2010 compared to December 31,2009 as a result of timing differences between the two periods.  We had less prepaid expenses at September 30,2010 compared to December 31, 2009 because we are no longer required to prepayfor our natural gas purchases as a result of the extension of trade credit byour natural gas supplier.  We hadsignificantly more cash due from our commodities broker at September 30, 2010compared to December 31, 2009 as a result of the effect that increased corncosts have on our derivative instruments along with having more risk managementpositions at September 30, 2010 compared to December 31, 2009.  Our other current assets were higher at September30, 2010 compared to December 31, 2009 due to an increase in our maintenancespare parts inventory.

 

Thenet value of our property and equipment was lower at September 30, 2010compared to December 31, 2009 due to increased accumulated depreciation at September30, 2010.  We have several efficiencyimprovement projects ongoing that are included in our construction in progressthat increase the gross value of our property and equipment.

 

Thevalue of our other assets was significantly lower at September 30, 2010compared to December 31, 2009 due to the fact that our lender allowed us torelease $10 million from our restricted cash account to prepay a portion of ourloans in September 2010.  We still haveapproximately $354,000 in our restricted cash account with our primary lenderwhich is the accrued interest on the $10 million previously held in ourrestricted cash account.  Further, thevalue of our loan fees and utility rights on our balance sheet continue todecrease due to our continued amortization of these expenses.

 

Ourtotal current liabilities were higher at September 30, 2010 compared to December31, 2009.  Our accounts payable werelower at September 30, 2010 compared to December 31, 2009 due to our cornsuppliers seeking to defer payments until after the end of their tax years on December31.  This results in an artificially highaccounts payable at December 31st each year dueto these deferred corn payments.  Ourderivative instruments represented a larger liability on our balance sheet at September30, 2010 compared to December 31, 2009 due to the effect that increased cornprices have on our derivative instrument positions as well as having morederivative instrument positions in place at September 30, 2010 compared to December31, 2009.  We commenced making principalpayments on our long-term debt in February 2010.  As a result, the current portion of ourlong-term debt was higher at September 30, 2010 compared to December 31, 2009because we had a full 12 months of principal payments on our long-term debtincluded in our current portion of long-term debt at September 30, 2010compared to only 11 months of principal payments at December 31, 2009.  The total amount of our long-term debt wassignificantly lower at September 30, 2010 compared to December 31, 2009 due toour continuing debt service payments, a $5 million free cash flow payment wemade early in the second quarter of 2010, and an approximately $20 millionprepayment we made on our term loan in September 2010.  These payments resulted in an approximately$30 million reduction in our long-term debt from December 31, 2009 to September30, 2010.

 

**Liquidity and Capital Resources**

 

Our primary sources ofliquidity are cash from our operations and our $20 million term revolvingloan.  These credit facilities aredescribed in greater detail below under “Short-Term and Long-Term Debt Sources.”  As of September 30, 2010, we had $20 millionavailable pursuant to the term revolving loan. In addition, we had approximately $1.3 million in cash and equivalentsat September 30, 2010.  Based onfinancial forecasts performed by our management, we anticipate that we willhave sufficient cash from our current credit facilities and cash from ouroperations to continue to operate the ethanol plant at capacity for the next 12months.  We do not anticipate seekingadditional equity or debt financing in the next 12 months.  However, should we experience unfavorableoperating conditions in the future, we may have to secure additional debt orequity financing for working capital or other purposes.

 

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Thefollowing table shows cash flows for the nine months ended September 30, 2010and 2009:

 
| ** **                                           | ** ** | **Nine Months Ended September 30** | ** ** |
|------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                           | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| Net cash provided by (used in) operating  activities |       | $                                  | 22,398,472 |   | $ | (705,785 | ) |
| Net cash (used in) investing activities              |       | (1,900,440                         | )          | (27,113,676 | ) |
| Net cash provided by (used in) financing  activities |       | (20,040,092                        | )          | 27,774,862 |   |
|                                                      |            |                                    |            |  |  |  |  |

 

OperatingCash Flows.  Wegenerated significantly more cash from our operating activities during the ninemonth period ended September 30, 2010 compared to the same period of 2009because our plant was operational during the entire 2010 period and our netincome was greater during the 2010 period compared to the 2009 period.  Further, since we were just startingoperations during the 2009 period, we used cash to build our inventories whichnegatively impacted our cash flow from operating activities.

 

InvestingCash Flows.  We usedless cash for investing activities during the nine month period ended September30, 2010 compared to the same period of 2009. We used cash during the 2009 period for equipment purchases andconstruction in progress payments as we were completing the construction of ourethanol plant at that time.  During the2010 period, we used cash for construction in progress related to an ongoingefficiency improvement project.  Our cashflow from investments was also positively impacted during the 2010 period dueto a utility rights refund that we received.

 

FinancingCash Flows.  Ourfinancing activities provided cash during the nine month period ended September30, 2009 due to approximately $26.6 million that we received from our HomeFederal loans which we used to pay costs associated with the construction ofour ethanol plant.  By comparison, duringthe nine month period ended September 30, 2010, we used cash for our financingactivities in making payments on our Home Federal term loan, including a significantprepayment we made in September 2010 and a free cash flow payment we madeduring the second quarter of 2010.  Ourcash flow from financing activities was positively impacted by the release ofcash from our restricted cash account as a result of our loan prepayment.

 

**Short-Termand Long-Term Debt Sources**

 

Master Loan Agreement with Home Federal SavingsBank

 

On November 30, 2007, we entered into a Master LoanAgreement with Home Federal Savings Bank (“Home Federal”) establishing a seniorcredit facility with Home Federal.  Inreturn, we executed a mortgage in favor of Home Federal creating a senior lienon substantially all of our assets.  TheMaster Loan Agreement provides for a (i) $74 million term loan; (ii) $20million term revolving loan; and (iii) $6 million seasonal revolving line ofcredit.

 

*Term Loan*

 

The original principal amount of the term loan was$74,000,000.  We made monthly payments ofaccrued interest on the term loan until February 1, 2010.  On February 1, 2010, we began making equalmonthly principal payments in the amount of $616,667 plus accrued interest. Allunpaid principal and accrued interest on the term loan will be due on July 1,2014. We have the right to convert up to 50% of the term loan into a fixed rateloan with the consent of Home Federal. The fixed rate loan will bear interestat the five year London Interbank Offered Rate (LIBOR) swap rate that is ineffect on the date of conversion plus 300 basis points, or another ratemutually agreed upon between us and Home Federal. If we elect this fixed rateoption, the interest rate will not be subject to any adjustments otherwiseprovided for in the Master Loan Agreement. The remaining portion of the termloan will bear interest at a rate equal to the LIBOR plus 300 basis points.  We made a free cash flow payment of $5million during our second quarter of 2010 which reduced the principal balanceof our term loan.  In addition, in September2010, we entered into an amendment of our loan agreement with Home Federalwhich allowed us to release $10 million from our restricted cash account earlyin order to prepay a portion of our term loan. In order to release this restricted cash early, we were required to makean additional $10 million prepayment to Home Federal.  Therefore, we made a

 

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total prepayment of $20 million on our term loan inSeptember 2010.  As of September 30,2010, the principal balance of the Home Federal term loan was approximately$39,067,000.  As of September 30, 2010,interest on the term loan accrued at an annual rate of 3.258%.

 

*Term Revolving Loan*

 

In addition to the term loan, we have a $20,000,000term revolving loan which has a maturity date of July 1, 2014. Interest on theterm revolving loan accrues at a rate equal to the LIBOR plus 300 basis points.We are required to make monthly payments of interest until the maturity date ofthe term revolving loan, on which date the unpaid principal amount of the termrevolving loan becomes due.  As of September30, 2010, we had no outstanding borrowing and $20,000,000 available to be drawnon the term revolving loan.

 

*Seasonal Revolving Line of Credit*

 

Under the terms of the Master Loan Agreement, weagreed to the terms of a seasonal revolving line of credit. The revolving lineof credit became available on July 1, 2009 and expired on June 30, 2010.  Management does not anticipate reinstatingthis revolving line of credit.

 

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

 

Covenants

 

In connection with the Master Loan Agreement, weare required to comply with certain debt covenants and financial ratios.  As of September 30, 2010, we were incompliance with all of our debt covenants and financial ratios.  In September 2010, we executed an amendmentto our Master Loan Agreement that allowed us to release $10 million HomeFederal was holding in a restricted debt reserve fund early.  However, should our tangible net worth fallbelow 65% at any time in the future, we are required to replenish therestricted debt service fund.  Tangiblenet worth is calculated as the excess total assets, including the debt reserveaccount, (with certain exclusions, such as intangible assets) over totalliabilities (except subordinated debt if applicable).  As of September 30, 2010, we had tangible networth of approximately 71% or approximately $116,420,000.

 

In addition, we are subject to certain financialcovenants at various times calculated monthly, quarterly or annually.  We were required to have working capital ofat least $12,000,000 as of July 1, 2010 and annually thereafter.  Our tangible net worth requirement was$90,000,000 as of December 31, 2009, and increases by $5,000,000 annually untilwe are required to meet $105,000,000 by December 31, 2012, and annuallythereafter.  Management anticipates thatwe will be in compliance with all of our debt covenants and financial ratiosfor the next 12 months.

 

Failure to comply with the loan covenants ormaintain the required financial ratios may cause acceleration of theoutstanding principal balances on the loans and/or the imposition of fees,charges or penalties.  Any accelerationof the debt financing or imposition of the significant fees, charges orpenalties may restrict or limit our access to the capital resources necessaryto continue plant operations.  Should wedefault on any of our obligations pursuant to the Home Federal loans, HomeFederal may terminate its commitment to provide us funds and declare the entireunpaid principal balance of the loans, plus accrued interest, immediately dueand payable.  Events of default include,the failure to make payments when due, our insolvency, any material adversechange in our financial condition or the breach of any of the covenants,representations or warranties we have in connection with the transaction.

 

We are required by the Master Loan Agreement tomake an additional payment each year equal to 100% of our excess cash flow asthat term is defined in the Master Loan Agreement.  This excess cash flow payment is capped at$5,000,000 each year.  Following the endof the first quarter of 2010, we made an excess cash flow payment of $5,000,000to Home Federal.  As a result, we willmake no further excess cash flow payments during our 2010 fiscal year.  We are only required to make the excess cashflow payment until our tangible net worth is equal to or greater than 65% ofour total assets.

 

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*Grantsand Government Programs*

 

Inaddition to our equity and debt financing, we have applied for and receivedvarious grants.  In May 2006 we receiveda grant from the Iowa Corn Promotion Board in the amount of $25,000 for thepreparation of our feasibility study and legal fees during our equity drive.

 

OnDecember 19, 2007, the Iowa Department of Economic Development approved us fora package of benefits under the High Quality Jobs Program from the State ofIowa. Such tax benefits include a refund of sales, service and use taxes paidto contractors during the construction phase, an investment tax credit of up to$10,000,000 for qualified expenditures directly related to the new jobscreated, and a property tax exemption for a portion of the value added byimprovements we made to our property directly related to new jobs created bythe plant (estimated at $10,350,000).  Inorder to receive these benefits, we are required to meet certain requirementsby 2012, such as the creation of 40 full-time employee positions meeting certainminimum wage and benefit criteria.  These40 positions must be maintained for at least two years following theircreation. Currently, we have 42 employees and hope to maintain the minimum jobrequirement until 2012.   We alsoreceived a grant of $240,000 from the Iowa Department of Transportation underthe RISE Program for the construction of a turning lane off of Iowa Highway 24to the plant.

 

OnSeptember 16, 2009, we received notice that we had satisfied the conditions fordisbursing the sales, service and use tax refund and the investment taxcredit.  The Department of EconomicDevelopment agreement contains certain requirements that we must meet through2012.  In the event that we fail to meetor maintain any one of the requirements of the High Quality Jobs CreationProgram or Funding Agreement, we are subject to repayment of all or a portionof the incentives and assistance received based on specific provisions of theagreement.  The agreement provides thatIDED may elect to have us repay a portion of the benefits received, on a prorata basis, based on the number of jobs attained compared to the number of jobspledged.  We have maintained all of therequirements to be met to date and have not incurred any liability forrepayment of the incentives and assistance received.

 

Wereceived preliminary approval for a loan guarantee of 60% of a potential$40,000,000 loan through Home Federal from the United States Department ofAgriculture (“USDA”) under the Rural Energy Program based on some uniqueefficiencies at our plant.  Currently,the board has decided not to pursue this loan guarantee due to costs associatedwith the loan guarantee.

 

InJune 2009, we were awarded a $300,000 working capital grant from the USDApursuant to the Value-Added Producer Grant (“VAPG”) program.  Pursuant to the program, the USDA can provideup to 50% of the eligible project amount, which in our case was $625,000.  We are required to utilize the funds, as wellas the $325,000 in matching funds, for corn, yeast, enzymes and processingchemical purchases.

 

*Grantsand Government Programs for Coal Gasification*

 

Weapplied to the Iowa Power Fund for approximately $8,000,000 in funds to helpfinance the construction of a coal gasification energy center.  However, our application was rejected and wewill not receive any funds from the Iowa Power Fund at this time.

 

Wewere awarded two unsecured loans from the Iowa Department of EconomicDevelopment.  The forgivable loan wassubject to installation of coal gasification technology.  We repaid the interest free and forgivableloans in full on April 23, 2009 because we did not fulfill the coalgasification requirement of the IDED agreement.

 

**Applicationof Critical Accounting Estimates and Significant Accounting Policies**

 

Managementuses estimates and assumptions in preparing our financial statements inaccordance with generally accepted accounting principles.  These estimates and assumptions affect thereported amounts of assets and liabilities, the disclosure of contingent assetsand liabilities, and the reported revenues and expenses.

 

We evaluate our contracts to determine whether thecontracts are derivative instruments. Certain contracts that literally meet the definition of a derivative maybe exempted from derivative accounting as normal purchases or

 

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normal sales. Normal purchases and normal sales are contracts that provide for thepurchase or sale of something other than a financial instrument or derivativeinstrument that will be delivered in quantities expected to be used or soldover a reasonable period in the normal course of business.  Contracts that meet the requirements ofnormal purchases or sales are documented as normal and exempted from theaccounting and reporting requirements of derivative accounting.

 

We enter into short-term cash, option and futurescontracts as a means of securing purchases of corn, natural gas and sales ofethanol for the plant and managing exposure to changes in commodity and energyprices.  All of our derivatives aredesignated as non-hedge derivatives, with changes in fair value recognized innet income.  Although the contracts areeconomic hedges of specified risks, they are not designated as and accountedfor as hedging instruments.

 

As part of our trading activity, we use futures andoption contracts through regulated commodity exchanges to manage our riskrelated to pricing of inventories.  Toreduce that risk, we generally take positions using cash and futures contractsand options.

 

Realized and unrealized gains and losses related toderivative contracts related to corn and natural gas are included as acomponent of cost of goods sold and derivative contracts related to ethanol areincluded as a component of revenues in the accompanying financialstatements.  The fair values of contractsentered through commodity exchanges are presented on the accompanying balancesheet as derivative instruments.

 

Revenue from the sale of our products is recognizedat the time title to the goods and all risks of ownership transfer to thecustomers.  This generally occurs uponshipment, loading of the goods or when the customer picks up the goods.Interest income is recognized as earned. Shipping costs incurred in the sale of ethanol and distillers grains arenot specifically identifiable and as a result, revenue from the sale of ethanoland distillers grains is recorded based on the net selling price reported to usfrom the marketer.

 

We consider the carrying amount of significantclasses of financial instruments on the balance sheets including cash, accountsreceivable, due from broker, restricted cash, other assets, accounts payable,accrued liabilities and variable rate long-term debt to be reasonable estimatesof fair value either due to their length of maturity or the existence ofvariable interest rates underlying such financial instruments that approximateprevailing market rates at September 30, 2010.

 

We review our property and equipment for impairment whenever eventsindicate that the carrying amount of the assets may not be recoverable.  Ifcircumstances require a long-lived asset be tested for possible impairment, wefirst compare undiscounted cash flows expected to be generated by an asset tothe carrying value of the asset. If the carrying value of the long-lived assetis not recoverable on an undiscounted cash flow basis, an impairment isrecognized to the extent that the carrying value exceeds its fair value. Fairvalue is determined through various valuation techniques including discountedcash flow models, quoted market values and third-party independent appraisals,as considered necessary.

 

**Off-Balance Sheet Arrangements**

 

We do not have any off-balance sheet arrangements.

 

**Item 3.**** ****Quantitativeand Qualitative Disclosures about Market Risk.**

 

Weare a smaller reporting company as defined by Rule 12b-2 of the SecuritiesExchange Act of 1934 and are not required to provide information under thisitem.

 

**Item 4.  Controls and Procedures.**

 

Wemaintain disclosure controls and procedures that are designed to ensure thatinformation required to be disclosed in the reports that we file or submitpursuant to the Securities Exchange Act of 1934 (the “Exchange Act”) isrecorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission’s rules and forms, and that suchinformation is accumulated and communicated to our management,

 

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includingour Chief Executive Officer and Chief Financial Officer, as appropriate, toallow for timely decisions regarding required disclosures.

 

Ourmanagement, including our President and Chief Executive Officer (the principalexecutive officer), Walter Wendland, along with our Chief Financial Officer,(the principal financial officer), Jeffrey Grober, have reviewed and evaluatedthe effectiveness of our disclosure controls and procedures as of September 30,2010.  Based on this review andevaluation, these officers believe that our disclosure controls and proceduresare effective in ensuring that material information related to us is recorded,processed, summarized and reported within the time periods required by theforms and rules of the Securities and Exchange Commission.

 

Forthe fiscal quarter ended September 30, 2010, there has been no change in ourinternal control over financial reporting that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

**PART II.****               ****OTHER INFORMATION**

 

**Item 1.**** ****LegalProceedings**

 

Fromtime to time in the ordinary course of business, Homeland Energy Solutions, LLCmay be named as a defendant in legal proceedings related to various issues,including without limitation, workers’ compensation claims, tort claims, orcontractual disputes.  We are notcurrently involved in any material legal proceedings.

 

**Item 1A.  Risk Factors.**

 

Weare a smaller reporting company as defined by Rule 12b-2 of the SecuritiesExchange Act of 1934 and are not required to provide information under thisitem.

 

**Item 2.  Unregistered Sales of Equity Securities andUse of Proceeds.**

 

None.

 

**Item 3.  Defaults Upon Senior Securities**

 

None.

 

**Item 4.  (Removed and Reserved)**

 

**Item 5.  Other Information**

 

None.

 

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**Item 6.**** ****Exhibits**

 

(a)           The followingexhibits are filed as part of, or are incorporated by reference into, thisreport:

 
| **Exhibit  No.** | ** ** | **Exhibit**                                                                                                                                    | ** ** | **Filed  Herewith** | ** ** | **Incorporated by Reference** |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|-------------------------------|
| 10.1             |       | Third  Amendment to the Master Loan Agreement between Homeland Energy Solutions, LLC  and Home Federal Savings Bank dated September 10, 2010 . |       | X                   |       |                          |
|             |       |                                                                                                                                           |       |                |       |                          |
| 31.1             |       | Certificate  Pursuant to 17 CFR 240.13a-14(a)                                                                                                  |       | X                   |       |                          |
|             |       |                                                                                                                                           |       |                |       |                          |
| 31.2             |       | Certificate  Pursuant to 17 CFR 240.13a-14(a)                                                                                                  |       | X                   |       |                          |
|             |       |                                                                                                                                           |       |                |       |                          |
| 32.1             |       | Certificate  Pursuant to 18 U.S.C. Section 1350                                                                                                |       | X                   |       |                          |
|             |       |                                                                                                                                           |       |                |       |                          |
| 32.2             |       | Certificate  Pursuant to 18 U.S.C. Section 1350                                                                                                |       | X                   |       |                          |

 

**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
|   |               |   | HOMELAND  ENERGY SOLUTIONS, LLC                                       |
|--------|--------------------|--------|-----------------------------------------------------------------------|
|   |               |   |                                                                  |
|   |               |   |                                                                  |
| Date:  | November  12, 2010 |   | /s/  Walter W. Wendland                                               |
|   |               |   | Walter  W. Wendland                                                   |
|   |               |   | Chief  Executive Officer and President (Principal Executive Officer)  |
|   |               |   |                                                                  |
|   |               |   |                                                                  |
| Date:  | November  12, 2010 |   | /s/  Jeffrey S. Grober                                                |
|   |               |   | Jeffrey  S. Grober                                                    |
|   |               |   | Chief  Financial Officer (Principal Financial and Accounting Officer) |

 

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