Attached files
file | filename |
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EX-32.1 - EXHIBIT 32.1 - HOMELAND ENERGY SOLUTIONS LLC | c92501exv32w1.htm |
EX-31.2 - EXHIBIT 31.2 - HOMELAND ENERGY SOLUTIONS LLC | c92501exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - HOMELAND ENERGY SOLUTIONS LLC | c92501exv31w1.htm |
EX-32.2 - EXHIBIT 32.2 - HOMELAND ENERGY SOLUTIONS LLC | c92501exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the fiscal quarter ended September 30, 2009
OR
o | Transition report under Section 13 or 15(d) of the Exchange Act. |
For
the transition period from to
.
Commission file number 000-53202
HOMELAND ENERGY SOLUTIONS, LLC
(Exact name of small business issuer 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)
(Address of principal executive offices)
(563) 238-5555
(Issuers telephone number)
(Issuers telephone number)
Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ Yes o No
Indicate by check mark whether the Registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the Registrant was required to submit and post such files). Yes o
No o
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). o Yes þ No
State the number of shares outstanding for each of the issuers classes of common equity as of the
latest practicable date: As of November 1, 2009, there were 91,445 units outstanding.
INDEX
Page No. | ||||||||
3 | ||||||||
3 | ||||||||
18 | ||||||||
28 | ||||||||
28 | ||||||||
30 | ||||||||
30 | ||||||||
30 | ||||||||
30 | ||||||||
30 | ||||||||
30 | ||||||||
30 | ||||||||
30 | ||||||||
31 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
2
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Homeland Energy Solutions, LLC
Balance Sheets
September 30, 2009 and December 31, 2008
September 30, 2009 and December 31, 2008
9/30/2009 | 12/31/2008 | |||||||
Unaudited | Audited | |||||||
ASSETS |
||||||||
CURRENT ASSETS |
||||||||
Cash and cash equivalents |
$ | | $ | 44,599 | ||||
Accounts receivable |
5,309,399 | | ||||||
Inventory |
6,156,291 | | ||||||
Due from broker |
900,532 | | ||||||
Prepaid and other |
1,411,152 | 115,867 | ||||||
Total current assets |
13,777,374 | 160,466 | ||||||
PROPERTY AND EQUIPMENT |
||||||||
Land and improvements |
22,437,848 | 3,705,585 | ||||||
Buildings |
4,859,131 | | ||||||
Equipment |
129,595,163 | 58,963 | ||||||
Construction in progress |
411,117 | 136,065,515 | ||||||
157,303,259 | 139,830,063 | |||||||
Less accumulated depreciation |
5,783,987 | 7,886 | ||||||
Total property and equipment |
151,519,272 | 139,822,177 | ||||||
OTHER ASSETS |
||||||||
Loan fees, net of amortization 2009 $362,074; 2008 $229,382 |
810,898 | 943,590 | ||||||
Restricted cash |
10,215,033 | 10,044,677 | ||||||
Assets held for sale |
250,000 | | ||||||
Utility rights, net of amortization 2009
$78,672; 2008 $0 |
2,639,496 | 2,085,708 | ||||||
Total other assets |
13,915,427 | 13,073,975 | ||||||
TOTAL ASSETS |
$ | 179,212,073 | $ | 153,056,618 | ||||
9/30/2009 | 12/31/2008 | |||||||
LIABILITIES AND MEMBERS EQUITY |
||||||||
CURRENT LIABILITIES |
||||||||
Checks issued in excess of bank balance |
$ | 1,540,162 | $ | | ||||
Accounts payable |
2,034,414 | 2,877,051 | ||||||
Derivative instruments |
450,670 | | ||||||
Retainage payable |
607,856 | 6,532,576 | ||||||
Interest payable |
234,562 | | ||||||
Property tax payable |
41,852 | 6,424 | ||||||
Payroll payable |
140,676 | 20,870 | ||||||
Current maturities of long term liabilities |
4,933,336 | 20,000 | ||||||
Total current liabilities |
9,983,528 | 9,456,921 | ||||||
COMMITMENTS AND CONTINGENCIES (NOTE 6) |
||||||||
LONG-TERM DEBT, less current maturities |
73,128,527 | 51,636,807 | ||||||
MEMBERS EQUITY |
||||||||
Capital units, less syndication costs |
89,572,744 | 89,572,744 | ||||||
Retained earnings |
6,527,274 | 2,390,146 | ||||||
Total members equity |
96,100,018 | 91,962,890 | ||||||
TOTAL LIABILITIES AND MEMBERS EQUITY |
$ | 179,212,073 | $ | 153,056,618 | ||||
See Notes to Unaudited Financial Statements.
3
Table of Contents
Homeland
Energy Solutions, LLC
Statements of Operations (Unaudited)
Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
Ended 9/30/09 | Ended 9/30/08 | Ended 9/30/09 | Ended 9/30/08 | |||||||||||||
REVENUE, NET OF SHIPPING COSTS |
$ | 52,934,845 | $ | | $ | 92,497,563 | $ | | ||||||||
COSTS OF GOODS SOLD |
47,307,748 | | 85,441,326 | | ||||||||||||
GROSS PROFIT |
5,627,097 | | 7,056,237 | | ||||||||||||
OPERATING EXPENSES |
||||||||||||||||
Start-up costs |
| | 70,733 | | ||||||||||||
Asset impairment |
| | 480,875 | | ||||||||||||
Professional expenses |
181,618 | 77,777 | 384,315 | 233,020 | ||||||||||||
Filings fees/permits |
14,853 | | 22,528 | | ||||||||||||
Insurance |
106,828 | | 228,028 | | ||||||||||||
Office expense |
25,986 | 1,530 | 69,392 | 6,965 | ||||||||||||
Depreciation |
15,370 | 949 | 30,707 | 2,848 | ||||||||||||
Amortization |
107,004 | | 197,115 | | ||||||||||||
Rent |
| 2,470 | | 5,105 | ||||||||||||
Utilities & communication expense |
9,900 | 898 | 27,467 | 4,607 | ||||||||||||
Wages & benefits |
129,749 | 10,733 | 432,023 | 32,285 | ||||||||||||
Miscellaneous expense |
93,970 | 5,970 | 108,831 | 16,249 | ||||||||||||
TOTAL OPERATING EXPENSES |
685,278 | 100,327 | 2,052,014 | 301,079 | ||||||||||||
OPERATING INCOME (LOSS) |
4,941,819 | (100,327 | ) | 5,004,223 | (301,079 | ) | ||||||||||
OTHER INCOME (EXPENSE) |
||||||||||||||||
Interest expense |
(758,055 | ) | | (1,352,253 | ) | | ||||||||||
Interest income |
46,009 | 22,156 | 185,157 | 536,962 | ||||||||||||
Grant income |
| | 300,000 | | ||||||||||||
(712,046 | ) | 22,156 | (867,096 | ) | 536,962 | |||||||||||
Net income (loss) |
$ | 4,229,773 | $ | (78,171 | ) | $ | 4,137,127 | $ | 235,883 | |||||||
Basic & diluted net income (loss) per capital unit |
$ | 46.25 | $ | (0.85 | ) | $ | 45.24 | $ | 2.58 | |||||||
Weighted average number of units outstanding for the
calculation of basic & diluted net income per capital unit |
91,445 | 91,445 | 91,445 | 91,445 | ||||||||||||
See Notes to Unaudited Financial Statements.
4
Table of Contents
Homeland Energy Solutions, LLC
Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 2009 and 2008
For the Nine Months Ended September 30, 2009 and 2008
2009 | 2008 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net income |
$ | 4,137,127 | $ | 235,883 | ||||
Adjustments to reconcile net income to net cash
provided by (used in) operating activities: |
||||||||
Depreciation and amortization |
5,972,682 | 2,848 | ||||||
Unrealized loss (gain) on risk management activities |
450,670 | | ||||||
Asset impairment |
480,875 | | ||||||
Increase in restricted cash |
(170,356 | ) | | |||||
Change in working capital components: |
||||||||
(Increase) decrease in accounts receivable |
(5,309,399 | ) | | |||||
(Increase) decrease in inventory |
(6,156,291 | ) | | |||||
(Increase) decrease in cash due to (from) broker |
(900,532 | ) | | |||||
(Increase) decrease in prepaid expenses |
(1,295,285 | ) | | |||||
Increase (decrease) in accounts payable |
1,524,572 | (179,665 | ) | |||||
Increase (decrease) in other current liabilities |
389,796 | (179,629 | ) | |||||
Net cash (used in) operating activities |
(876,141 | ) | (120,563 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Payments for equipment and construction in progress |
(26,633,118 | ) | (66,259,787 | ) | ||||
Payments for other assets |
(480,558 | ) | | |||||
Purchase of land & land options |
| (24,374 | ) | |||||
Net cash (used in) investing activities |
(27,113,676 | ) | (66,284,161 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Increase in outstanding checks in excess of bank balance |
1,540,162 | 3,250 | ||||||
Proceeds from long-term borrowing |
26,592,850 | 8,925,248 | ||||||
Payments on long-term borrowing |
(187,794 | ) | (10,000 | ) | ||||
Payments for rejected subscriptions |
| (7,500,000 | ) | |||||
Net cash provided by (used in) financing activities |
27,945,218 | 1,418,498 | ||||||
Net (decrease) in cash |
$ | (44,599 | ) | $ | (64,986,226 | ) | ||
CASH AND CASH EQUIVALENTS |
||||||||
Beginning |
44,599 | 64,986,226 | ||||||
Ending |
$ | | $ | | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
||||||||
Cash paid for interest |
$ | 1,933,918 | $ | 217,164 | ||||
SUPPLEMENTAL
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES |
||||||||
Accounts payable related to construction in progress |
$ | 50,350 | $ | 15,185,160 | ||||
Retainage payable related to construction in progress |
607,856 | 6,379,337 | ||||||
Interest capitalized |
817,183 | 38,586 | ||||||
Insurance costs capitalized |
83,423 | 216,590 | ||||||
Loan fee amortization capitalized |
58,974 | 132,692 |
See Notes to Unaudited Financial Statements.
5
Table of Contents
HOMELAND ENERGY SOLUTIONS, LLC
Notes to Condensed Unaudited Financial Statements
Notes to Condensed Unaudited Financial Statements
September 30, 2009
1. Nature of Business and Significant Accounting Policies
The accompanying unaudited condensed financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in annual financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been condensed or omitted as
permitted by such rules and regulations. These financial statements and related notes should be
read in conjunction with the financial statements and notes thereto included in the Companys
audited financial statements for the year ended December 31, 2008, contained in the Companys
annual report on Form 10-K for 2008.
In the opinion of management, the interim condensed financial statements reflect all adjustments
considered necessary for fair presentation. The adjustments made to these statements consist only
of normal recurring adjustments.
Nature of business: Homeland Energy Solutions, LLC (an Iowa Limited Liability Company) is located
near Lawler, Iowa and was organized to pool investors for a 110 million gallon ethanol plant with
distribution throughout the United States. In addition, the company produces and sells distillers
dried grains as byproducts of ethanol production. Site preparation was 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 being principally devoted to organizational activities
and construction activities. The Company sells its production of ethanol and distiller grains
primarily in the continental United States.
Significant Accounting Policies:
Fiscal Reporting Period: The Company has a fiscal year ending on December 31.
Accounting Estimates: Management uses estimates and assumptions in preparing these financial
statements in accordance with United States Generally Accepted Accounting Principles. Those
estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure
of contingent assets and liabilities, and the reported revenues and expenses. Actual results
could differ from those estimates.
Cash and Cash Equivalents: The Company maintains its accounts primarily at one financial
institution. At various times, the Companys cash balances may exceed amounts insured by the
Federal Deposit Insurance Corporation. The Company has not experienced losses in such accounts.
For purposes of balance sheet presentation and reporting the statement of cash flows, the Company
considers all cash deposits with an original maturity of three months or less to be cash
equivalents.
Accounts Receivable: Account receivables are recorded at their estimated net realizable value,
net of an allowance for doubtful accounts. The Companys estimate of the allowance for doubtful
accounts is based upon historical experience, its evaluation of the current status of
receivables, and unusual circumstances, if any. Accounts are considered past due if payment is
not made on a timely basis in accordance with the Companys credit terms. Accounts considered
uncollectible are charged against the allowance. Credit terms are extended to customers in the
normal course of business. The Company performs ongoing credit evaluations of its customers
financial condition and, generally, requires no collateral.
Revenue Recognition: Revenue from the sale of the Companys products is recognized at the time
title to the goods and all risks of ownership transfer to the customers. This generally occurs
upon shipment, loading of the goods or when the customer picks up the goods. Interest income is
recognized as earned. Shipping costs incurred by the Company in the sale of ethanol and
distiller grains are not specifically identifiable and as a result, revenue from the sale of
ethanol and distiller grains is recorded based on the net selling price reported to the Company
from the marketer.
6
Table of Contents
HOMELAND ENERGY SOLUTIONS, LLC
Notes to Condensed Unaudited Financial Statements
Notes to Condensed Unaudited Financial Statements
September 30, 2009
Inventories: Inventories are generally valued at the lower of cost (first-in, first-out) or
market. In the valuation of inventories and purchase and sale commitments, market is based on
current replacement values except that it does not exceed net realizable values and is not less
than net realizable values reduced by allowances for approximate normal profit margin.
Property and Equipment: The Company incurred site selection and plan development costs on the
proposed site that were capitalized. Significant additions, betterments and costs to acquire
land options are capitalized, while expenditures for maintenance and repairs are charged to
operations when incurred. Property and equipment are stated at cost. The Company uses the
straight-line method of computing depreciation over estimated useful lives as follows. There is
no comparison to December 31, 2009 due to the vast majority of assets being classified as
construction in process as of that date.
Estimated Useful | Net Book | |||||||||||
Life in Years | Cost | Value | ||||||||||
Land & Improvements |
||||||||||||
Land |
n/a | $ | 4,772,882 | 4,772,882 | ||||||||
Road Infrastructure |
20 | 13,675,600 | 13,334,515 | |||||||||
General Sitework |
40 | 3,989,366 | 3,939,499 | |||||||||
Buildings |
||||||||||||
Grain Handling Buildings |
10-15 | 1,492,682 | 1,441,832 | |||||||||
Process Buildings |
20 | 317,122 | 309,194 | |||||||||
Administrative Buildings |
40 | 3,049,327 | 3,011,210 | |||||||||
Equipment |
||||||||||||
Mechanical Equipment |
15-20 | 121,904,632 | 116,734,073 | |||||||||
Rail Handling Equipment |
40 | 7,194,277 | 7,105,847 | |||||||||
Administrative &
Maintenance Equipment |
5-15 | 496,254 | 459,103 | |||||||||
Total |
$ | 156,892,142 | 151,108,155 | |||||||||
Land improvements relate to two general categories: road infrastructure and general sitework.
Road infrastructure relates to the excavating and paving of surface roads and the sitework
includes such things as the well system and earthmoving. Buildings relate to three general
categories: grain handling, process and administrative buildings. Equipment relates to three
general categories: mechanical equipment, rail handling equipment and administrative and
maintenance equipment. Mechanical equipment generally relates to equipment for handling
inventories and the production of ethanol and related products, including such things as boilers,
cooling towers, grain bins, centrifuges, conveyors, fermentation tanks, pumps and drying
equipment. Rail handling equipment relates to railroad track. Administrative and maintenance
equipment includes vehicles, computer systems, security equipment, testing devices and shop
equipment.
Long-Lived Assets: The Company reviews its property and equipment for impairment whenever events
indicate that the carrying amount of the assets may not be recoverable. If circumstances require
a long-lived asset be tested for possible impairment, the Company first compares undiscounted
cash flows expected to be generated by an asset to the carrying value of the asset. If the
carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, an
impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value
is determined through various valuation techniques including discounted cash flow models, quoted
market values and third-party independent appraisals, as considered necessary.
The Company impaired an asset associated with the coal gasification project by $230,875 due to
the long term nature and uncertainty of the project. The remaining $230,875 has been capitalized
as part of the plants infrastructure as these costs relate to the design of the Companys rail
system and engineering expenses that are currently in use at the plant and are not specifically
related to the coal gasification project. The remaining $230,875 is being amortized over the
estimated useful life of the asset.
7
Table of Contents
HOMELAND ENERGY SOLUTIONS, LLC
Notes to Condensed Unaudited Financial Statements
Notes to Condensed Unaudited Financial Statements
September 30, 2009
The Company entered into a change order during the original construction of the plant to change
the design from one large thermal oxidizer stack to two smaller thermal oxidizer stacks. The
unused larger stack was deemed impaired by approximately $250,000 due to a drop in value of the
construction materials used to make the stack. The estimated fair market value of this asset is
$250,000, for which management intends to sell on the open market should another ethanol plant
under construction require the same materials, and is listed on the Balance Sheet as Assets held
for sale.
The total loss on asset impairments for the nine months ending September 30, 2009 is $480,875 and
is included in operating expense.
Derivative Instruments: The Company evaluates its contracts to determine whether the contracts
are derivative instruments. Certain contracts that literally meet the definition of a derivative
may be exempted from derivative accounting as normal purchases or normal sales. Normal purchases
and normal sales are contracts that provide for the purchase or sale of something other than a
financial instrument or derivative instrument that will be delivered in quantities expected to be
used or sold over a reasonable period in the normal course of business. Contracts that meet the
requirements of normal purchases or sales are documented as normal and exempted from the
accounting and reporting requirements of derivative accounting.
The Company enters into short-term cash, option and futures contracts as a means of securing
purchases of corn, natural gas and sales of ethanol for the plant and managing exposure to
changes in commodity and energy prices. All of the Companys derivatives are designated as
non-hedge derivatives, with changes in fair value recognized in net income. Although the
contracts are economic hedges of specified risks, they are not designated as and accounted for as
hedging instruments.
As part of its trading activity, the Company uses futures and option contracts through regulated
commodity exchanges to manage its risk related to pricing of inventories. To reduce that risk,
the Company generally takes positions using cash and futures contracts and options.
Realized and unrealized gains and losses related to derivative contracts related to corn and
natural gas are included as a component of cost of goods sold and derivative contracts related to
ethanol are included as a component of revenues in the accompanying financial statements. The
fair values of contracts entered through commodity exchanges are presented on the accompanying
balance sheet as derivative instruments.
Intangible Assets: Intangible assets consist of loan fees and utility rights. Utility
rights consist of payments to electric and natural gas companies for construction in aid of
electric and gas lines to the facility but the Company retains no ownership rights to the assets.
The loan fees are amortized over the term of the loan and utility rights are amortized over 15
years or the anticipated useful life utilizing the straight-line method. The useful life was
determined in part by the length of service agreements the Company has with the utility companies
as well as normal usage of such infrastructure. Amortization for the next five years is
estimated as follows:
Loan Fees | Utility Rights | Total | ||||||||||
2009 |
$ | 176,923 | 245,724 | 422,647 | ||||||||
2010 |
176,923 | 245,724 | 422,647 | |||||||||
2011 |
176,923 | 207,252 | 384,175 | |||||||||
2012 |
176,923 | 168,768 | 345,691 | |||||||||
2013 |
103,206 | 168,768 | 271,974 | |||||||||
Thereafter |
| 1,603,260 | 1,603,260 | |||||||||
Total |
$ | 810,898 | 2,639,496 | 3,450,394 | ||||||||
Restricted Cash: The Company has a restriction on a specific account with a bank that is
restricted in use for the repayment of long-term debt. The balance in this account has been
treated as a non-current asset due to this restriction.
8
Table of Contents
HOMELAND ENERGY SOLUTIONS, LLC
Notes to Condensed Unaudited Financial Statements
Notes to Condensed Unaudited Financial Statements
September 30, 2009
Fair Value: On January 1, 2009, the Company implemented the previously deferred provisions of
SFAS No 157 Fair Value Measurements for non-financial assets and liabilities recorded at fair
value, which had no impact on the Companys financial statements and is presented in Note 9.
Grant Income: Revenue for grants awarded to the Company is recognized upon meeting the
requirements set forth in the grant documents.
Income Taxes: The Company is organized as a limited liability company under state law.
Accordingly, the Companys earnings pass through to the members and are taxed at the member
level. No income tax provision has been included in these financial statements. Differences
between the financial statement basis of assets and the tax basis of assets are related to
capitalization and amortization of organization and start-up costs for tax purposes, whereas
these costs are expensed for financial statement purposes. All fiscal tax years of the Company
are subject to examination by the Internal Revenue Service.
Net Income (loss) per Unit: Basic and diluted net income per unit is computed by dividing net
income by the weighted average number of members units and members unit equivalents outstanding
during the period. There were no member unit equivalents outstanding during the periods
presented; accordingly, the Companys basic and diluted net income (loss) per unit are the same.
Environmental Liabilities: The Companys operations are subject to environmental laws and
regulations adopted by various governmental authorities in the jurisdiction in which it operates.
These laws require the Company to investigate and remediate the effects of the release or
disposal of materials at its locations. Accordingly, the Company has adopted policies, practices
and procedures in the areas of pollution control, occupational health and the production,
handling, storage and use of hazardous materials to prevent material environmental or other
damage, and to limit the financial liability which could result from such events. Environmental
liabilities are recorded when the Companys liability is probable and the costs can be reasonably
estimated. No expense has been recorded for the period from inception to September 30, 2009.
Risks and Uncertainties: The Company has certain risks and uncertainties that it will experience
during volatile market conditions, which can have a severe impact on operations. The Company
began operations in April 2009. The Companys revenues are derived from the sale and distribution
of ethanol and distiller grains to customers primarily located in the United States. Corn for the
production process is supplied to the plant primarily from local agricultural producers and from
purchases on the open market. Ethanol sales average approximately 85% of total revenues, while
15% of revenues are generated from the sale of distiller grains and other by-products. Corn
costs average 80% of cost of revenues.
The Companys operating and financial performance is largely driven by the prices at which we
sell ethanol and the net expense of corn. The price of ethanol is influenced by factors such as
supply and demand, weather, government policies and programs, and unleaded gasoline and the
petroleum markets, although since 2005 the prices of ethanol and gasoline began a divergence with
ethanol selling for less than gasoline at the wholesale level. Excess ethanol supply in the
market, in particular, puts downward pressure on the price of ethanol. Our largest cost of
production is corn. The cost of corn is generally impacted by factors such as supply and demand,
weather, government policies and programs, and our risk management program used to protect
against the price volatility of these commodities.
The current U.S. economic condition has reduced the nations demand for energy. The bankruptcy
filing of several of the industrys producers since 2008 has resulted in great economic
uncertainty about the viability of ethanol. The ethanol boom of recent years has spurred
overcapacity in the industry and production capacity is currently exceeding the RFS mandates. As
such, the Company may need to evaluate whether crush margins will be sufficient to operate the
plant and generate enough debt service. In the event crush margins become negative for an
extended period of time, the Company may be required to reduce capacity or shut down the plant.
The Company will continue to evaluate crush margins on a regular basis. Based on the Companys
operating plan and
the borrowing capacity, management believes it has the capital to meet its obligations for the
twelve months following the quarter ended September 30, 2009.
9
Table of Contents
HOMELAND ENERGY SOLUTIONS, LLC
Notes to Condensed Unaudited Financial Statements
Notes to Condensed Unaudited Financial Statements
September 30, 2009
Reclassification: Certain items have been reclassified within the financial statements for
periods before September 30, 2009. The changes do not affect net income or members equity but
were changed to agree with the classifications used in the September 30, 2009 financial
statements.
Recently Issued Accounting Standards: Generally Accepted Accounting Principlesa replacement of
FASB Statement No. 162, (SFAS 168). SFAS 168, as codified in FASB ASC Topic 105, replaces SFAS
No. 162, The Hierarchy of Generally Accepted Accounting Principles, and establishes the FASB
Accounting Standards Codification TM (Codification) as the source of authoritative accounting
principles recognized by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with GAAP. Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.
The FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or
Emerging Issues Task Force Abstracts; instead the FASB will issue Accounting Standards Updates.
Accounting Standards Updates will not be authoritative in their own right as they will only serve
to update the Codification. The issuance of SFAS 168 and the Codification does not change GAAP.
We adopted this pronouncement in the third quarter of fiscal 2009 and the adoption of this
pronouncement did not have a material impact on our financial position and results of operations.
In June 2009, the FASB issued guidance which amends certain ASC concepts related to consolidation
of variable interest entities. Among other accounting and disclosure requirements, this guidance
replaces the quantitative-based risks and rewards calculation for determining which enterprise has
a controlling financial interest in a variable interest entity with an approach focused on
identifying which enterprise has the power to direct the activities of a variable interest entity
and the obligation to absorb losses of the entity or the right to receive benefits from the
entity. The Company will adopt this guidance in its first annual and interim reporting periods
beginning after November 15, 2009. The Company has not determined the impact that this guidance
may have on its financial statements.
In August 2009, the FASB issued Accounting Standards Update No. 2009-05, Fair Value Measurements
and Disclosures Measuring Liabilities at Fair Value (ASU 2009-05). The update provides
clarification for circumstances in which a quoted price in an active market for an identical
liability is not available. ASU 2009-05 is effective for the first reporting period beginning
after August 2009. The Company adopted this statement for the quarter ended September 30, 2009.
The adoption of this statement did not have a material impact on the Companys financial condition
and results of operations.
New pronouncements issued but not effective until after September 30, 2009, are not expected to
have a significant effect on the Companys consolidated financial position or results of
operations.
2. Inventory
Inventory consisted of the following as of September 30, 2009. There was no inventory as of
December 31, 2008.
September 30, 2009 | ||||
Raw Materials |
$ | 2,877,045 | ||
Work in Process |
1,139,552 | |||
Finished Goods |
2,139,694 | |||
Totals |
$ | 6,156,291 | ||
10
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HOMELAND ENERGY SOLUTIONS, LLC
Notes to Condensed Unaudited Financial Statements
Notes to Condensed Unaudited Financial Statements
September 30, 2009
3. Debt
Master Loan Agreement with Home Federal Savings Bank
On November 30, 2007, the Company entered into a Master Loan Agreement with Home Federal Savings
Bank (Home Federal) establishing a senior credit facility with Home Federal for the construction
of a 100 million gallon per year natural gas powered dry mill ethanol plant. In return, the
Company executed a mortgage in favor of Home Federal creating a senior lien on the real estate and
plant and a security interest in all personal property located on Company property. The Master
Loan Agreement provides for (i) a construction loan in an amount not to exceed $94,000,000 (of
which up to $20,000,000 may be converted to a term revolving loan upon start-up of operations), and
(ii) a revolving line of credit loan in an amount not to exceed $6,000,000 (the foregoing
collectively referred to as the Loans).
On July 1, 2009 the Company converted the $94,000,000 construction loan with Home Federal Savings
Bank into a $74,000,000 term loan and a $20,000,000 term revolving loan under the terms of the
Master Loan Agreement and supplements thereto. The Company will make monthly payments of accrued
interest on the Term Loan from the date of conversion until seven months later. Beginning in the
seventh month after conversion, or on February 1, 2010, equal monthly principal payments in the
amount of $616,667 plus accrued interest will be made. All unpaid principal and accrued interest
on the term loan will be due on the fifth anniversary of such conversion. The Company will have
the right to convert up to 50% of the term loan into a Fixed Rate Loan with the consent of Home
Federal. The Fixed Rate Loan will bear interest at the five year LIBOR swap rate that is in effect
on the date of conversion plus 325 basis points, or another rate mutually agreed upon by Homeland
Energy and Home Federal. If the Company elects this fixed rate option, the interest rate will not
be subject to any adjustments otherwise provided for in the Master Loan Agreement. The remaining
portion will bear interest at a rate equal to the LIBOR Rate plus 325 basis points.
The Company agreed to the terms of a $20,000,000 Term Revolving Loan which was converted on July 1,
2009 from the construction loan and has a maturity date of five years from the conversation date or
July 2014. Interest on the Revolving Term Loan shall accrue at a rate equal to the LIBOR Rate plus
325 basis points. The Company will be required to make monthly payments of interest until the
Maturity Date, which is the fifth anniversary of the Conversion Date, on which date the unpaid
principal amount of the Revolving Term Loan will become due and payable.
Revolving Line of Credit Loan
Under the terms of the Master Loan Agreement and the third supplement thereto, the Company agreed
to the terms of a Revolving Line of Credit Loan consisting of a maximum $6,000,000 revolving line
of credit. The Revolving Line of Credit Loan became available on July 1, 2009 when all conditions
precedent to the Revolving Line of Credit Loan were met. The aggregate principal amount of the
Revolving Line of Credit Loan may not exceed the lesser of $6,000,000 or the Borrowing Base. The
Borrowing Base means, at any time, the lesser of: (a) $6,000,000; or (b) the sum of (i) 75% of the
eligible accounts receivable, plus (iii) 75% of the eligible inventory. Interest on the Revolving
Line of Credit Loan shall accrue at a rate equal to the LIBOR Rate plus 325 basis points. The
Company will be required to make monthly payments of accrued interest until the Revolving Line of
Credit Loan expires, on which date the unpaid principal amount will become due and payable. The
Revolving Line of Credit Loan expires on June 30, 2010.
If the Company fails to make a payment of principal or interest on any loan within 10 days of the
due date, there will be a late charge equal to 5% of the amount of the payment. Balances
outstanding on the term loan, term revolving loan and revolving line of credit as of September 30,
2009 were $74,000,000, $4,000,000 and $0, respectively. Amounts available on the term loan, term
revolving loan and revolving line of credit as of September 30, 2009 were $0, $16,000,000 and
$6,000,000, respectively.
11
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HOMELAND ENERGY SOLUTIONS, LLC
Notes to Condensed Unaudited Financial Statements
Notes to Condensed Unaudited Financial Statements
September 30, 2009
Covenants
In addition, during the term of the loans, the Company will be subject to certain financial
covenants at various times calculated monthly, quarterly or annually. Failure to comply with the
protective loan covenants or maintain the required financial ratios may cause acceleration of the
outstanding principal balances on the loans and/or the imposition of fees, charges or penalties.
Any acceleration of the debt financing or imposition of the significant fees, charges or penalties
may restrict or limit the access to the capital resources necessary to continue plant operations.
As of September 30, 2009, the Company is in compliance with all covenants. The Company will be
required to make a $5,000,000 free cash flow payment on the term loan prior to November 15, 2009 as
part of the covenant calculations. This payment will be made with funds from the long term
revolving loan currently in place with our senior lender and therefore has not been classified as a
current liability.
Upon an occurrence of an event of default or an event which will lead to the default, Home Federal
may upon notice terminate its commitment to loan funds and declare the entire unpaid principal
balance of the loans, plus accrued interest, immediately due and payable. Events of default
include, but are not limited to, the failure to make payments when due, insolvency, any material
adverse change in the financial condition or the breach of any of the covenants, representations or
warranties the Company has given in connection with the transaction.
The Company also entered into two unsecured loan agreements with the Iowa Department of Economic
Development (IDED); one for a $100,000 loan to be repaid over 60 months starting April 2008 at a 0%
interest rate and one for a $100,000 forgivable loan. The forgivable loan is subject to meeting
terms of the agreement, such as installation of coal gasification and the fulfillment of Job
Obligations. The IDED may also elect to allow the repayment on a pro rata basis, based on the
number of jobs attained compared to the number of jobs pledged. The Company repaid the interest
free and forgivable loans in full on April 23, 2009 because the Company did not fulfill the coal
gasification requirement of the IDED agreement.
4. Members Equity
The Company has raised a total of $89,920,000 in membership units. By a motion of the board on
May 10, 2006 the total seed stock issued was capped at $1,325,000. This total consists of the
initial $200,000 (600 units at $333.33 per unit) issued on January 11, 2006 to the founding
members. It also consists of $1,125,000 (2,250 units at $500 per unit) which was raised from other
seed stock investors on May 10, 2006. On October 29, 2007 $88,595,000 (88,595 units at $1,000 per
unit) in membership units were issued and $7,500,000 (7,500 units at $1,000 per unit) of the
subscription units were rejected. All of the rejected subscription units were paid in 2008. All
membership units have equal voting rights.
Each member who holds five thousand or more units, all of which were purchased by such member from
the Company during its initial public offering of equity securities filed with the Securities and
Exchange Commission, shall be deemed an Appointing Member and shall be entitled to appoint one
Director for each block of five thousand units; provided, however, that no Appointing Member
shall be entitled to appoint more than two Directors regardless of the total number of units owned
and purchased in the initial public offering.
5. Related Party Transactions
The Company has engaged one of its board members as Vice President of Project Development. The
Vice President of Project Development served as an independent contractor to provide project
development and consulting services through construction and initial start-up of the project.
Costs incurred for these services were $0 and $20,000 for the three and nine months ended September
30, 2009, respectively and none and $20,000 for the same periods of 2008.
The Company purchased corn and materials from members of its Board of Directors who own or manage
elevators or are local producers of corn. Purchases during the three and nine months ended
September 30, 2009 from these companies and individuals totaled approximately $5,127,000 and
$9,638,000, respectively. Amounts due to these members was approximately $44,000 as of September
30, 2009. There were no purchases during the same periods of 2008 and therefore no amount due to
them as of December 31, 2008.
12
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HOMELAND ENERGY SOLUTIONS, LLC
Notes to Condensed Unaudited Financial Statements
Notes to Condensed Unaudited Financial Statements
September 30, 2009
On December 15, 2008, the Company entered into an agreement with Golden Grain Energy, LLC, a member
of the Company, for management services. Pursuant to the Agreement, Homeland Energy and Golden
Grain have agreed to share management services in an effort to reduce the costs of administrative
overhead. Homeland Energy and Golden Grain have agreed to split the compensation costs associated
with each of the employees covered by the Agreement. For the three and nine months ending September
30, 2009 the Company incurred net costs of approximately $129,000 and $354,000 related to this
agreement. There were no costs for the same periods of 2008 related to this agreement.
6. Commitments, Contingencies and Agreements
On July 18, 2007, the Company entered into a Lump Sum Design-Build Agreement with Fagen, Inc. for
the design and construction of a one hundred (100) million gallon per year dry grind ethanol
production facility (the Design-Build Agreement) on the Companys plant site located near Lawler,
Iowa. Pursuant to the Lump Sum Design-Build Agreement, the effective date is July 6, 2007. Under
the Design-Build Agreement and subsequent change notices, the final contract price was
approximately $121,630,000. As of September 30, 2009 the Company has spent approximately
$121,414,000 for this commitment.
Ethanol, Distillers grain, marketing agreements and major customers
The Company has entered into a marketing agreement to sell the entire ethanol produced at the plant
to an unrelated party at a mutually agreed on price, less commission and transportation charges.
As of September 30, 2009, the Company has commitments to sell approximately 21,382,000 gallons at
various fixed and basis price levels indexed against exchanges for delivery through December 2009.
Should the Company not be able to meet delivery on these gallons in the future the Company will be
responsible for purchasing gallons in the open market. The Company has not incurred any losses due
to non-delivery of product and anticipates that all contracts will be sufficient to cover costs in
the future.
The Company has entered into a marketing agreement to sell the entire distiller grains produced at
the plant to an unrelated party. The initial term of the agreement is for one year beginning with
the start-up of production in April 2009. The agreement calls for automatic renewal for successive
one-year terms unless 120-day prior written notice is given before the current term expires. As of
September 30, 2009, the Company had approximately 23,000 tons of distiller grains commitments for
delivery through March 2010 at various fixed prices. Should the Company not be able to meet
delivery on these tons in the future the Company will be responsible for purchasing tons in the
open market. The Company has not incurred any losses due to non-delivery of product.
Approximate sales and marketing fees related to the agreements in place at are the same for the
three and nine month period ending September 30, 2009. There were no sales or marketing fees
during 2008.
Three Months | Nine Months | |||||||
Sales ethanol |
$ | 45,038,000 | 77,875,000 | |||||
Sales distiller grains |
7,896,000 | 14,623,000 | ||||||
Marketing fees ethanol |
365,000 | 626,000 | ||||||
Marketing fees distiller grains |
167,000 | 286,000 | ||||||
9/30/09 | 12/31/08 | |||||||
Amount due from ethanol marketer |
4,518,000 | | ||||||
Amount due from distiller marketer |
746,000 | |
On November 29, 2007 the Company was awarded a USDA loan guarantee which is subject to using coal
gasification technology. This award will guarantee 60% of a potential $40,000,000 loan through
Home Federal Savings Bank. The USDA reserves the right to terminate its commitment if certain
conditions set forth in the agreement are not met by November 2009. As of September 30, 2009 the
Company had received notification that
would allow us to qualify for the guarantee taking into consideration certain efficiencies at the
plant without the coal gasification requirement. However, we must meet certain requirements prior
to the receipt of the loan guarantee. There is no guarantee we will be able to meet these
requirements. This loan is not included in the master loan agreement with Home Federal (see Note
3).
13
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HOMELAND ENERGY SOLUTIONS, LLC
Notes to Condensed Unaudited Financial Statements
Notes to Condensed Unaudited Financial Statements
September 30, 2009
On December 19, 2007, the Iowa Department of Economic Development approved the Company for a
package of benefits, provided the Company meets and maintains certain requirements. The package
provides for the following benefits: (1) a $100,000 forgivable loan and a $100,000 interest-free
loan under the Iowa Value-Added Agricultural Products and Processes Financial Assistance Program
which was paid off during 2009 (see Note 3); (2) a grant of $240,000 under the Revitalize Iowas
Sound Economy program for the construction of a turning lane off of Iowa Highway 24 to the plant;
and (3) the following tax incentives under the High Quality Jobs Program from the state of Iowa:
| Refund of sales, service or use taxes paid to contractors and subcontractors during
construction work (estimated at $1,000,000). As of September 30, 2009 the Company has filed
for a refund of sales or use taxes but the funds have not been received or verified. Any
refunds received in the future will be accounted for as a reduction of construction costs. |
||
| Investment tax credit (limited to $10,000,000. To be amortized over 5 years). This
Iowa tax credit may be claimed for qualifying expenditures, not to exceed $10,000,000,
directly related to new jobs created by the start-up, location, expansion or modernization
of the company under the program. This credit is to be taken in the year the qualifying
asset is placed into service and is amortized over a 5 year period starting with the 2009
tax return. Since the Company is organized as a limited liability company, under state law
all earnings and tax credits pass through to the members. The investment tax credit will
have no impact on the financial statements. |
||
| Local Value-added Property Tax Exemption (estimated at $10,350,000). Chickasaw County
has approved an exemption from taxation on all or a portion of the value added by
improvements to real property directly related to new jobs created by location or expansion
of the company and used in the operations of the company. The property taxes paid on
September 30, 2009 reflected the first portion of the abatement over the 20 year period.
All exemptions will be account for as a reduction of property tax expense. |
On July 7, 2008, the Company entered into an agreement with Iowa, Chicago, & Eastern Railroad for
the installation of two new mainline switches and the re-alignment of the main line at a cost of
$239,764. As of September 30, 2009 the project was completed.
At September 30, 2009, the Company had outstanding commitments for purchases of approximately
$9,714,000 of corn at various prices, of which approximately $11,000 is with related parties.
The Company has commitments for minimum purchases of various utilities such as natural gas and
electricity over the next 10 years which are anticipated to approximate the following:
2009 |
$ | 3,950,000 | ||
2010 |
3,950,000 | |||
2011 |
3,950,000 | |||
2012 |
3,950,000 | |||
2013 |
3,870,000 | |||
Thereafter |
17,030,000 | |||
Total anticipated commitments |
$ | 36,700,000 | ||
7. Lease Obligations
During fiscal year 2009, the Company entered into leases for rail cars and rail moving equipment
with original terms up to 3 years. The Company is obligated to pay costs of insurance, taxes,
repairs and maintenance pursuant to terms
of the leases. Rent expense incurred for the operating leases during the three and nine months
ending September 30, 2009, was approximately $523,000 and $982,000.
14
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HOMELAND ENERGY SOLUTIONS, LLC
Notes to Condensed Unaudited Financial Statements
Notes to Condensed Unaudited Financial Statements
September 30, 2009
At September 30, 2009 the Company had the following approximate minimum rental commitments under
non-cancelable operating leases.
2009 |
$ | 1,348,500 | ||
2010 |
1,252,500 | |||
2011 |
645,750 | |||
2012 |
66,000 | |||
2013 |
33,000 | |||
Total lease commitments |
$ | 3,345,750 | ||
8. Derivative Instruments
The Companys activities expose it to a variety of market risks, including the effects of changes
in commodity prices. These financial exposures are monitored and managed by the Company as an
integral part of its overall risk-management program. The Companys risk management program
focuses on the unpredictability of financial and commodities markets and seeks to reduce the
potentially adverse effects that the volatility of these markets may have on its operating results.
To reduce price risk caused by market fluctuations, the Company generally follows a policy of using
exchange traded futures and options contracts to reduce its net position of merchandisable
agricultural commodity inventories and forward cash purchase and sales contracts and uses exchange
traded futures and options contracts to reduce price risk. Exchange-traded futures contracts are
valued at market price. Changes in market price of exchange traded futures and options contracts
related to corn and natural gas are recorded in costs of goods sold and changes in market prices of
contracts related to sale of ethanol, if applicable, are recorded in revenues.
The Company uses futures or options contracts to fix the purchase price of anticipated volumes of
corn to be purchased and processed in a future month. The Companys plant will grind
approximately 40 million bushels of corn per year. During the previous period and over the next 12
months, the Company has hedged and anticipates hedging between 5% and 40% of its anticipated
monthly grind. At September 30, 2009, the Company has hedged portions of its anticipated monthly
purchases for corn averaging approximately 4% to 7% of its anticipated monthly grind over the next
twelve months.
Unrealized gains and losses on non-exchange traded forward contracts are deemed normal purchases
or sales under authoritative accounting guidance and, as amended and, therefore, are not marked to
market in the Companys financial statements. The fair value of the Companys open derivative
positions are summarized in the following table as of September 30, 2009.
Balance Sheet | Asset Fair | Liability Fair | ||||||||||
Classification | Value | Value | ||||||||||
Derivatives not designated as
hedging instruments: |
||||||||||||
Commodity Contracts |
Derivative Instruments | $ | | $ | 450,670 | |||||||
15
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HOMELAND ENERGY SOLUTIONS, LLC
Notes to Condensed Unaudited Financial Statements
Notes to Condensed Unaudited Financial Statements
September 30, 2009
The following table represents the amount of realized gains (losses) and changes in fair value
recognized in earnings on commodity contracts for the three and nine months ending 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 month period |
Cost of Goods Sold | $ | 1,916,419 | (1,066,032 | ) | 850,387 | ||||||||
Commodity
Contracts for the
nine month period |
Cost of Goods Sold | $ | 3,111,531 | (450,670 | ) | 2,660,861 |
9. Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date. In determining fair
value, the Company uses various methods including market, income and cost approaches. Based on
these approaches, the Company often utilizes certain assumptions that market participants would use
in pricing the asset or liability, including assumptions about risk and/or the risks inherent in
the inputs to the valuation technique. These inputs can be readily observable,
market-corroborated, or generally unobservable inputs. The Company utilizes valuation techniques
that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on
the observability of the inputs used in the valuation techniques, the Company is required to
provide the following information according to the fair value hierarchy. The fair value hierarchy
ranks the quality and reliability of the information used to determine fair values. Financial
assets and liabilities carried at fair value will be classified and disclosed in one of the
following three categories:
Level 1: Valuations for assets and liabilities traded in active markets from readily available
pricing sources for market transactions involving identical assets or liabilities.
Level 2: Valuations for assets and liabilities traded in less active dealer or broker markets.
Valuations are obtained from third-party pricing services for identical or similar assets or
liabilities.
Level 3: Valuations incorporate certain assumptions and projections in determining the fair value
assigned to such assets or liabilities.
A description of the valuation methodologies used for instruments measured at fair value, including
the general classification of such instruments pursuant to the valuation hierarchy, is set forth
below. These valuation methodologies were applied to all of the Companys financial assets and
financial liabilities carried at fair value effective January 1, 2009.
Derivative financial instruments: Commodity futures and exchange-traded commodity options
contracts are reported at fair value utilizing Level 1 inputs. For these contracts, the Company
obtains fair value measurements from an independent pricing service. The fair value measurements
consider observable data that may include dealer quotes and live trading levels from the CBOT and
NYMEX markets.
Asset held for sale: Assets held for sale comprises of equipment not used during the
construction of the plant and is reported at the fair value utilizing Level 3 inputs. The
Company obtains fair value measurements from an independent third party.
The following table summarizes financial assets and financial liabilities measured at fair value on
a recurring basis as of September 30, 2009, segregated by the level of the valuation inputs within
the fair value hierarchy utilized to measure fair value:
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Other Assets, assets held for sale |
$ | 250,000 | $ | | $ | | $ | 250,000 | ||||||||
Liability, derivative financial
instruments |
450,670 | 450,670 | | |
16
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HOMELAND ENERGY SOLUTIONS, LLC
Notes to Condensed Unaudited Financial Statements
Notes to Condensed Unaudited Financial Statements
September 30, 2009
Certain financial assets and financial liabilities are measured at fair value on a nonrecurring
basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject
to fair value adjustments in certain circumstances, for example, when there is evidence of
impairment.
The following tables present a reconciliation of all assets and liabilities measured at fair value
using significant unobservable inputs (Level 3) during the period ended September 30, 2009.
Assets held | ||||
for Sale | ||||
Balance January 1, 2009 |
$ | | ||
Transfers in and/or out of Level 3 |
250,000 | |||
Ending balance September 30, 2009 |
$ | 250,000 | ||
The Company considers the carrying amount of significant classes of financial instruments on the
balance sheets including cash, accounts receivable, due from broker, restricted cash, other assets,
accounts payable, accrued liabilities and variable rate long-term debt to be reasonable estimates
of fair value either due to their length of maturity or the existence of variable interest rates
underlying such financial instruments that approximate prevailing market rates at September 30,
2009.
10. Subsequent Events
Management
of the Company has evaluated the period after the balance sheet date
up through November 12, 2009, which is the date that the financial statements were issued, and determined that there
were no subsequent events or transactions that required recognition or disclosure in the financial
statements.
17
Table of Contents
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that involve future events, our future
performance and our expected future operations and actions. In some cases, you can identify
forward-looking statements by the use of words such as may, should, expect, plan,
anticipate, believe, estimate, future, intend, could, will, hope, predict,
target, potential, or continue or the negative of these terms or other similar expressions.
These forward-looking statements are only our predictions and involve numerous assumptions,
risks and uncertainties, including, but not limited to those listed below and those business risks
and factors described elsewhere in this report and our other filings with the Securities and
Exchange Commission.
| Our ability to satisfy the financial covenants contained in our credit agreements
with our senior lender; |
||
| Our ability to operate the ethanol plant profitably and maintain a positive spread
between the price at which we sell our products and our raw materials costs; |
||
| Our ability to generate free cash flow to invest in our business and service our
debt; |
||
| Volatility of corn, natural gas, ethanol, unleaded gasoline, distillers grain and
other commodities prices and availability; |
||
| Changes in general economic conditions or the occurrence of certain events causing
an economic impact in the agriculture, oil or automobile industries; |
||
| Changes in interest rates or the lack of credit availability; |
||
| Changes in our business strategy, capital improvements or development plans; |
||
| Limitations and restrictions contained in the instruments and agreements governing
our indebtedness; |
||
| The results of our hedging transactions and other risk management strategies; |
||
| Our inelastic demand for and the availability of corn, as it is the only available
feedstock for our plant; |
||
| Changes in the environmental regulations or in our ability to comply with the
environmental regulations that apply to our plant site and our anticipated operations; |
||
| The effects of mergers, bankruptcies or consolidations in the ethanol industry; |
||
| Changes in federal and/or state laws including the Renewable Fuel Standard and
VEETC, or the elimination of any federal and/or state ethanol tax incentives; |
||
| Overcapacity within the ethanol industry; |
||
| Changes in plant production capacity or technical difficulties in operating the
plant; |
||
| Changes and advances in ethanol production technology that may make it more
difficult for us to compete with other ethanol plants utilizing such technology; |
||
| Our ability to retain key employees and maintain labor relations; |
||
| The development of infrastructure related to the sale and distribution of ethanol;
and |
||
| Competition in the ethanol industry and from alternative fuel additives. |
Our actual results or actions could and likely will differ materially from those anticipated
in the forward-looking statements for many reasons, including but not limited to the reasons
described in this report. We are not under any duty to update the forward-looking statements
contained in this report. We cannot guarantee future results, levels of activity, performance or
achievements. We caution you not to put undue reliance on any forward-looking statements, which
speak only as of the date of this report. You should read this report and the documents that we
reference in this report completely and with the understanding that our actual future results may
be materially different from what we currently expect. We qualify all of our forward-looking
statements by these cautionary statements.
Available Information
Information about us is also available at our website at www.homelandenergysolutions.com,
under Investor Relations SEC Filings, which includes links to reports we have filed with the
Securities and Exchange Commission. The contents of our website are not incorporated by reference
in this Quarterly Report on Form 10-Q.
18
Table of Contents
Overview
Homeland Energy Solutions, LLC (referred to herein as we, us, the Company, Homeland or
Homeland Energy) is an Iowa limited liability company. It was formed on December 7, 2005 for the
purpose of pooling investors for the development, construction and operation of a 100 million
gallon per year natural-gas powered ethanol plant located near Lawler, Iowa. We began producing
ethanol and distillers grains at the plant in April 2009. The ethanol plant is currently operating
at a rate in excess of its nameplate capacity of 100 million gallons, as it is currently producing
at a rate of approximately 110 million gallons per year from approximately 40 million bushels of
corn per year. In addition, the plant is expected to produce approximately 320,000 tons of
distillers grains per year.
Over the past 12 months we have installed the infrastructure necessary to support plant
operations and have begun operations. We have also obtained the permits required to construct and
operate the plant. The total project cost was approximately $176,000,000, which included
construction of our ethanol plant and start-up of operations. We financed the construction and
start-up of the ethanol plant with a combination of equity and debt. We currently employ 37
employees.
Our revenues are derived primarily from the sale of our ethanol and distillers grains. We
market and sell our products primarily in the continental United States through third party
marketers. We have an Ethanol Marketing Agreement with Green Plains Trade Group LLC (GPTG),
which is the ethanol marketing and distribution subsidiary of Green Plains Renewable Energy, LLC
(GPRE). Pursuant to the agreement, we sell all of our ethanol produced at our plant to GPTG, who
markets all of the ethanol produced at our plant and is responsible for all transportation of the
ethanol including, without limitation, the scheduling of all shipments of ethanol with us. GPTG is
based in Omaha, Nebraska. Its parent company, GPRE, operates two ethanol plants in Nebraska, two
in Iowa, one in Indiana and one in Tennessee.
The ethanol sold must meet or exceed the quality specifications set forth in ASTM 4806 for
Fuel Grade ethanol or standards promulgated in the industry. Under the Ethanol Marketing
Agreement, we provide GPTG with annual production forecasts and monthly updates, as well as daily
plant inventory balances. We are also responsible for compliance with all federal, state and local
rules relating to the shipment of ethanol from our plant. The Ethanol Marketing Agreement may be
terminated upon a material breach of any material obligation under the agreement by either party or
upon willful misconduct by either party.
The price per gallon that we will receive for our ethanol is based on the contract selling
price less all direct costs (on a per gallon basis) incurred by GPTG in conjunction with the
handling, movement and sale of the ethanol. In addition, we pay GPTG a commission for each gallon
of ethanol sold under the Ethanol Marketing Agreement. As of September 30, 2009, we have
commitments to sell approximately 21,382,000 gallons at various fixed and basis price levels
indexed against energy exchanges, for delivery through December 2009. If we are not able to meet
delivery on these gallons in the future, we will be responsible for purchasing gallons in the open
market. The Company has not incurred any losses due to non-delivery of product and anticipates
that all contracts will be sufficient to cover costs in the future.
We have also entered into a Distillers Grains Marketing Agreement with CHS, Inc. (CHS),
wherein CHS purchases the distillers grains produced at our plant. The initial one-year term of
the agreement began with start-up of operations and production at the plant. After the initial
one-year term, it will be automatically renewed for successive one year terms unless either we or
CHS give 120 day prior written notice before the current term expires.
A party is considered in default of the agreement with CHS upon any of the following events:
(a) failure of either party to make payment to the other when due; (b) default by either party in
the performance of the their respective obligations; and (c) upon the insolvency of either CHS or
Homeland Energy or upon the assignment to creditors in connection with bankruptcy. If an event of
default occurs, the parties will have certain remedies available to them in addition to any remedy
at law, such as all amounts owed being immediately payable or immediate termination of the
Distillers Grains Marketing Agreement.
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CHS pays us 98% of the actual sale price, which is based on prevailing market conditions,
received by CHS from its customers, less all of the customary freight costs incurred by CHS in
delivering the distillers grains to the customer. CHS retains the balance of the FOB plant price
received by CHS from its customers as its fee for services provided under this agreement.
Under our ethanol and distillers grain marketing agreements, revenue is recognized at the
gross price received. Marketing fees and rail fees are included in costs of goods sold.
Since we only recently became operational, we do not have comparable income, production and
sales data for the three and nine months ended September 30, 2008. Accordingly, we do not provide
a comparison of our financial results between reporting periods in this report. If you undertake
your own comparison, it is important that you keep this in mind. We expect to fund our operations
during the next 12 months using cash flow from our continuing operations and our current credit
facilities.
Results of Operations for the Three Months Ended September 30, 2009
Our fiscal quarter ended September 30, 2009 was the second fiscal quarter during which we were
an operational company. The following table shows the result of our operations and the percentage
of revenues, cost of goods sold, operating expenses and other items to total revenues in our
statement of operations for the three months ended September 30, 2009. Because we did not begin
operations of the plant until April 2009, we do not have comparable data for the three months ended
September 30, 2008.
Quarter Ended | ||||||||
September 30, 2009 | ||||||||
(Unaudited) | ||||||||
Income Statement Data | Amount | Percent | ||||||
Revenues |
$ | 52,934,845 | 100.00 | % | ||||
Cost of Goods Sold |
$ | 47,307,748 | 89.37 | % | ||||
Gross Profit (Loss) |
$ | 5,627,097 | 10.63 | % | ||||
Operating Expenses |
$ | 685,278 | 1.29 | % | ||||
Operating Income (Loss) |
$ | 4,941,819 | 9.33 | % | ||||
Other Income (Expense) |
$ | (712,046 | ) | (1.35 | )% | |||
Net Income (Loss) |
$ | 4,229,773 | 7.99 | % |
Revenues
Our revenues from operations come from two primary sources: sales of fuel ethanol and sales
of distillers grains. For the three months ended September 30, 2009, we received approximately 85%
of our revenue from the sale of fuel ethanol and approximately 15% of our revenue from the sale of
distillers grains. The average price we received for our ethanol was substantially the same for
the three month period ended September 30, 2009, compared to the our first quarter of operations
ending June 30, 2009.
The average price we received for our dried distillers grains decreased by approximately 29%
during the quarter ended September 30, 2009 compared to our first quarter of operations ending June
30, 2009. In addition, we experienced a decrease in the average price we received for our
modified/wet distillers grains of approximately 32% for the quarter ended September 30, 2009,
compared to our first quarter of operations ending June 30, 2009. Management attributes the
overall decrease in the price to a seasonal decrease in demand for distillers grains from livestock
producers during the quarter ended September 30, 2009. Distillers grains are commonly used for
animal feed as a substitute for corn and soybean meal, especially when corn and soybean meal prices
are high. We anticipate that the price of distillers grains will continue to fluctuate in reaction
to demand from livestock producers
and changes in the price of corn and soybean meal. The ethanol industry needs to continue to
expand the market of distillers grains in order to maintain current distillers grains prices.
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The plant operated profitably during the three months ended September 30, 2009. Management
believes this is due in part to an increase in the positive spread between ethanol and corn prices.
In addition, demand for gasoline and ethanol during the late summer and early fall was higher than
previous months and there was a reduction in supply of ethanol. Management attributes the
reduction in supply to a number of factors, such as a decline in sugar cane ethanol imports from
South America due to an increase in the cost of sugar. In addition, Management believes that the
reduction in supply for this quarter was due in part to the fact that many ethanol producers,
including Homeland Energy, scheduled shutdowns for semi-annual maintenance work prior to the
harvest of this years corn crop, after which corn is anticipated to be more readily available
compared to the decreasing supply of last years corn crop.
In addition, Management believes that the reduction in supply is partly due to the fact that
some producers have reduced or halted production due to a surplus of ethanol production capacity in
the United States which has contributed to lower ethanol prices and decreased profit margins
compared to higher ethanol prices and profit margins experienced in prior years. According to the
Renewable Fuels Association, as of October 22, 2009, there were 202 ethanol plants nationwide with
the capacity to produce approximately 13.1 billion gallons of ethanol annually. However, according
to the Renewable Fuels Association, of the total 13.1 billion gallons of total ethanol production
capacity, approximately 1.2 billion gallons of capacity is not currently operational. An
additional 13 plants are currently under construction or expansion, which may add an estimated 1.4
billion gallons of annual ethanol production capacity when they are completed. Management believes
that of the 13 plants under construction or expansion, only a few have substantial construction
progress being made on them. However, the price of ethanol will likely be negatively impacted as
much of the idled production capacity could come back online within a reasonably short period of
time. In addition, ethanol prices will likely continue to change as the price of corn and energy
prices in general fluctuate. Energy and corn prices have been volatile due to the uncertain
general economic conditions. We anticipate that the ethanol industry must continue to grow demand
for ethanol in order to retain profitability in the industry.
The economic downturn has impacted our business as we must continually monitor the profit
margins for our ethanol to determine whether production at full capacity is feasible given those
margins. Due to the overcapacity in the ethanol market and tight operating margins, management
cautions that the ethanol plant may not operate profitably in the next fiscal quarter. If the
price of ethanol remains low for an extended period of time, management anticipates that this could
significantly impact our liquidity, especially if our raw material costs increase. According to
the Renewable Fuels Association, 2008 ethanol demand was 9.5 billion gallons (including imported
ethanol) which is significantly less than the current production capacity of the ethanol industry.
Pursuant to the National Renewable Fuels Standard, renewable fuels must be blended into 11.1
billion gallons of fuel in 2009, however, corn based ethanol can only account for 10.5 billion
gallons of the RFS. Therefore, management anticipates that corn ethanol demand will be capped at
approximately 10.5 billion gallons for 2009. In previous years, more ethanol was blended than was
required by the RFS as a result of the price of ethanol being more favorable than the price of
gasoline. The ethanol industry must increase demand for ethanol in order to support current
ethanol prices and maintain profitability in the industry.
A debate continues in the industry about what percentage of ethanol blended with gasoline
should be allowed for use in standard (non-flex fuel) vehicles. Currently, a blend of 10% ethanol
and 90% gasoline is allowed. Estimates indicate that approximately 135 billion gallons of gasoline
are sold in the United States each year and gasoline demand has decreased in the United States as a
result of the global economic slowdown. Even using the 135 billion gallon figure and assuming that
all gasoline in the United States is blended at a rate of 10% ethanol and 90% gasoline, the maximum
demand for ethanol is approximately 13.5 billion gallons. This is commonly referred to as the
blending wall, which represents a theoretical limit where more ethanol cannot be blended into the
national gasoline pool. This is a theoretical limit because it is believed that it would not be
possible to blend ethanol into every gallon of gasoline that is used in the United States and it
discounts additional ethanol used in higher percentage blends such as E85 used in flex fuel
vehicles. Many in the ethanol industry believe that we will reach this blending wall in 2010 or
2011.
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The RFS mandate requires that 36 billion gallons of renewable fuels be used each year by 2022.
In order to meet the RFS mandate and expand demand for ethanol, higher percentage blends of
ethanol must be utilized in conventional automobiles. Such higher percentage blends of ethanol
have recently become a contentious issue. Automobile manufacturers and environmental groups have
fought against higher percentage ethanol blends. State and federal regulations prohibit the use of
higher percentage ethanol blends in conventional automobiles and vehicle manufacturers have
indicated that using higher percentage blends of ethanol in conventional automobiles would void the
manufacturers warranty. Without increases in the allowable percentage blends of ethanol, demand
for ethanol may not continue to increase. Our financial condition may be negatively affected by
decreases in the selling price of ethanol resulting from ethanol supply exceeding demand.
A waiver request has been filed under the Clean Air Act by a group of ethanol producers that
suggests raising the current 10% blending limit an additional five percent for each gallon of
gasoline produced. The proposed increase would not require a 15% blend, but would provide
flexibility for the blenders and retailers to incorporate more ethanol if the economics are
suitable. The public comment period ended on July 30, 2009, and a decision is expected by
December 1, 2009. There is significant opposition to this proposed waiver request, however, and
there is no guarantee that it will be granted.
Cost of Goods Sold
Our cost of goods sold as a percentage of revenues was approximately 89.37% for the three
months ended September 30, 2009. Our two primary costs of producing ethanol and distillers grains
are corn costs and energy costs (natural gas and electricity). The cost of corn is the highest
input to the plant and uncertainties regarding the cost and supply of corn dramatically affect our
expected input cost. The average corn price we paid was 13% lower and natural gas cost were
approximately 4% lower for the quarter ended September 30, 2009 verses the previous quarter.
However, a substantial hailstorm earlier this year in the nearby area damaged approximately 30,000
acres of corn and soybeans, and the local area has more recently experienced a wet fall, which has
delayed the harvest in our area. While we cannot predict the full impact these factors will have
on corn availability in our area, supply may be tighter than anticipated over the next year, which
may lead to higher corn prices.
In an attempt to minimize the effects of the volatility of corn costs on operating profits, we
have opened commodities trading accounts. In addition, we have hired a commodities manager to
manage our corn procurement activities. This activity is intended to fix the purchase price of
our anticipated requirements of corn in production activities. Our commodity trading broker
assists in the purchase and sale of commodity futures contracts for corn, and will enter into
transactions and exercise commodity options for our account in accordance with our written or oral
instructions. We are required to maintain adequate margins in our accounts, and if we do not
maintain adequate margins, our broker may close out on any of our positions or transfer funds from
other accounts of ours to cover the margin. In addition, if we are unable to deliver any security
or commodity bought or sold, our broker has authority to borrow or buy any security, commodity or
other property to meet the delivery requirement.
The effectiveness of our strategies through our commodities accounts is dependent upon the
cost of corn and our ability to sell sufficient products to use all of the corn for which we have
futures contracts. There is no assurance that our activities will successfully reduce the risk
caused by price fluctuation, which may leave us vulnerable to high corn prices. However, for the
quarter ended September 30, 2009, we experienced an approximate $850,000 realized and unrealized
gain related to our corn and natural gas derivative instruments which decreased our costs of goods
sold. We recognize the gains or losses that result from the changes in the value of our derivative
instruments in cost of goods sold as the changes occur. Our plant is expected to grind
approximately 40 million bushels of corn per year. During the previous period and over the next 12
months, we have hedged and anticipate hedging between 5% and 40% of our anticipated monthly
grind. At September 30, 2009, we had hedged portions of our anticipated monthly purchases for corn
averaging approximately 4% to 6% of our anticipated monthly grind over the next twelve months. As
of September 30, 2009 less than 1% of the forward corn purchases were with a related party. We
expect continued volatility in the price of corn, which could significantly impact our cost of
goods sold. The growing number of operating ethanol plants nationwide is also expected to increase
the demand for corn. This increase will likely drive the price of corn upwards in our market which
will impact our ability to operate profitably.
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To access sufficient supplies of natural gas to operate the plant, a dedicated lateral
pipeline has been constructed to service our plant. We entered into an agreement with Northern
Natural Gas in April 2008 for connection to its interstate pipeline and for transportation services
for our natural gas supply.
We source our natural gas through various suppliers. As we enter the winter months, we
estimate that our cost for natural gas will be approximately 40%-50% higher per MMBtu than we
experienced during the quarter ended September 30, 2009 due to the typical seasonal increase in
prices during the late fall and winter months, but this is an estimate only and our costs will be
subject to market fluctuations.
U.S. Energy assists us with electric energy and natural gas management and procurement under
an Energy Management Services Agreement dated July 10, 2009. U.S. Energys responsibilities
include administration of our gas supply contracts, nomination, scheduling and other logistical
issues such as storage and transportation, negotiation and delivery. We work with U.S. Energy to
provide estimated usage volumes on a monthly basis. In exchange for these management services, we
pay a monthly service fee, as well as pre-approved expenses in connection with the services. The
agreement for these services continues on a month to month basis.
For our electricity supply, we entered into an Electrical Services Agreement with Hawkeye
Tri-County Electric Cooperative d/b/a Hawkeye REC (Hawkeye), on March 6, 2009 for our electricity
needs. Pursuant to the agreement, Hawkeye will provide electric power and energy to our plant, and
has installed the electrical facilities necessary to deliver all of the electric power and energy
required to operate Homeland Energys ethanol plant.
The agreement with Hawkeye will remain in effect for ten years from the date Homeland Energy
began processing ethanol at the plant (April 2009), and will terminate on the tenth anniversary of
that date (April 2019). Homeland Energy may continue to receive the service following expiration
of the ten-year term for a minimum of two years. Either party will then have the right to
terminate the agreement upon giving six (6) months written notice of its intention to terminate.
Operating Expense
Our operating expenses as a percentage of revenues were 1.28% for our quarter ended September
30, 2009, which is slightly higher than the expenses as of our quarter ended June 30, 2009. We
attribute this small increase to increased personnel expenses during our quarter ended September
30, 2009. We expect our operating expenses to level out and be more consistent as the plant is
operational for a longer period of time. Operating expenses include salaries and benefits of the
employees under the Management Services Agreement with Golden Grain Energy, LLC, as well as
additional employees not subject to the agreement, insurance, taxes, professional fees and other
general administrative costs. Currently, two of our 37 employees are subject to the Management
Services Agreement with Golden Grain and Golden Grain supplies us with six shared positions. We
estimate that our costs per year related to salaries and benefits are approximately $430,000 per
year and include our total costs related to salaries and benefits for all administrative employees
including those under the Management Services Agreement The increase in operating expenses for the
quarter ended September 30, 2009, compared to the same period for September 30, 2008, was primarily
due to the increased number of employees due to start-up of operations, which increased costs in
salaries, insurance, professional fees, and other general administrative costs due to the plant
being under full-time production. We do not expect that these expenses will vary significantly with
the level of production at the plant.
Operating Income (Loss)
Our income from operations for the three months ended September 30, 2009 was approximately
9.35% of our revenues. Our operating income for the three month period ended September 30, 2009
was primarily the result of the price at which we sold our products exceeding our costs of good
sold and operating expenses. Our decrease in income from interest for the three months ended
September 30, 2009 compared to the three months ended September 30, 2008, was due to cash on hand
for a significant part of the quarter ended September 30, 2008 until we started drawing on our
construction loan. During the same quarter of 2009 we have been managing cash through our term
line of credit.
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Changes in Financial Condition for the Nine Months Ended September 30, 2009
We experienced an increase in our current assets at September 30, 2009 compared to our fiscal
year ended December 31, 2008. We had an increase of approximately $6,100,000 in the value of our
inventory at September 30, 2009, compared to December 31, 2008, primarily as a result of the
commencement of operations at our plant. Additionally, at September 30, 2009, we had cash in our
hedge accounts of approximately $901,000 compared to no open accounts as of December 31, 2008. One
category in which we had a greater amount at December 31, 2008, compared to September 30, 2009, is
cash on hand. The decrease in our cash on hand is attributed to a payment that was made on our
$20,000,000 term revolving loan upon conversion of the construction loan.
We experienced a small increase in our total current liabilities on September 30, 2009
compared to December 31, 2008 due primarily to an increase in current maturities of long-term debt
offset by a reduction in retainage payable. However, due to the increase in our current assets at
September 30, 2009, we expect that we have sufficient working capital to meet our obligations and
maintain compliance with our debt covenants as they come due for the 12 months following September
30, 2009. In addition, compared to our quarter ended June 30, 2009, we had a slight increase in
our current liabilities, primarily due to an increase in the amount of our long-term debt that is
due in the next 12 months.
Our net property and equipment was higher at September 30, 2009 compared to December 31, 2008
as a result of the net effect of significant increases in the assets due to completion of the
plant. The value of our land and land improvements and property and equipment can be offset by our
construction in process decreasing from approximately $136,000,000 at December 31, 2008 to
approximately $411,000 at September 30, 2009.
We experienced an increase in our long-term liabilities as of September 30, 2009 compared to
December 31, 2008. At September 30, 2009, we had approximately $73,000,000 outstanding in the form
of long-term loans, compared to approximately $51,600,000 at December 31, 2008. This increase is
attributed to cash we utilized from our long-term loans to complete the construction of our
facility and commence operations.
Liquidity and Capital Resources
We have completed approximately seven months of operations as of the filing of this report,
and are currently operating at full capacity. Based on financial forecasts performed by our
management, as of the date of this report, we anticipate that we will have sufficient cash from our
current credit facilities and from our operations to continue to operate the ethanol plant at full
capacity for the next 12 months. The relative price levels of corn, ethanol and distillers grains
have resulted in positive operating margins and a small income margin for us in the first two
quarters during which we have been operational. We anticipate that we will continue to experience
positive operating margins for the 12 months following our quarter ended September 30, 2009.
However, a substantial hail storm damaged approximately 30,000 acres of corn and soybeans this
growing season near the plant, and an unusually wet fall has delayed the corn harvest in our area.
Thus, corn availability from the immediate area of the plant may be tight over the next 12 months
which will require us to pay more for corn and may reduce operating margins. If the Company suffers
substantial losses, or if we are unable to obtain additional working capital, liquidity concerns
may require us to curtail operations or pursue other actions that could adversely affect future
operations.
The following table shows cash flows for the nine months ended September 30, 2009:
Nine Months Ended | ||||
September 30, 2009 | ||||
Net cash (used in) operating activities |
$ | (876,141 | ) | |
Net cash (used in) investing activities |
$ | (27,113,676 | ) | |
Net cash provided by financing activities |
$ | 27,945,218 | ||
Net decrease in cash |
$ | (44,599 | ) | |
Cash and cash equivalents, end of period |
$ | |
Operating Cash Flows. Cash used in operating activities for the nine months ended September
30, 2009 was primarily from the increase in both accounts receivables and inventory for the nine
months ended September 30, 2009.
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Investing Cash Flows. Cash used in investing activities for the nine months ended September
30, 2009 were used for capital expenditures and payments for construction in process.
Financing Cash Flows. Cash provided by financing activities was from construction loan
proceeds for the nine months ended September 30, 2009.
Our liquidity, results of operations and financial performance will be impacted by many
variables, including the market price for commodities such as, but not limited to, corn, ethanol
and other energy commodities, as well as the market price for any co-products generated by the
facility and the cost of labor and other operating costs. Assuming future relative price levels
for corn, ethanol and distillers grains remain consistent with the relative price levels as of
November 1, 2009; we expect operations to generate adequate cash flows to maintain operations and
meet our obligations for the next 12 months following our quarter ended September 30, 2009. This
expectation assumes that we will be able to sell all the ethanol that is produced at the plant.
Project Capitalization
We financed the development and construction of our ethanol plant with both equity and debt
financing. We have issued 2,850 membership units in two private placement offerings for a total of
$1,325,000 in offering proceeds. We have also issued 88,595 units in our SEC registered offering
for an aggregate amount of $88,595,000 in offering proceeds.
On November 2007, we entered into a $100,000,000 credit facility with Home Federal Savings
Bank (Home Federal) consisting of a construction loan in an amount up to $94,000,000 and a
seasonal line of credit loan in an amount up to $6,000,000, which are secured by secured by all of
our real and personal property, and we have also assigned all rents and leases of our property to
Home Federal. On July 1, 2009, the balance of our construction loan was converted into a term loan
and a term revolving loan.
As of September 30, 2009, the outstanding balance on the converted term loan was $74,000,000.
Interest on the converted term loan is equal to the LIBOR rate plus 325 basis points. Interest is
currently due each month, and we must begin making principal payments of approximately $617,000 per
month beginning in February 2010. All unpaid principal and accrued interest on the term loan that
was so converted will be due on the fifth anniversary of the date of conversion. If we fail to
make a payment of principal or interest within 10 days of the due date, there will be a late charge
equal to 5% of the amount of the payment. We will have the right to convert up to 50% of the term
loan into a Fixed Rate Loan with the consent of Home Federal. The Fixed Rate Loan will bear
interest at the five year LIBOR swap rate that is in effect on the date of conversion plus 325
basis points, or another rate mutually agreed upon by Homeland Energy and Home Federal. If we
elect this fixed rate option, the interest rate will not be subject to any adjustments otherwise
provided for in the Master Loan Agreement.
Under the terms of the Master Loan Agreement and the second supplement thereto, we agreed to
the terms of a term revolving loan, consisting of a conversion of a maximum amount of $20,000,000
of the Construction Loan into a term revolving loan. As of September 30, 2009, the outstanding
balance on the converted term revolving loan was $4,000,000. Home Federal agreed to make one or
more advances under this loan between the Conversion Date, which was July 1, 2009, and the Maturity
Date, which is the fifth anniversary of the Conversion Date. Each advance made under the term
revolving loan must be in a minimum amount of $50,000, and advances may be used for project costs
and cash and inventory management. Interest on the Revolving Term Loan shall accrue at a rate
equal to the LIBOR Rate plus 325 basis points. If we fail to make a payment of principal or
interest within 10 days of the due date, there will be a late charge equal to 5% of the amount of
the payment. We will be required to make monthly payments of interest until the Maturity Date,
which is the fifth anniversary of July 1, 2009 (the Conversion Date), on which date the unpaid
principal amount of the Revolving Term Loan will become due and payable.
The aggregate principal amount of the seasonal line of credit may not exceed the lesser of
$6,000,000 or the Borrowing Base. The Borrowing Base means, at any time, the lesser of: (a)
$6,000,000; or (b) the sum of (i) 75% of the eligible accounts receivable, plus (iii) 75% of the
eligible inventory. Interest on the seasonal line of credit shall accrue at a rate equal to the
LIBOR Rate plus 325 basis points. If we fail to make a payment of principal or interest within
10 days of the due date, there will be a late charge equal to 5%
of the amount of the payment. Each advance made under this loan must be in a minimum amount of $50,000, and advances may be used
for general corporate and operating purposes. We will be required to make monthly payments of
accrued interest until the seasonal line of credit, on which date the unpaid principal amount will
become due and payable. This line of credit will expire on June 30, 2010. As of September 30,
2009, the outstanding balance on this loan was $0.
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In connection with the Master Loan Agreement and all supplements thereto, we executed a
mortgage in favor of Home Federal creating a senior lien on the real estate and plant and a
security interest in all personal property located on Company property. We are also required to
maintain a debt service reserve account of $10,000,000, for use by Home Federal for repayment of
the loans in their sole discretion. Should Home Federal apply any of the funds in this account,
we are required to replenish the account to $10,000,000. Once we achieve and maintain tangible net
worth of 65% and are in compliance with all other covenants, the debt service fund will be released
to us and we will no longer be required to replenish the account. Tangible net worth is calculated
as the excess total assets, including the debt reserve account, (with certain exclusions, such as
goodwill) over total liabilities (except subordinated debt). It is difficult to predict when and
if we will achieve tangible net worth of 65%. In addition, we assigned all rents and leases to our
property in favor of Home Federal. As additional security for the performance of the obligations
under the Master Loan Agreement and its supplements, a security interest was granted in the
government permits for the construction of the project and all reserves, deferred payments,
deposits, refunds, cost savings and payments of any kind relating to the construction of the
project. If we attempt to change any plans and specifications for the project from those that were
approved by Home Federal that might adversely affect the value of Home Federals security interest
and have a cost of $25,000 or greater, we must obtain Home Federals prior approval.
In addition, during the term of the loans, we will be subject to certain financial covenants
at various times calculated monthly, quarterly or annually. On July 1, 2009, our construction loan
converted into the loans described above. As a prerequisite to conversion, we were required to
certify that we had working capital of at least $10,000,000 as of May 1, 2009. Our certification
showed that we had working capital of $20,970,603. We will be required to have working capital
of at least $12,000,000 by May 1, 2010 and annually thereafter. In addition, we were required to
certify that we had tangible net worth of $87,000,000 as of May 1, 2009. Our certification showed
that we had a tangible net worth of $88,539,073 as of May 1, 2009. Our tangible net worth
requirement increases to $90,000,000 by December 31, 2009, and increases by $5,000,000 annually
until we are required to meet $105,000,000 by December 31, 2012, and annually thereafter. We
anticipate our tangible net worth will be in excess of $90,000,000 on December 31, 2009 but there
is no guarantee it will happen.
In addition to our interest and principal payments, we are required to make an excess cash
flow payment to Home Federal on the term loan prior to November 15, 2009. This payment will be
made with funds from the long term revolving loan in place with Home Federal and is therefore
classified as long term debt on the balance sheet rather than a current liability. Excess cash
flow is calculated as our earnings before interest, taxes, depreciation and amortization (EBITDA),
less the sum of (1) our required debt payments, (2) capital expenditures in the ordinary course of
business, and (3) any allowed distributions. Excess cash flow is calculated based on our fiscal
quarters interim financial statements, and the maximum excess cash flow payment per quarter is
$5,000,000. As of September 30, 2009, our excess cash flow covenant calculation was $5,000,000.
This payment is in addition to all other payments of principal and interest. This excess cash flow
payment requirement will be suspended if our Tangible owners equity is greater than or equal to
65%, and the total of all excess cash flow payments shall not exceed an aggregate of $25,000,000.
Tangible owners equity is calculated as tangible net worth divided by total assets and is
currently less than 65%.
As of the date of this report, we are in compliance with all of our loan covenants with Home
Federal. We anticipate that we will be in compliance with our loan covenants for the 12 months
following our quarter ended September 30, 2009, and we will work with our lenders to try ensure
that the agreements and terms of the loan agreements are met going forward. However, we cannot
provide any assurance that our actions will result in sustained profitable operations or that we
will not be in violation of our loan covenants or in default on our principal payments. Because it
is unclear what the market will do, there is uncertainty about our ability to meet our liquidity
needs and comply with our financial covenants and other terms of our loan agreements. If we violate
the terms of our loan or fail to obtain a waiver of any such term or covenant, our primary lender
could deem us in default of our loans and require us to immediately repay a significant portion or
possibly the entire outstanding balance of our loans. Our lender could also elect to proceed with
a foreclosure action on our plant.
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In addition to our equity and debt financing we have applied for and received various grants.
We applied for a working capital Value-Added Producer Grant (VAPG) from the USDA, and proposed a
$625,000 working capital total project amount. Under the VAPG program, the USDA can provide up to
50% of the total project amount (in our case, $625,000) in the form of a grant. In June 2009, we
were awarded a $300,000 grant under this program. We will be required to utilize the funds, as
well as the $325,000 in matching funds, for corn, yeast, enzymes and processing chemical purchases.
On December 19, 2007, the Iowa Department of Economic Development approved us for a package of
benefits, including a grant of $240,000 for the construction of a turning lane off of Iowa Highway
24 to the plant as well as a package of tax benefits under the High Quality Jobs Program from the
State of Iowa. Such tax benefits include a refund of sales, service and use taxes paid to
contractors during the construction phase, an investment tax credit of up to $10,000,000 for
qualified expenditures directly related to new jobs created, and a property tax exemption for a
portion of the value added by improvements to real property directly related to new jobs created by
the plant (estimated at $10,350,000). In order to receive these benefits, we will be required to
meet certain requirements by 2012, such as the creation of 40 full-time employee positions meeting
certain minimum wage and benefit criteria and these jobs must be maintained for at least two years
following their creation. Currently, we have 37 employees and expect to meet the minimum job
requirement by 2012. However, in the event that we do not meet the minimum jobs requirement, the
IDED may elect to allow the repayment on a pro rata basis, based on the number of jobs attained
compared to the number of jobs pledged. In addition, we may be ineligible for some or all of the
benefits listed above if our project does not meet a minimum investment amount, which was based on
a budget for the plant that included a coal gasification energy center. The minimum investment
amount is a measure of the value of Homelands investment in land, improvements, buildings and
structures, long-term lease costs, and/or depreciable assets. We intend to seek an amendment with
IDED prior to this condition becoming due if it becomes apparent that we will not meet this
requirement. While we expect that IDED will entertain an amendment, they could reduce or eliminate
our benefits, which may require us to repay the local taxing authority and the Iowa Department of
Revenue all or a portion of any incentives received, which would have a negative impact on our
profitability.
We received preliminary approval for a loan guarantee of 60% of a potential $40,000,000 loan
through Home Federal Savings Bank from the United States Department of Agriculture (USDA) under
the Rural Energy Program based on some unique efficiencies at our plant. However, we were required
to meet certain conditions prior to the receipt of the loan guarantee which we have not yet been
able to meet. If we do not meet those conditions by November 29, 2009, we will not receive the
guarantee.
Application of Critical Accounting Estimates and Significant Accounting Policies
Management uses estimates and assumptions in preparing our financial statements in accordance
with generally accepted accounting principles, such as estimates related to construction in
progress. These estimates and assumptions affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities, and the reported revenues and expenses.
We evaluate our contracts to determine whether the contracts are derivative instruments.
Certain contracts that literally meet the definition of a derivative may be exempted from
derivative accounting as normal purchases or normal sales. Normal purchases and normal sales are
contracts that provide for the purchase or sale of something other than a financial instrument or
derivative instrument that will be delivered in quantities expected to be used or sold over a
reasonable period in the normal course of business. Contracts that meet the requirements of normal
purchases or sales are documented as normal and exempted from the accounting and reporting
requirements of derivative accounting.
We enter into short-term cash, option and futures contracts as a means of securing purchases
of corn, natural gas and sales of ethanol for the plant and managing exposure to changes in
commodity and energy prices. All of our derivatives are designated as non-hedge derivatives, with
changes in fair value recognized in net income. Although the contracts are economic hedges of
specified risks, they are not designated as and accounted for as hedging instruments.
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As part of our trading activity, we use futures and option contracts through regulated
commodity exchanges to manage our risk related to pricing of inventories. To reduce that risk, we
generally take positions using cash and futures contracts and options.
Realized and unrealized gains and losses related to derivative contracts related to corn and
natural gas are included as a component of cost of goods sold and derivative contracts related to
ethanol are included as a component of revenues in the accompanying financial statements. The fair
values of contracts entered through commodity exchanges are presented on the accompanying balance
sheet as derivative instruments.
Revenue from the sale of our products is recognized at the time title to the goods and all
risks of ownership transfer to the customers. This generally occurs upon shipment, loading of the
goods or when the customer picks up the goods. Interest income is recognized as earned. Shipping
costs incurred in the sale of ethanol and distiller grains are not specifically identifiable and as
a result, revenue from the sale of ethanol and distiller grains is recorded based on the net
selling price reported to us from the marketer.
We review our property and equipment for impairment whenever events indicate that the carrying
amount of the assets may not be recoverable. If circumstances require a long-lived asset be tested
for possible impairment, we first compare undiscounted cash flows expected to be generated by an
asset to the carrying value of the asset. If the carrying value of the long-lived asset is not
recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the
carrying value exceeds its fair value. Fair value is determined through various valuation
techniques including discounted cash flow models, quoted market values and third-party independent
appraisals, as considered necessary.
We impaired an asset associated with the coal gasification project by $230,875 due to the long
term nature and uncertainty of the project. The estimated fair market value of this asset is
$230,875, for which we intend to depreciate over the life of the plant, and is listed on the
Balance Sheet as Equipment. We entered into a change order during the original construction of
the plant to change the design from one large thermal oxidizer stack to two smaller thermal
oxidizer stacks. The unused larger stack was deemed impaired by approximately $250,000 due to a
drop in value of the construction materials used to make the stack. The estimated fair market
value of this asset is $250,000, for which management intends to sell on the open market, and is
listed on the Balance Sheet as Assets held for sale. The total loss on asset impairments for the
period ending June 30, 2009 is $480,875 and is included in operating expense.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of
1934 and are not required to provide information under this item.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
Management of Homeland Energy is responsible for maintaining disclosure controls and
procedures that are designed to ensure that information required to be disclosed in the reports
that the Company files or submits under the Securities Exchange Act of 1934 (the Exchange Act) is
recorded, processed, summarized and reported within the time periods specified in the Securities
and Exchange Commissions rules and forms. In addition, the disclosure controls and procedures
must ensure that such information is accumulated and communicated to the Companys management,
including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required financial and other required disclosures.
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As of the end of the period covered by this report, an evaluation of the effectiveness of our
disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) of the
Securities Exchange Act of 1934 (the Exchange Act)) was carried out under the supervision and
with the participation of our Principal Executive Officer, Walter W. Wendland, and our Principal
Financial and Accounting Officer, Christine A. Marchand. Based on their evaluation of our
disclosure controls and procedures, they have concluded that such disclosure controls and
procedures were not effective to detect the inappropriate application of US GAAP standards. This is
because the weaknesses that were identified as of the end of our fiscal year ended December 31,
2008, will not be considered remediated until the applicable remedial controls operate for a
sufficient period of time and management has concluded, through testing, that these controls are
operating effectively. We identified deficiencies as of the end of our fiscal year on December 31,
2008, that existed in the design or operation of our internal control over financial reporting that
adversely affected our disclosure controls and that may be considered to be material weaknesses.
Specifically, the following deficiencies in our internal controls, which adversely affected our
disclosure controls, were discovered as of the end of our fiscal year on December 31, 2008:
Policies and Procedures for the Financial Close and Reporting Process There
were no policies or procedures that clearly define the roles in the financial close and
reporting process. The various roles and responsibilities related to this process should be
defined, documented, updated and communicated. Failure to have such policies and procedures
in place amounts to a material weakness to the Companys internal controls over its
financial reporting processes.
Representative with Financial Expertise For the majority of the year ending
December 31, 2008, the Company did not have a representative with the requisite knowledge
and expertise to review the financial statements and disclosures at a sufficient level to
monitor the financial statements and disclosures of the Company. Failure to have a
representative with such knowledge and expertise amounts to a material weakness to the
Companys internal controls over its financial reporting processes.
Adequacy of Accounting Systems at Meeting Company Needs The accounting system
in place at the time of the assessment lacked the ability to provide high quality financial
statements from within the system, and there were no procedures in place or built into the
system to ensure that all relevant information is secured, identified, captured, processed,
and reported within the accounting system. Failure to have an adequate accounting system
with procedures to ensure the information is secure and accurately recorded and reported
amounts to a material weakness to the Companys internal controls over its financial
reporting processes.
Segregation of Duties Management identified a significant general lack of
definition and segregation of duties throughout the financial reporting processes. Due to
the pervasive nature of this issue, the lack of adequate definition and segregation of
duties amounts to a material weakness to the Companys internal controls over its financial
reporting processes.
Since identifying these material weaknesses as of our fiscal year ended December 31, 2008,
Homeland Energy continues to create and refine a structure in which critical accounting policies
and estimates are identified, and together with other complex areas, are subject to multiple
reviews by qualified accounting personnel. In addition, Homeland Energy will enhance and test our
year-end financial close process for our fiscal year ended December 31, 2009, and thereafter.
Additionally, Homeland Energys audit committee will increase its review of our disclosure controls
and procedures. Finally, we have designated individuals responsible for identifying reportable
developments. We believe these actions, after functioning properly for a sufficient amount of time,
will remediate the material weakness by focusing additional attention and resources in our internal
accounting functions.
Changes in Internal Controls
During our quarters ended March 31, June 30, and September 30, 2009, we have enhanced our
month and quarter end financial close process. Additionally, our audit committee has enhanced its
review of our disclosure controls and procedures. Under the Management Services Agreement with
Golden Grain Energy, LLC, we now have a Chief Financial Officer with the requisite knowledge and
expertise to oversee the financial reporting process. On January 1, 2009, we implemented new
accounting software capable of providing high quality financial
statements and capable of providing the appropriate level of security for the information. We have
also developed and implemented policies and procedures for the financial close and reporting
process, such as identifying the roles, responsibilities, methodologies, and review/approval
process.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time in the ordinary course of business, Homeland Energy Solutions, LLC may be
named as a defendant in legal proceedings related to various issues, including without limitation,
workers compensation claims, tort claims, or contractual disputes. We are not currently involved
in any material legal proceedings.
Item 1A. Risk Factors.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of
1934 and are not required to provide information under this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
The following exhibits are filed as part of, or are incorporated by reference into, this
report:
Exhibit | Method of | |||
No. | Description | Filing | ||
31.1
|
Certificate pursuant to 17 CFR 240 13a-14(a) | * | ||
31.2
|
Certificate pursuant to 17 CFR 240 13a-14(a) | * | ||
32.1
|
Certificate pursuant to 18 U.S.C. Section 1350 | * | ||
32.2
|
Certificate pursuant to 18 U.S.C. Section 1350 | * |
(*) | Filed herewith. |
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
HOMELAND ENERGY SOLUTIONS, LLC | ||||
Date: November 12, 2009
|
/s/ Walter W. Wendland
|
|||
Chief Executive Officer and President | ||||
(Principal Executive Officer) | ||||
Date: November 12, 2009
|
/s/ Christine A. Marchand
|
|||
Chief Financial Officer (Principal Financial and Accounting Officer) |
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