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EXCEL - IDEA: XBRL DOCUMENT - HOMELAND ENERGY SOLUTIONS LLCFinancial_Report.xls
EX-31.1 - CERTIFICATION - HOMELAND ENERGY SOLUTIONS LLCexhibit311-certification63.htm
EX-31.2 - CERTIFICATION - HOMELAND ENERGY SOLUTIONS LLCexhibit312-certification63.htm
EX-32.1 - CERTIFICATION - HOMELAND ENERGY SOLUTIONS LLCexhibit321-certification63.htm
EX-32.2 - CERTIFICATION - HOMELAND ENERGY SOLUTIONS LLCexhibit322-certification63.htm

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.        x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
x Yes    o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
 
Accelerated filer
o
Non-accelerated filer
x
 
Smaller Reporting Company
o
(Do not check if a smaller reporting company)
 
 

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

As of August 10, 2012, we had 90,445 membership units outstanding.








2



PART I.        FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
Homeland Energy Solutions, LLC
Balance Sheets
 
June 30, 2012
 
December 31, 2011
 ASSETS
(Unaudited)
 
(Audited)
 
 
 
 
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
1,289,019

 
$
5,153,553

Accounts receivable
4,502,768

 
3,396,034

Inventory
9,567,480

 
10,501,434

Due from broker
5,898,610

 
1,912,131

Prepaid and other
1,666,117

 
2,247,124

Derivative instruments

 
109,600

Total current assets
22,923,994

 
23,319,876

 
 
 
 
PROPERTY AND EQUIPMENT
 
 
 
Land and improvements
22,471,580

 
22,471,580

Buildings
5,305,625

 
5,150,659

Equipment
136,013,358

 
135,455,256

Construction in progress
254,957

 
333,725

 
164,045,520

 
163,411,220

Less accumulated depreciation
38,306,193

 
32,192,770

Total property and equipment
125,739,327

 
131,218,450

 
 
 
 
OTHER ASSETS
 
 
 
Loan fees, net of amortization of $1,024,036 and $941,057
148,936

 
231,915

Utility rights, net of amortization of $724,711 and $618,038
1,583,318

 
1,689,991

Other assets
1,816,799

 
1,049,875

Total other assets
3,549,053

 
2,971,781

 
 
 
 
TOTAL ASSETS
$
152,212,374

 
$
157,510,107


See Notes to Unaudited Financial Statements.

3


Homeland Energy Solutions, LLC
Balance Sheets (continued)
 
June 30, 2012
 
December 31, 2011
LIABILITIES AND MEMBERS' EQUITY
 
 
 
 
 
 
 
CURRENT LIABILITIES
 
 
 
Accounts payable
$
3,427,592

 
$
8,296,875

Derivative instruments
3,768,125

 
421,013

Interest payable
13,110

 
12,967

Property tax payable
467,933

 
464,314

Payroll payable
175,397

 
592,690

Current maturities of long term debt
3,083,333

 
6,783,333

Total current liabilities
10,935,490

 
16,571,192

 
 
 
 
COMMITMENTS AND CONTINGENCIES

 

 
 
 
 
LONG-TERM LIABILITIES
 
 
 
Long-term debt, less current liabilities
9,500,000

 

Other liabilities
246,488

 
246,488

Total long-term liabilities
9,746,488

 
246,488

 
 
 
 
MEMBERS' EQUITY, June 30, 2012 and December 31, 2011 90,445 units issued and outstanding
131,530,396

 
140,692,427

 
 
 
 
TOTAL LIABILITIES AND MEMBERS' EQUITY
$
152,212,374

 
$
157,510,107

 
 
 
 

See Notes to Unaudited Financial Statements.


4


Homeland Energy Solutions, LLC
Statements of Operations
(Unaudited)
 
Three Months Ended
 
Three Months Ended
 
Six Months Ended
 
Six Months Ended
 
June 30, 2012
 
June 30, 2011
 
June 30, 2012
 
June 30, 2011
 
 
 
 
 
 
 
 
Revenue
$
93,780,274

 
$
106,548,491

 
$
185,791,888

 
$
201,046,557

 
 
 
 
 
 
 
 
Costs of Goods Sold
91,884,055

 
95,417,818

 
181,528,660

 
184,922,711

 
 
 
 
 
 
 
 
Gross Profit
1,896,219

 
11,130,673

 
4,263,228

 
16,123,846

 
 
 
 
 
 
 
 
Operating Expenses
656,045

 
645,507

 
1,428,453

 
1,350,696

 
 
 
 
 
 
 
 
Operating Income
1,240,174

 
10,485,166

 
2,834,775

 
14,773,150

 
 
 
 
 
 
 
 
Other Income (Expense)
 
 
 
 
 
 
 
Interest expense
(67,384
)
 
(272,359
)
 
(113,251
)
 
(627,046
)
Interest income
203

 
4,051

 
282

 
7,778

Other income
48,502

 

 
145,348

 
340,489

Total Other Income (Expense)
(18,679
)
 
(268,308
)
 
32,379

 
(278,779
)
 
 
 
 
 
 
 
 
Net Income
$
1,221,495

 
$
10,216,858

 
$
2,867,154

 
$
14,494,371

 
 
 
 
 
 
 
 
Basic & diluted net income per capital unit
$
13.51

 
$
112.96

 
$
31.70

 
$
160.26

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

 
90,445

 
90,445

 
90,445

 
 
 
 
 
 
 
 


See Notes to Unaudited Financial Statements.


5


Homeland Energy Solutions, LLC
Statements of Cash Flows
 
Six Months Ended
 
Six Months Ended
 
June 30, 2012
 
June 30, 2011
 
(Unaudited)
 
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
2,867,154

 
$
14,494,371

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
6,303,075

 
6,086,185

Unrealized loss (gain) on risk management activities
3,456,712

 
(8,044,265
)
Change in working capital components:
 
 
 
Accounts receivable
(1,106,734
)
 
5,252,903

Inventory
933,954

 
1,102,530

Cash due to (from) broker
(3,986,479
)
 
5,332,454

Prepaid expenses and other
581,007

 
38,602

Accounts payable and other accrued expenses
(5,282,814
)
 
(471,517
)
Net cash provided by operating activities
3,765,875

 
23,791,263

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Payments for equipment and construction in progress
(634,300
)
 
(1,543,640
)
Increase in other assets
(178,466
)
 
(157,119
)
Net cash (used in) investing activities
(812,766
)
 
(1,700,759
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
(Decrease) in checks issued in excess of bank balance

 
(1,574,710
)
(Increase) Decrease in restricted cash
(588,458
)
 
329,155

Distribution to members
(12,029,185
)
 
(6,150,260
)
Proceeds from long-term borrowings
9,500,000

 

Payments on long-term borrowings
(3,700,000
)
 
(7,986,159
)
Net cash (used in) financing activities
(6,817,643
)
 
(15,381,974
)
 
 
 
 
Net (decrease) increase in cash
(3,864,534
)
 
6,708,530

 
 
 
 
Cash and Cash Equivalents - Beginning
5,153,553

 

Cash and Cash Equivalents - Ending
$
1,289,019

 
$
6,708,530

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 
 
Cash paid for interest, net of capitalized interest of none and $59,654, respectively
$
113,108

 
$
554,928

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

 
$
1,000,000

Accounts payable related to investment in RPMG

 
447,881


See Notes to Unaudited Financial Statements.

6

Homeland Energy Solutions, LLC
Notes to Unaudited Financial Statements


1.
Nature of Business and Significant Accounting Policies

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

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

Nature of Business
Homeland Energy Solutions, LLC (an Iowa Limited Liability Company) is located near Lawler, Iowa and was organized to pool investors for a 100 million gallon ethanol plant with distribution throughout the United States. The Company produces in excess of 130 million gallons annually and sells distillers dried grains and corn oil as byproducts of ethanol production.

Accounting Estimates
Management uses estimates and assumptions in preparing these financial statements in accordance with United States Generally Accepted Accounting Principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates.

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

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

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

7

Homeland Energy Solutions, LLC
Notes to Unaudited Financial Statements

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

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

Risks and Uncertainties
The Company has certain risks and uncertainties that it will experience during volatile market conditions, which can have a severe impact on operations. The Company's revenues are derived from the sale and distribution of ethanol and distiller grains to customers primarily located in the United States. Corn for the production process is supplied to the plant primarily from local agricultural producers and from purchases on the open market. For the six months ended June 30, 2012, ethanol sales averaged approximately 78% of total revenues, while approximately 22% of revenues were generated from the sale of distiller grains and other co-products. For the six months ended June 30, 2012, corn costs averaged approximately 83% of cost of goods sold.

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

2.    INVENTORY

Inventory consisted of the following as of June 30, 2012 and December 31, 2011.
 
 
June 30, 2012
 
December 31, 2011
Raw Materials
 
$
3,821,919

 
$
3,692,016

Work in Process
 
2,097,694

 
2,059,658

Finished Goods
 
3,647,867

 
4,749,760

Totals
 
$
9,567,480

 
$
10,501,434


3.    DEBT

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

Term Loan
The initial principal amount of the Term Loan was $74,000,000. The Company is required to make equal monthly principal

8

Homeland Energy Solutions, LLC
Notes to Unaudited Financial Statements

payments of $616,667 plus accrued interest on the Term Loan. All unpaid principal and accrued interest on the Term Loan will be due on July 1, 2014. The Company has the right to convert up to 50% of the Term Loan into a fixed rate loan with the consent of Home Federal. The fixed rate loan will bear interest at the five year London Interbank Offered Rate (LIBOR) swap rate that is in effect on the date of conversion plus 275 basis points, or another rate mutually agreed upon by the Company and Home Federal. If the Company elects this fixed rate option, the interest rate will not be subject to any adjustments otherwise provided for in the Master Loan Agreement. The remaining portion of the term loan will bear interest at a rate equal to the five year LIBOR swap rate plus 275 basis points, 2.989% on June 30, 2012. The balance outstanding on the Term Loan as of June 30, 2012 and December 31, 2011 was $3,083,333 and $6,783,333 respectively.

Term Revolving Loan
Under the terms of the Master Loan Agreement, we have a $20 million Term Revolving Loan which has a maturity date of July 1, 2014. Interest on the Term Revolving Loan accrues at a rate equal to the five year LIBOR swap rate plus 275 basis points, 2.989% on June 30, 2012. We are required to make monthly payments of interest until the maturity date of the Term Revolving Loan on July 1, 2014, on which date the unpaid principal balance of the Term Revolving Loan becomes due. The balance outstanding on the Term Revolving Loan as of June 30, 2012 and December 31, 2011 was $9,500,000 and $0 respectively.

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

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, including restriction of the payment of dividends and capital expenditures and maintenance of certain financial ratios including the minimum working capital, tangible net worth, and a fixed charge ratio as defined by the Master Loan Agreement. Failure to comply with the protective loan covenants or maintain the required financial ratios may cause acceleration of the outstanding principal balances on the Loans and/or the imposition of fees, charges or penalties.

4.    RELATED PARTY TRANSACTIONS

The Company 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 six months ended June 30, 2012 totaled $0 and $0 respectively, and during the three and six months ended June 30, 2011 totaled approximately $7,274,000 and $7,345,000, respectively. Amounts due to these members was $0 as of June 30, 2012 and $0 as of December 31, 2011.
    
The Company has an agreement with Golden Grain Energy, LLC, a member of the Company, for management services. Pursuant to the agreement, Homeland Energy and Golden Grain have agreed to share management services in an effort to reduce the costs of administrative overhead. Homeland Energy and Golden Grain have agreed to split the compensation costs associated with each of the employees covered by the agreement. For the three and six months ending June 30, 2012 the Company incurred net costs of approximately $38,500 and $104,500 related to this agreement. The cost for the same periods of 2011 related to this agreement were approximately $78,000 and $185,000.

5.    COMMITMENTS, CONTINGENCIES AND AGREEMENTS

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

Prior to May 1, 2011, the Company had entered into a marketing agreement to sell all ethanol produced at the plant to an unrelated entity at a mutually agreed on price, less commission and transportation charges. This agreement was terminated effective April 30, 2011.


9

Homeland Energy Solutions, LLC
Notes to Unaudited Financial Statements

Effective May 1, 2011, the Company entered into a marketing agreement with RPMG, a related party, to sell all ethanol produced at the plant to an entity in which the Company invests in at a mutually agreed on price, less commission and transportation charges. As of June 30, 2012, the Company had commitments to sell approximately 4,600,000 gallons at various fixed prices and 4,900,000 gallons at basis price levels indexed against exchanges for delivery through July 31, 2012.

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

The Company also has an investment in RPMG, included in other assets, totaling approximately $654,000 as of June 30, 2012.

The Company has entered into a marketing agreement to sell all distiller grains produced at the plant to CHS, an unrelated party, at a mutually agreed on price, less commission and transportation charges. The agreement was renewed for another one year term on April 1, 2012. The agreement calls for automatic renewal for successive one-year terms unless 120-day prior written notice is given before the current term expires. As of June 30, 2012, the Company had approximately 34,600 tons of distiller grains commitments for delivery through November 2012 at various fixed prices.

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

 
 
Three Months Ended
 
Six Months Ended
 
Three Months Ended
 
Six Months Ended
 
 
June 30, 2012
 
June 30, 2012
 
June 30, 2011
 
June 30, 2011
Sales ethanol - unrelated parties
 
$

 
$

 
$
26,167,144

 
$
103,973,042

Sales ethanol - RPMG
 
72,493,842

 
144,952,811

 
62,297,666

 
62,297,666

Sales distiller grains
 
18,055,164

 
34,837,327

 
18,077,681

 
34,342,066

Sales corn oil - RPMG
 
3,229,167

 
5,999,384

 

 

 
 
 
 
 
 
 
 
 
Marketing fees ethanol - unrelated parties
 

 

 
129,796

 
558,318

Marketing fees ethanol - RPMG
 
138,724

 
274,800

 
112,941

 
112,941

Marketing fees distiller grains
 
203,258

 
399,604

 
318,966

 
507,892

Marketing fees corn oil - RPMG
 
22,734

 
44,799

 

 

 
 
 
 
 
 
 
 
 
 
 
As of June 30, 2012
 
As of June 30, 2011
 
 
 
 
Amount due from RPMG
 
$
2,666,698

 
$
3,441,170

 
 
 
 
Amount due from CHS
 
1,696,503

 
1,383,422

 
 
 
 


At June 30, 2012, the Company had approximately $35,000,000 in outstanding corn purchase commitments for bushels at various prices and approximately 900,000 bushels of unpriced corn through June 2013 accounted for under the normal purchase exclusion.

The Company has commitments for minimum purchases of various utilities such as natural gas and electricity over the next 10 years which are anticipated to approximate the following for the twelve month periods ending June 30, 2012:


10

Homeland Energy Solutions, LLC
Notes to Unaudited Financial Statements

2013
 
$
3,949,000

2014
 
3,909,000

2015
 
3,787,000

2016
 
3,787,000

Thereafter
 
10,415,000

Total anticipated commitments
 
$
25,847,000

6. SELF-INSURANCE

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

7.    LEASE OBLIGATIONS

The Company leases rail cars and rail moving equipment with original terms up to 5 years. The Company is obligated to pay costs of insurance, taxes, repairs and maintenance pursuant to terms of the leases. Rent expense incurred for the operating leases during the three and six months ended June 30, 2012, was approximately $357,000 and $575,000 and for the same periods in 2011 was approximately $624,000 and $1,500,000.
 
At June 30, 2012, the Company had the following approximate minimum rental commitments under non-cancelable operating leases for the twelve month periods ended June 30:
2013
 
1,581,000

2014
 
632,000

2015
 
419,000

2016
 
419,000

Thereafter
 
768,000

         Total lease commitments
 
$
3,819,000



8.    DERIVATIVE INSTRUMENTS

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

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

The Company uses futures or options contracts to fix the purchase price of anticipated volumes of corn to be purchased and processed in a future month.    The Company's plant will grind approximately 42 million bushels of corn per year.  During the previous period and over the next 12 months, the Company has hedged and anticipates hedging between 5% and 60% of its anticipated monthly grind.  At June 30, 2012, the Company has hedged portions of its anticipated monthly purchases for corn

11

Homeland Energy Solutions, LLC
Notes to Unaudited Financial Statements

averaging approximately 13% of its anticipated monthly grind over the next twelve months.
  
Unrealized gains and losses on non-exchange traded forward contracts are deemed "normal purchases or sales" under authoritative accounting guidance, as amended and, therefore, are not marked to market in the Company's financial statements. The fair value of the Company's open derivative positions are summarized in the following table as of June 30, 2012 and December 31, 2011.
 
Balance Sheet Classification
 
Asset Fair Value
 
Liability Fair Value
Derivatives not designated as hedging instruments:
 
 
 
 
 
Commodity Contracts - corn at 06/30/12
Derivative Instruments
 
$

 
$
3,768,125

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

 
$
421,013


The following table represents the amount of realized/unrealized gains (losses) and changes in fair value recognized in earnings on commodity contracts for the three and six months ending June 30, 2012 and 2011:
 
Income Statement Classification
 
Realized Gain (Loss)
 
Unrealized Gain (Loss)
 
Total Gain (Loss)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Commodity Contracts for the three months ended 6/30/2012, corn
Cost of Goods Sold
 
$
1,885,883

 
$
(3,768,125
)
 
$
(1,882,242
)
 
 
 
 
 
 
 
 
Commodity Contracts for the six months ended 6/30/2012, corn
Cost of Goods Sold
 
$
3,487,479

 
$
(4,694,713
)
 
$
(1,207,234
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Commodity Contracts for the three months ended 6/30/2011, corn
Cost of Goods Sold
 
$
(273,058
)
 
$
4,008,565

 
$
3,735,507

 
 
 
 
 
 
 
 
Commodity Contracts for the six months ended 6/30/2011, ethanol
Revenue
 
$
(4,830
)
 
$
429,588

 
$
424,758

Commodity Contracts for the six months ended 6/30/2011, corn
Cost of Goods Sold
 
(7,258,351
)
 
7,614,677

 
356,326

 
Total
 
$
(7,263,181
)
 
$
8,044,265

 
$
781,084


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

12

Homeland Energy Solutions, LLC
Notes to Unaudited Financial Statements

assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

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

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

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

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

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

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

 
Total
 
Level 1
 
Level 2
 
Level 3
Current Liability, derivative financial instruments - corn as of 6/30/12
$
3,768,125

 
$
3,768,125

 

 

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

 
$
109,600

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

 
$
421,013

 

 

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

 
$
311,413

 
 
 
 

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

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

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


13


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
This report contains forward-looking statements that involve future events, our future performance and our expected future operations and actions. In some cases you can identify forward-looking statements by the use of words such as "may," "will," "should," "anticipate," "believe," "expect," "plan," "future," "intend," "could," "estimate," "predict," "hope," "potential," "continue," or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions and involve numerous assumptions, risks and uncertainties. Our actual results or actions may differ materially from these forward-looking statements for many reasons, including the reasons described in this report or in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011. We are not under any duty to update the forward-looking statements contained in this report. We cannot guarantee future results, levels of activity, performance or achievements. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits, completely and with the understanding that our actual future results may be materially different from what we currently expect. We qualify all of our forward-looking statements by these cautionary statements.

Overview

Homeland Energy Solutions, LLC (referred to herein as "we," "us," the "Company," or "Homeland") is an Iowa limited liability company. Homeland was formed on December 7, 2005 for the purpose of pooling investors for the development, construction and operation of a 100 million gallon per year ethanol plant located near Lawler, Iowa. We began producing ethanol and distiller grains at the plant in April 2009. The ethanol plant is currently capable of operating at a rate in excess of 130 million gallons of ethanol per year year.

In the past, the ethanol industry was impacted by the Volumetric Ethanol Tax Credit ("VEETC") which is frequently referred to as the blenders' credit. The blenders' credit expired on December 31, 2011 and was not renewed. The blenders' credit provided a tax credit of 45 cents per gallon of ethanol that is blended with gasoline. Management believes that the expiration of VEETC will not have a significant effect on ethanol demand provided gasoline prices remain high and the renewable fuels use requirement of the Federal Renewable Fuels Standard ("RFS") is maintained. The RFS requires that a certain amount of renewable fuels must be used in the United States each year. However, if the RFS is repealed, ethanol demand may be significantly impacted. Recently, there have been proposals in Congress to reduce or eliminate the RFS. Management does not believe that these proposals will be adopted in the near future. However, if the RFS is reduced or eliminated now that the blenders' credit was allowed to expire, the market price and demand for ethanol will likely decrease which could negatively impact our financial performance.

On July 30, 2012, a coalition of meat and poultry groups filed the second formal request to waive the RFS, asking EPA for a waiver "in whole or in substantial part" of the amount of renewable fuel that must be produced under RFS for the remainder of this year and for the portion of 2013 that is one year from the time the waiver becomes effective. Several state governors are also considering filing RFS waiver requests. Despite the high threshold for actual approval of a waiver, biofuel sources have been on the offense, issuing statements defending the RFS and noting that the provision includes flexibility. Any decrease in the RFS could negatively impact our operations and profitability.

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

United States ethanol production was benefited by a 54 cent per gallon tariff imposed on ethanol imported into the United States. On December 31, 2011, this tariff expired. Management believes that in the short-term, since the United States is a net

14


exporter of ethanol, including ethanol exports to Brazil, the second largest ethanol producer in the world, the expiration of the tariff will not have a significant impact on the United States ethanol industry. However, if other countries are able to increase their ethanol production, the expiration of the tariff may result in increased competition from foreign ethanol producers. This is especially true during times when ethanol prices in the United States are higher.

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

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

The United States is experiencing drought conditions in many of the corn producing states which has created uncertainty regarding the amount of corn that will be harvested in the fall of 2012. This uncertainty, along with strong export demand for corn, has resulted in significantly higher corn prices following the end of our second quarter. These higher corn prices have not been completely offset by higher ethanol prices which has led to tighter operating margins for many ethanol producers. These tighter operating margins have resulted in some ethanol plants reducing production or ceasing production altogether. Management believes that the more efficient ethanol plants and those that are located in areas where corn is available will continue to operate and will likely receive higher prices for the ethanol they produce. Management continues to monitor the availability of corn in our area and the operating margins that are available for our ethanol plant. While we believe that we are a lower cost producer of ethanol, we may experience operating margins which are unfavorable which may lead to significantly reduced production. Current operating margins are still positive and we continue to operate the ethanol plant. Management is making efforts to operate the ethanol plant in the most efficient manner possible in order to maximize our corn conversion rates and reduce our corn consumption which can result in reduced ethanol production.

Results of Operations

Comparison of Fiscal Quarters Ended June 30, 2012 and 2011
    
 
 
2012
 
2011
Income Statement Data
 
Amount
 
%
 
Amount
 
%
Revenue
 
$
93,780,274

 
100.0

 
$
106,548,491

 
100.0

 
 
 
 
 
 
 
 
 
Cost of Goods Sold
 
91,884,055

 
98.0

 
95,417,818

 
89.6

 
 
 
 
 
 
 
 
 
Gross Profit
 
1,896,219

 
2.0

 
11,130,673

 
10.4

 
 
 
 
 
 
 
 
 
Operating Expenses
 
656,045

 
0.7

 
645,507

 
0.6

 
 
 
 
 
 
 
 
 
Operating Income
 
1,240,174

 
1.3

 
10,485,166

 
9.8

 
 
 
 
 
 
 
 
 
Other (Expense)
 
(18,679
)
 

 
(268,308
)
 
(0.3
)
 
 
 
 
 
 
 
 
 
Net Income
 
$
1,221,495

 
1.3

 
$
10,216,858

 
9.6


Revenue

Our total revenue for our second quarter of 2012 was approximately 12% less than our total revenue for our second quarter of 2011. Management attributes this decrease in revenue with lower ethanol prices. Management believes that ethanol

15


demand was lower during our second quarter of 2012 due to higher gasoline prices which led to decreased gasoline demand. When gasoline demand decreases, ethanol demand also decreases because ethanol is typically blended with gasoline. Further, the ethanol industry was continuing to experience higher ethanol supplies during our second quarter of 2012. Management believes that the excess ethanol supply, along with decreased ethanol demand, resulted in decreased ethanol prices. For our second quarter of 2012, ethanol sales accounted for approximately 77% of our total revenue, distiller grains sales accounted for approximately 20% of our total revenue and corn oil accounted for approximately 3%. For our second quarter of 2011, ethanol sales accounted for approximately 83% of our total revenue and distiller grains sales accounted for approximately 17% of our total revenue. We did not have any corn oil revenue during our second quarter of 2011 as the corn oil extraction equipment was not yet operational. Our revenue is presented in our financial statements, net of the shipping costs that are incurred in transporting our ethanol, distiller grains and corn oil to the end customer. These shipping charges are deducted by our marketers from the amounts realized on the sale of our ethanol, distiller grains and corn oil.

For our second quarter of 2012, our total ethanol revenue decreased by approximately 18% compared to our second quarter of 2011. Management attributes this decrease in ethanol revenue with lower ethanol prices during our second quarter of 2012 compared to the same period of 2011. The average price we received for our ethanol during our second quarter of 2012 was approximately 19% less than during our second quarter of 2011. Management attributes this ethanol price decrease primarily to excess ethanol supply and lower gasoline demand. When gasoline demand decreases, it results in lower ethanol demand which has a negative impact on ethanol prices. Following the end of our second quarter of 2012, ethanol prices have increased. Management attributes these higher ethanol prices with increased corn prices. Further, ethanol supplies decreased after the end of our second quarter of 2012 due to decreased ethanol production which resulted from tighter operating margins. Further, some ethanol producers are unable to secure the corn that they need to operate due to lower corn supplies. Management anticipates continuing to operate the ethanol plant for the remaining quarters of our 2012 fiscal year, provided that we can secure sufficient corn to operate. Based on current management projections, management believes that we can secure the corn necessary to continue to operate and that we can maintain operating margins that will allow us to continue to operate the ethanol plant. However, we are working to operate the ethanol plant as efficiently as possible in order to produce as much ethanol per bushel of corn as possible, which may result in us producing less total gallons of ethanol since we anticipate running the ethanol plant more slowly in order to maintain peak efficiency.

Partially offsetting the lower ethanol prices we experienced during our second quarter of 2012, we sold approximately 3% more ethanol compared to the same period of 2011 which positively impacted our revenue. Management attributes this increase in ethanol sales during the 2012 period to less plant downtime during the 2012 period.

Based on management projections, we anticipate that we will continue to operate the ethanol plant for the remaining quarters of our 2012 fiscal year. However, we may produce less ethanol during our third quarter due to tighter operating margins that may require us to work to slow our operations in order to maximize production efficiency. When we work to increase our ethanol conversion efficiencies, it may lead to less total ethanol produced but management believes this will provide the best operating margins.
    
Our total distiller grains revenue was comparable during our second quarter of 2012 and the same period of 2011. We sold less tons of distiller grains during the 2012 period due to the fact that we were separating the corn oil from our distiller grains during the 2012 period which results in decreased tons of distiller grains produced. We produced approximately 5% less tons of distiller grains during our second quarter of 2012 compared to the same period of 2011. However, the average price we received per ton of dried distiller grains sold increased by approximately 6% during our second quarter of 2012 compared to the same period of 2011 and the average price we received per ton of modified/wet distiller grains sold increased by approximately 14% during our second quarter of 2012 compared to the same period of 2011. Management attributes these higher distiller grains prices to higher corn prices. Since distiller grains are typically used as an animal feed substitute for corn, when corn prices increase, the market price of distiller grains typically increase. Management anticipates continued strong distiller grains demand due to higher market corn prices and tight corn supplies which management believes could continue into the foreseeable future.

We had revenue from corn oil sales during our second quarter of 2012. Management believes that the revenue we received from corn oil sales more than offset the decreased revenue we experienced due to selling less tons of distiller grains. Management anticipates that corn oil demand will remain strong due to increased biodiesel production which has resulted in higher corn oil demand in recent years. Further, corn oil demand for animal feed has been strong which management believes will continue due to higher corn prices.

Cost of Goods Sold

Our two primary costs of producing ethanol and distiller grains are corn costs and natural gas costs. Our total cost of goods sold was comparable during our second quarter of 2012 and the same period of 2011. The average price we paid per bushel

16


of corn, without taking into account derivative instruments, was approximately 6% less during our second quarter of 2012 compared to our second quarter of 2011. Management attributes this decrease in corn prices with lower corn prices earlier in our second quarter of 2012 due to a record number of corn acres planted compared to the 2011 crop year. However, we experienced a spike in corn prices in June and July 2012 due to unfavorable weather conditions which impacted corn prices during those times. Management anticipates that corn prices will remain volatile and will depend on how much corn is harvested in the fall of 2012 and whether the current high corn prices result in corn demand decreases.

In addition to the decrease in corn prices, we purchased approximately 1% more bushels of corn during our second quarter of 2012 compared to our second quarter of 2011. Management attributes this increase in corn consumption with increased production during the 2012 period.

Despite the recent increases in commodity prices, natural gas prices have fallen. During our second quarter of 2012, the average price we paid per MMBtu of natural gas was approximately 44% lower compared to our second quarter of 2011. Management attributes this decrease in natural gas prices to large natural gas supplies and continued increases in natural gas production. Management anticipates that natural gas prices will remain relatively stable during the rest of our 2012 fiscal year due to fundamental supply and demand conditions in the natural gas market. We expect higher natural gas prices during winter months due to annual increases in natural gas transportation costs. In addition to the decrease in natural gas prices was a decrease in our total natural gas consumption of approximately 2% during our second quarter of 2012 compared to the same period of 2011. This decrease in natural gas consumption was due to greater plant efficiencies and less tons of distiller grains produced.

In an attempt to minimize the effects of the volatility of corn costs on operating profits, we have commodities trading accounts. In addition, we have a commodities manager who manages our corn procurement activities. Our risk management activities are intended to fix the purchase price of the corn we require to produce ethanol and distiller grains. During our second quarter of 2012, we had a realized gain of approximately $1,886,000 and an unrealized loss of approximately $3,768,000 related to our corn derivative instruments. During our second quarter of 2011, we had a realized loss of approximately $273,000 and an unrealized gain of approximately $4,009,000 related to our corn derivative instruments. We recognize the gains or losses that result from changes in the value of our corn derivative instruments in cost of goods sold as the changes occur. Our plant is expected to use approximately 45 million bushels of corn per year. As of June 30, 2012, we had risk management positions in place for approximately 13% of our corn needs for the next 12 months.

Operating Expenses

Our operating expenses were comparable during our second quarter of 2012 and second quarter of 2011.

Other Income (Expense)

Our other expense was significantly lower during our second quarter of 2012 compared to the same period of 2011 due to having less interest expense during the 2012 period because of our reduced debt load. We also had other revenue of approximately $49,000 due to a patronage dividend we received from CHS during the 2012 period.

Comparison of Six Months Ended June 30, 2012 and 2011
    
 
 
2012
 
2011
Income Statement Data
 
Amount
 
%
 
Amount
 
%
Revenue
 
$
185,791,888

 
100.0

 
$
201,046,557

 
100.0

 
 
 
 
 
 
 
 
 
Cost of Goods Sold
 
181,528,660

 
97.7

 
184,922,711

 
92.0

 
 
 
 
 
 
 
 
 
Gross Profit
 
4,263,228

 
2.3

 
16,123,846

 
8.0

 
 
 
 
 
 
 
 
 
Operating Expenses
 
1,428,453

 
0.8

 
1,350,696

 
0.7

 
 
 
 
 
 
 
 
 
Operating Income
 
2,834,775

 
1.5

 
14,773,150

 
7.3

 
 
 
 
 
 
 
 
 
Other Income (Expense)
 
32,379

 

 
(278,779
)
 
(0.1
)
 
 
 
 
 
 
 
 
 
Net Income
 
$
2,867,154

 
1.5

 
$
14,494,371

 
7.2



17


Revenue

Our total revenue for our first six months of 2012 was approximately 8% less than our total revenue for our first six months of 2011. For our first six months of 2012, ethanol sales accounted for approximately 78% of our total revenue, distiller grains sales accounted for approximately 19% of our total revenue and corn oil sales accounted for approximately 3% of our total revenue. For our first six months of 2011, ethanol sales accounted for approximately 83% of our total revenue and distiller grains sales accounted for approximately 17% of our total revenue. We did not have any corn oil revenue during the 2011 period.

For our first six months of 2012, our total ethanol revenue decreased by approximately 13% compared to our first six months of 2011. The average price we received for our ethanol during our first six months of 2012 was approximately 16% less than during our first six months of 2011. Partially offsetting the decrease in ethanol prices, we had increased ethanol production which allowed us to sell approximately 4% more gallons of ethanol during our first six months of 2012 compared to the same period of 2011 which positively impacted our ethanol revenue.

For our first six months of 2012, our total distiller grains revenue increased by approximately 1% compared to our first six months of 2011, primarily due to higher distiller grains prices. The average price we received for our dried distiller grains was approximately 5% greater for our first six months of 2012 compared to the same period of 2011. The average price we received for our modified/wet distiller grains was approximately 15% greater for our first six months of 2012 compared to the same period of 2011. Due to the fact that we started extracting corn oil from our distillers grains during the 2012 period, we sold approximately 3% less tons of distiller grains during our first six months of 2012 compared to our first six months of 2011.

Cost of Goods Sold

Our total cost of goods sold decreased by approximately 2% for our first six months of 2012 compared to our first six months of 2011. Management attributes this decrease in our total cost of goods sold with lower corn prices during the 2012 period. The average price we paid per bushel of corn, not including derivative instrument costs, was approximately 1% less during our first six months of 2012 compared to our first six months of 2011. We consumed approximately 3% more bushels of corn during our first six months of 2012 compared to our first six months of 2011. This increased consumption can be attributed to an increase in production.

During our first six months of 2012, the average price we paid per MMBtu of natural gas was approximately 33% lower compared to our first six months of 2011. Our natural gas consumption was comparable during our first six months of 2012 and the same period of 2011.

During our first six months of 2012, we had a realized gain of approximately $3,487,000 and an unrealized loss of approximately $4,695,000 related to our corn derivative instruments. During our first six months of 2011, we had a realized loss of approximately $7,258,000 and an unrealized gain of approximately $7,615,000 related to our corn and ethanol derivative instruments. We recognize the gains or losses that result from changes in our ethanol derivative instruments in revenue.

Operating Expenses

Our operating expenses were higher during our first six months of 2012 compared to our first six months of 2011 primarily due to costs associated with registering to sell E15, along with promoting E15 and ethanol generally through various business promotion campaigns.

Other Income (Expense)

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


18


Changes in Financial Condition for the Six Months Ended June 30, 2012.

Balance Sheet Data
 
June 30, 2012
 
December 31, 2011
Total current assets
 
$
22,923,994

 
$
23,319,876

Total property and equipment
 
125,739,327

 
131,218,450

Total other assets
 
3,549,053

 
2,971,781

Total Assets
 
$
152,212,374

 
$
157,510,107

Total current liabilities
 
$
10,935,490

 
$
16,571,192

Total long-term liabilities
 
9,746,488

 
246,488

Total members' equity
 
131,530,396

 
140,692,427

Total Liabilities and Members' Equity
 
$
152,212,374

 
$
157,510,107


Our current assets were lower at June 30, 2012 compared to December 31, 2011 due primarily to a significant decrease in our cash and cash equivalents due to cash we used in our financing activities for distributions paid during our 2012 fiscal year based off of 2011 earnings. Our accounts receivable was higher at June 30, 2012 compared to December 31, 2011 because we were awaiting payment for more ethanol at June 30, 2012 compared to December 31, 2011. The value of our inventory was lower at June 30, 2012 compared to December 31, 2011 due to lower finished goods inventory due to the fact that we valued our inventory using a lower price at June 30, 2012 compared to December 31, 2011. We had almost $5.9 million due from our commodities broker at June 30, 2012 compared to approximately $1.9 million at December 31, 2011 due to cash we were required to maintain in our margin account as a result of unrealized losses we had on our derivative instruments. We had less prepaid and other assets at June 30, 2012 compared to December 31, 2011 because our natural gas supplier refunded a $400,000 deposit it was holding.

Our net property and equipment was lower at June 30, 2012 compared to December 31, 2011 due to depreciation. We had approximately $255,000 in construction in progress at June 30, 2012 related to several small plant upgrade and maintenance projects.

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

Our current liabilities were lower at June 30, 2012 compared to December 31, 2011 primarily due to decreases in our accounts payable and current maturities of long-term debt at June 30, 2012. However, the liability that we had at June 30, 2012 related to unrealized losses on our derivative instrument positions was larger compared to at December 31, 2011. Our accounts payable was lower at June 30, 2012 compared to December 31, 2011 due to deferred corn payments requested by our suppliers at December 31, 2011 which were paid early in our 2012 fiscal year. Our current maturities of long-term debt was lower at June 30, 2012 compared to December 31, 2011 because we only had approximately five months of principal payments included in the current portion of our long-term debt at June 30, 2012 compared to approximately eleven months of principal payments at December 31, 2011. We are scheduled to make our final principal payment on our long-term debt in November 2012.

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

Liquidity and Capital Resources

Our primary sources of liquidity are cash from our operations, our $20 million long-term revolving loan and our $5 million short-term revolving line of credit. Our credit facilities are described in greater detail below under "Short-Term and Long-Term Debt Sources." As of June 30, 2012, we had $10.5 million available pursuant to our revolving loans and approximately $1.3 million in cash. Based on financial forecasts performed by our management, we anticipate that we will have sufficient cash from our revolving loans and cash from our operations to continue to operate the ethanol plant at capacity for the next 12 months and beyond. We do not anticipate seeking additional equity or debt financing in the next 12 months. However, should we experience unfavorable operating conditions in the future, we may have to secure additional debt or equity financing for working capital or other purposes.


19


The following table shows cash flows for the six months ended June 30, 2012 and 2011:
 
 
2012
 
2011
Net cash provided by operating activities
 
$
3,765,875

 
$
23,791,263

Net cash (used in) investing activities
 
(812,766
)
 
(1,700,759
)
Net cash (used in) financing activities
 
(6,817,643
)
 
(15,381,974
)
Cash at beginning of period
 
5,153,553

 

Cash at end of period
 
1,289,019

 
6,708,530


Cash Flow From Operations

Our operations generated less cash during our first six months of 2012 compared to the same period of 2011 primarily due to having less net income during the 2012 period along with cash we used for our margin account with our commodities broker and changes in our accounts payable which used cash during the 2012 period.

Cash Flow From Investing Activities

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

Cash Flow From Financing Activities

We used less cash for financing activities during our first six months of 2012 compared to the same period of 2011. We paid a larger distribution during the 2012 period offset by proceeds we received from our long-term debt. We also made fewer payments on our long-term debt during the 2012 period compared to the same period of 2011. We paid a distribution of more than $12 million during our first six months of 2012 compared to a distribution of approximately $6.2 million during the comparable period of 2011. We received $9.5 million in proceeds from our long-term revolving line of credit which provided us with additional cash. We made $3.7 million in payments on our long-term debt during the first six months of 2012 compared to nearly $8 million during the same period of 2011.

Short-Term and Long-Term Debt Sources

Master Loan Agreement with Home Federal Savings Bank

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

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

Term Loan

Our term loan was used for the construction and start-up of our ethanol plant. We make equal monthly principal payments in the amount of $616,667 plus accrued interest pursuant to the term loan. All unpaid principal and accrued interest on the term loan will be due on July 1, 2014. We have the right to convert up to 50% of the term loan into a fixed rate loan with the consent of Home Federal. The fixed rate loan will bear interest at the five year London Interbank Offered Rate (LIBOR) swap rate that is in effect on the date of conversion plus 275 basis points, or another rate mutually agreed upon by Homeland Energy and Home Federal. If we elect this fixed rate option, the interest rate will not be subject to any adjustments otherwise provided for in the

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Master Loan Agreement. The remaining portion will bear interest at a rate equal to the five year LIBOR swap rate plus 275 basis points. As of June 30, 2012, we had approximately $3,083,000 outstanding on our term loan which accrued interest at a rate of 2.989% per year.

Long-Term Revolving Loan

We have a $20 million term revolving loan which has a maturity date of July 1, 2014. Interest on the term revolving loan accrues at a rate equal to the five year LIBOR swap rate plus 275 basis points. We are required to make monthly payments of interest until the maturity date of the term revolving loan on July 1, 2014, on which date the unpaid principal balance of the term revolving loan becomes due. As of June 30, 2012, we had $9,500,000 outstanding on our term revolving loan and $10.5 million available to be drawn. Interest accrued on our term revolving loan as of June 30, 2012 at a rate of 2.989% per year.

Short-Term Revolving Line of Credit

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

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

Covenants

In connection with the Master Loan Agreement, we are required to comply with certain debt covenants and financial ratios. As of June 30, 2012, we were in compliance with all of our debt covenants and financial ratios. Our primary financial covenant is our tangible net worth requirement. Tangible net worth is calculated as the excess of our total assets, including the debt reserve account, (with certain exclusions, such as intangible assets) over total liabilities (except subordinated debt if applicable). Our tangible net worth requirement as of December 31, 2011 was $100 million. Our tangible net worth requirement increases by $5 million annually until 2012 when we are required to have tangible net worth of $105 million. We are required to maintain this $105 tangible net worth until the maturity date of our loans. As of June 30, 2012, we had tangible net worth of approximately $131 million.

In addition to the tangible net worth covenant discussed above, we are subject to certain financial covenants at various times calculated monthly, quarterly or annually. We were required to have working capital of at least $12 million by May 1, 2010 and annually thereafter. As of June 30, 2012, we had working capital of approximately $37 million. Management anticipates that we will be in compliance with all of our debt covenants and financial ratios for at least the next 12 months.

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

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

Application of Critical Accounting Estimates

Management uses estimates and assumptions in preparing our financial statements in accordance with generally accepted accounting principles.  These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses.  Of the significant accounting policies described in the notes to our financial statements, we believe that the following are the most critical:


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Derivative Instruments

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

Revenue recognition

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

Long-Lived Assets

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

Inventory Valuation

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

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to the impact of market fluctuations associated with commodity prices and interest rates as discussed below. We have no exposure to foreign currency risk as all of our business is conducted in U.S. Dollars. We use derivative financial instruments as part of an overall strategy to manage market risk. We use cash, futures and option contracts to hedge changes to the commodity prices of corn, natural gas and ethanol. We do not enter into these derivative financial instruments for trading or speculative purposes, nor do we designate these contracts as hedges for accounting purposes.

Interest Rate Risk

We are exposed to market risk from changes in interest rates. Exposure to interest rate risk results primarily from holding a revolving line of credit and term loan which bear variable interest rates. As of June 30, 2012, we had approximately $12,583,000 outstanding on our variable interest rate loans and interest accrued at a rate of 2.989%. Our variable interest rates are calculated by adding 275 basis points to LIBOR. If we were to experience a 10% adverse change in LIBOR, the annual effect such change would have on our income statement, based on the amount we had outstanding on our variable interest rate loans as of June 30, 2012, would be approximately $38,000.

Commodity Price Risk

We seek to minimize the risks from fluctuations in the prices of raw material inputs, such as corn and natural gas, and finished products, such as ethanol and distiller grains, through the use of hedging instruments. In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate. Although we believe our hedge positions accomplish an

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economic hedge against our future purchases and sales, management has chosen not to use hedge accounting, which would match the gain or loss on our hedge positions to the specific commodity purchase being hedged. We are using fair value accounting for our hedge positions, which means as the current market price of our hedge positions changes, the realized or unrealized gains and losses are immediately recognized in our cost of goods sold or as an offset to revenues. The immediate recognition of hedging gains and losses under fair value accounting can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged.

As of June 30, 2012, we had price protection in place for approximately 13% of our anticipated corn needs for the next 12 months. A sensitivity analysis has been prepared to estimate our exposure to ethanol, corn and natural gas price risk. Market risk related to these factors is estimated as the potential change in income resulting from a hypothetical 10% adverse change in the average cost of our corn and natural gas prices and average ethanol price as of June 30, 2012, net of the forward and future contracts used to hedge our market risk for corn and natural gas usage requirements. The volumes are based on our expected use and sale of these commodities for a one year period from June 30, 2012. The results of this analysis, which may differ from actual results, are as follows:

 
 
Estimated Volume Requirements for the next 12 months (net of forward and futures contracts)
 
Unit of Measure
 
Hypothetical Adverse Change in Price
 
Approximate Adverse Change to income
Natural Gas
 
3,600,000

 
MMBTU
 
10%
 
$
(931,000
)
Ethanol
 
131,400,000

 
Gallons
 
10%
 
(26,976,420
)
Corn
 
40,803,000

 
Bushels
 
10%
 
(25,297,860
)

ITEM 4. CONTROLS AND PROCEDURES.

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

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

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

PART II

ITEM 1. LEGAL PROCEEDINGS.

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

ITEM 1A. RISK FACTORS.

The following risk factor is provided due to material changes from the risk factors previously disclosed in our annual report on Form 10-K. The risk factor set forth below should be read in conjunction with the risk factors section and the Management's Discussion and Analysis section for the fiscal year ended December 31, 2011, included in our annual report on Form 10-K.

Recent increases in corn prices have led to tight operating margins which may make ethanol production unprofitable. Due to unfavorable weather conditions, corn prices have recently increased significantly. Many believe that current unfavorable weather conditions will result in a smaller corn harvest in the fall of 2012. This, along with smaller corn carryover in the last two crop years and higher export demand for corn has led to higher corn prices. The price of ethanol has not kept pace with rising corn prices which has resulted in tighter operating margins in the ethanol industry. These tighter operating margins have caused

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some ethanol producers to reduce production or cease operating altogether. We are also facing tighter operating margins which have reduced our net income. While management believes that it is still favorable for us to operate the ethanol plant, if conditions in the ethanol industry deteriorate, we may be forced to reduce production or cease operating altogether. This could negatively impact the value of our units.

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

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

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

Exhibit No.
Exhibit
31.1
Certificate Pursuant to 17 CFR 240.13a-14(a)*
31.2
Certificate Pursuant to 17 CFR 240.13a-14(a)*
32.1
Certificate Pursuant to 18 U.S.C. Section 1350*
32.2
Certificate Pursuant to 18 U.S.C. Section 1350*
101
The following financial information from Homeland Energy Solutions, LLC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Balance Sheets as of June 30, 2012 and December 31, 2011, (ii) Statements of Operations for the three and six months ended June 30, 2012 and 2011, (iii) Statements of Cash Flows for the six months ended June 30, 2012 and 2011, and (iv) the Notes to Unaudited Financial Statements.**
________________________________
(*) Filed herewith.
(**) Furnished herewith.


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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
HOMELAND ENERGY SOLUTIONS, LLC
 
 
Date:
August 10, 2012
 
  /s/ Walter Wendland
 
Walter Wendland
 
President and Chief Executive Officer
(Principal Executive Officer)
 
 
Date:
August 10, 2012
 
/s/ David A. Finke
 
David A. Finke
 
Treasurer/Chief Financial Officer
(Principal Financial Officer)

    

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