Heron Lake BioEnergy, LLC (Form: 10-Q, Received: 09/16/2013 16:30:27)

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 quarterly period ended July 31, 2013

o	Transition report under Section 13 or 15(d) of the Exchange Act.

For the transition period from to .

COMMISSION FILE NUMBER 000-51825

HERON LAKE BIOENERGY, LLC

(Exact name of Registrant as specified in its charter)

Minnesota		41-2002393
(State or other jurisdiction of organization)		(I.R.S. Employer Identification No.)

91246 390th Avenue, Heron Lake, MN 56137-1375

(Address of principal executive offices)

(507) 793-0077

(Issuer’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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

(Do not check if a smaller reporting company)

Smaller reporting company o

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

As of September 9, 2013, there were 46,697,107 Class A units and 15,000,000 Class B units issued and outstanding.

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INDEX

	Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements	1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3. Quantitative and Qualitative Disclosures About Market Risk	19
Item 4. Controls and Procedures	19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	20
Item 1A. Risk Factors	20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 3. Defaults Upon Senior Securities	20
Item 4. Mine Safety Disclosures	20
Item 5. Other Information	21
Item 6. Exhibits	21
SIGNATURES	22

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

	July 31, 2013			October 31, 2012
	(Unaudited)

ASSETS
Current Assets
Cash and equivalents	$	1,022,764		$	653,361
Restricted cash	—			65,259
Restricted certificates of deposit	510,955			650,000
Accounts receivable	3,005,121			1,784,761
Inventory	2,303,157			3,588,572
Prepaid expenses	1,107,025			796,829
Total current assets	7,949,022			7,538,782

Property and Equipment
Land and improvements	9,111,838			9,252,379
Plant buildings and equipment	71,415,804			76,155,846
Vehicles and other equipment	611,976			645,481
Office buildings and equipment	611,826			622,711
Construction in Progress	—			645,486
	81,751,444			87,321,903
Accumulated depreciation	(30,125,670		)	(29,222,617		)
	51,625,774			58,099,286

Other Assets
Other intangibles	235,813			256,513
Debt service deposits and other	942,924			686,438
Total other assets	1,178,737			942,951

Total Assets	$	60,753,533		$	66,581,019

See Notes to Condensed Consolidated Financial Statements

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HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

	July 31, 2013		October 31, 2012
	(Unaudited)

LIABILITIES AND MEMBERS’ EQUITY
Current Liabilities
Line of credit	$	—	$	480,000
Current maturities of revolving line of credit	—		4,211,163
Current maturities of long-term debt	3,008,029		37,840,239
Accounts payable	936,893		2,085,882
Accrued expenses	399,623		382,953
Total current liabilities	4,344,545		45,000,237

Revolving Term Loan, net of current maturities	10,650,377		—

Long-Term Debt, net of current maturities	20,480,986		4,031,335

Members’ Equity

Controlling interest in equity 61,697,107 and 38,622,107 units issued and oustanding at July 31, 2013 and October 31, 2012, respectively	24,902,731		17,344,433
Noncontrolling interest	374,894		205,014
Total members’ equity	25,277,625		17,549,447

Total Liabilities and Members’ Equity	$	60,753,533	$	66,581,019

See Notes to Condensed Consolidated Financial Statements

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HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

	Three Months			Three Months
	Ended			Ended
	July 31, 2013			July 31, 2012
	(Unaudited)			(Unaudited)

Revenues	$	45,583,441		$	41,908,904

Cost of Goods Sold	41,523,283			39,987,071

Gross Profit	4,060,158			1,921,833

Selling, General, and Administrative Expenses	674,200			714,906

Operating Income	3,385,958			1,206,927

Other Income (Expense)
Interest income	310			2,441
Interest expense	(755,532		)	(653,663		)
Other income	10,925			2,182
Total other expense, net	(744,297		)	(649,040		)

Net Income	2,641,661			557,887

Net Income Attributable to Noncontrolling Interest	(87,168		)	(87,289		)

Net Income Attributable to Heron Lake BioEnergy, LLC	$	2,554,493		$	470,598

Weighted Average Units Outstanding - Basic	38,875,678			38,622,107

Net Income Per Unit - Basic	$	0.07		$	0.01

Weighted Average Units Outstanding - Diluted	42,741,063			38,622,107

Net Income Per Unit - Diluted	$	0.06		$	0.01

See Notes to Condensed Consolidated Financial Statements

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HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

	Nine Months			Nine Months
	Ended			Ended
	July 31, 2013			July 31, 2012
	(Unaudited)			(Unaudited)

Revenues	$	125,203,672		$	121,956,934

Cost of Goods Sold	119,568,050			118,668,185

Gross Profit	5,635,622			3,288,749

Selling, General, and Administrative Expenses	2,537,919			2,428,646
Settlement Expense	—			900,000
Operating Income (Loss)	3,097,703			(39,897		)

Other Income (Expense)
Interest income	17,063			9,299
Interest expense	(2,254,167		)	(1,943,578		)
Other income	30,198			34,136
Total other expense, net	(2,206,906		)	(1,900,143		)

Net Income (Loss)	890,797			(1,940,040		)

Net Income Attributable to Noncontrolling Interest	(254,999		)	(258,520		)

Net Income (Loss) Attributable to Heron Lake BioEnergy, LLC	$	635,798		$	(2,198,560	)

Weighted Average Units Outstanding - Basic	38,706,942			38,472,447

Net Income (Loss) Per Unit - Basic	$	0.02		$	(0.06	)

Weighted Average Units Outstanding - Diluted	40,000,140			38,472,447

Net Income (Loss) Per Unit - Diluted	$	0.02		$	(0.06	)

See Notes to Condensed Consolidated Financial Statements

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HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Consolidated Statements of Cash Flows

	Nine Months			Nine Months
	Ended			Ended
	July 31, 2013			July 31, 2012
	(Unaudited)			(Unaudited)

Cash Flow From Operating Activities
Net income (loss)	$	890,797		$	(1,940,040	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	3,034,267			4,277,887
Change in operating assets and liabilities:
Restricted certificates of deposit	139,045			16,000
Accounts receivable	(1,220,360		)	136,566
Inventory	1,285,415			983,514
Prepaid expenses	(312,197		)	223,489
Accounts payable	(1,148,989		)	(2,010,782		)
Accrued expenses	(29,517		)	(38,260		)
Net cash provided by operating activities	2,638,461			1,648,374

Cash Flows from Investing Activities
Capital expenditures	(268,724		)	(2,444,010		)
Proceeds from disposal of property and equipment	3,728,669			—
Net cash provided by (used in) investing activities	3,459,945			(2,444,010		)

Cash Flows from Financing Activities
Payments on line of credit	(480,000		)	—
Proceeds from long-term debt	520,210			—
Proceeds from convertible debt	1,407,000			—
Payments on revolving term loan, net	(11,843,911		)	—
Payments on long-term debt	(2,026,644		)	(5,550,360		)
Release of restricted cash	65,259			257,630
Member contributions	6,922,500			707,017
Cost of raising capital	—			(3,169		)
Distributions to noncontrolling interest	(38,932		)	(72,928		)
Deferred financing fees	(254,485		)
Net cash used in financing activities	(5,729,003		)	(4,661,810		)

Net Increase (Decrease) in cash and equivalents	369,403			(5,457,446		)

Cash and Equivalents - Beginning of period	653,361			7,140,573

Cash and Equivalents - End of period	$	1,022,764		$	1,683,127

Supplemental Disclosure of Cash Flow Information
Interest expense paid	$	2,253,814		$	1,933,499

Supplemental Disclosure of Non-Cash Activities
Cost of raising capital offset against member contributions	$	—		$	165,045
Distribution to noncontrolling interest in accrued expenses	46,187			11,807
Capital expenditures financed with note payable	—			1,325,000
Energy efficiency rebate receivable	—			554,577

See Notes to Condensed Consolidated Financial Statements

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HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

July 31, 2013 (Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited condensed consolidated interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and 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 October 31, 2012, contained in the Company’s annual report on Form 10-K.

In the opinion of management, the condensed consolidated interim financial statements reflect all adjustments consisting of normal recurring accruals that we consider necessary to present fairly the Company’s results of operations, financial position and cash flows. The results reported in these condensed consolidated interim financial statements should not be regarded as necessarily indicative of results that may be expected for any other quarter or for the fiscal year.

Nature of Business

The Company owns and operates an ethanol plant near Heron Lake, Minnesota with a permitted capacity of approximately 59.2 million gallons. In addition, the Company produces and sells distillers grains with solubles and corn oil as co-products of ethanol production.

The Company entered into an asset purchase agreement dated January 22, 2013, which provided for the sale of substantially all of the Company’s assets to, and the assumption of certain of the Company’s liabilities by, Guardian Energy Heron Lake, LLC (Guardian). On April 4, 2013, the Company terminated the agreement in accordance with its terms. As a result of terminating the purchase agreement and the Company renegotiating their loan agreements with AgStar Financial Services, PCA (“AgStar”), AgStar required certain principal paydowns by July 31, 2013. The Company raised all the required funds to pay down its debt to AgStar, to provide adequate working capital to operate the Company effectively and to meet AgStar’s requirements.

Pursuant to an asset purchase agreement dated January 3, 2013, the Company’s subsidiary, Lakefield Farmers Elevator, LLC, sold substantially all of its assets consisting of the elevator and grain storage facilities in Lakefield, Minnesota and Wilder, Minnesota to FCA Co-op, a Minnesota cooperative, for approximately $3.7 million plus the purchase price for corn and fuel inventory (the “Elevator Sale”). The Elevator Sale closed on February 1, 2013.

Principles of Consolidation

The financial statements include the accounts of Heron Lake BioEnergy, LLC and its wholly owned subsidiaries, Lakefield Farmers Elevator, LLC and HLBE Pipeline Company, LLC, collectively, the “Company.” HLBE Pipeline Company, LLC owns 73% of Agrinatural Gas, LLC (“Agrinatural”). Given the Company’s control over the operations of Agrinatural and its majority voting interest, the Company consolidates the financial statements of Agrinatural with its consolidated financial statements, with the equity and earnings (loss) attributed to the remaining 27% noncontrolling interest identified separately in the accompanying Consolidated Balance Sheets and Statements of Operations. All significant intercompany balances and transactions are eliminated in consolidation.

Noncontrolling Interest

Amounts recorded as noncontrolling interest on the balance sheet relate to the net investment by an unrelated party in Agrinatural. Income and losses are allocated to the members of Agrinatural based on their respective percentage of membership units held. Agrinatural will provide natural gas to the plant with a specified price per MMBTU for an initial term of 10 years, with two renewal options for five year periods.

Accounting Estimates

Management uses estimates and assumptions in preparing these financial statements in accordance with 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. The Company uses estimates and assumptions in accounting for significant matters including, among others, the analysis of impairment of long-lived assets, contingencies and valuation of forward purchase contract

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commitments and inventory. The Company periodically reviews estimates and assumptions, and the effects of revisions are reflected in the period in which the revision is made. Actual results could differ from those estimates.

Long-Lived Assets

The Company reviews property, plant and equipment and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If circumstances require a long-lived asset to 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 basis, impairment is recognized to the extent the carrying value exceeds 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.

Fair Value of Financial Instruments

Except for those assets and liabilities which are required by authoritative accounting guidance to be recorded at fair value in our balance sheets, the Company has elected not to record any other assets or liabilities at fair value. No events occurred during the periods ended July 31, 2013 or October 31, 2012 that required adjustment to the recognized balances of assets or liabilities, which are recorded at fair value on a nonrecurring basis.

The carrying value of cash and equivalents, restricted cash, restricted certificates of deposit, accounts receivable, accounts payable and accrued liabilities approximates fair value due to the short maturity of these instruments. The fair value of long-term debt has been estimated using discounted cash flow analysis based upon the Company’s current incremental borrowing rates for similar types of financing arrangements. The fair value of outstanding debt will fluctuate with changes in applicable interest rates. Fair value will exceed carrying value when the current market interest rate is lower than the interest rate at which the debt was originally issued. The fair value of a company’s debt is a measure of its current value under present market conditions. It does not impact the financial statements under current accounting rules. The Company believes the carrying amount of the debt approximates the fair value.

Environmental Liabilities

The Company’s operations are subject to environmental laws and regulations adopted by various governmental entities 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 location. 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 that could result from such events. Environmental liabilities are recorded when the liability is probable and the costs can be reasonably estimated.

Net Income (Loss) per Unit

Basic net income (loss) per unit is computed by dividing net income (loss) by the weighted average number of members’ units outstanding during the period. 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.

2. GOING CONCERN

The financial statements have been prepared on a going-concern basis, which contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business. The Company has previously disclosed losses related to operations related to difficult market conditions and operating performance. The Company has had instances of unwaived debt covenant violations and had been operating under

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forbearance agreements with AgStar Financial Services, PCA (“Agstar”). In addition, the Company’s working capital was at a lower level than desired. These conditions contributed to the long-term debt with Agstar being classified as current in previously filed financial statements. These factors and the continual volatile commodity prices raise substantial doubt about the Company’s ability to continue as a going concern.

The Company has continued to make changes to plant operations, including converting from a coal-fired ethanol plant to a natural gas plant in October 2011 and the addition of corn oil separation in February 2012. These changes have improved the operating performance of the plant, and lead to lower operating costs. Additionally, market conditions have improved during the three months ended July 31, 2013. The Company raised additional equity of approximately $6.9 million as of July 31, 2013, as well as issued convertible secured debt as described in Note 8. As a result, the Company was able to reduce their debt obligations as of July 31, 2013 and is in compliance with their debt covenants as of July 31, 2013.

The Company renegotiated its loans with AgStar into a Term Loan and a Revolving Term Loan and entered into a Sixth Amended and Restated Master Loan Agreement with AgStar on May 17, 2013. The Revolving Term Loan will be used by the Company to optimize its cash management. The additional equity raised was used to improve working capital availability by paying down the Revolving Term Loan and meeting the required $5 million payment obligation by July 31, 2013. The Company’s Board of Governors loaned the Company $1.4 million in convertible secured debt, which was used to bring the previous AgStar loans up to date. In addition, the Company is expecting to raise approximately $3.6 million, subsequent to July 31, 2013, in convertible secured debt, which will be released from escrow as described in Note 8.

While the Company believes these changes will improve the operating performance of the plant, provide additional working capital, and reduce the effects on our plant of volatility in the industry, it is not yet certain as to whether these efforts and changes will be successful.

3. UNCERTAINTIES

The Company has certain risks and uncertainties that it experienced during volatile market conditions. These volatilities can have a severe impact on operations. The Company’s revenues are derived from the sale and distribution of ethanol and distillers grains to customers primarily located in the U.S. Corn for the production process is supplied to the plant primarily from local agricultural producers. Ethanol sales average 75% - 80% of total revenues and corn costs average 85% - 90% of cost of goods sold.

The Company’s operating and financial performance is largely driven by the prices at which it sells ethanol and the net expense of corn. The price of ethanol is influenced by factors such as supply and demand, the weather, government policies and programs, unleaded gasoline prices and the petroleum markets as a whole. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol. The largest cost of production is corn. The cost of corn is generally impacted by factors such as supply and demand, the weather, government policies and programs, and a risk management program used to protect against the price volatility of these commodities. Market fluctuations in the price of and demand for these products may have a significant adverse effect on the Company’s operations, profitability and the availability and adequacy of cash flow to meet the Company’s working capital requirements.

4. CONCENTRATIONS

The Company sells all of the ethanol and dry distiller grains produced to one customer under marketing agreements at July 31, 2013.

5. INVENTORY

Inventory consisted of the following:

	July 31,		October 31,
	2013		2012
Raw materials	$	285,490	$	521,865
Work in process	1,084,300		1,149,214
Supplies	933,367		922,384
Other grains	—		995,109
Total	$	2,303,157	$	3,588,572

6. DERIVATIVE INSTRUMENTS

As of July 31, 2013, the Company had no derivative instruments in place.

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The following tables provide details regarding the losses from the Company’s derivative instruments included in the Condensed Consolidated Statements of Operations, none of which were designated as hedging instruments:

	Statement of	Three-Months Ended July 31,
	Operations Locations	2013		2012
Corn contracts	Cost of goods sold	$	—	$	862,000

Natural gas contracts	Cost of goods sold	—		119,000

Totals		$	—	$	981,000

	Statement of	Nine-Months Ended July 31,
	Operations Locations	2013		2012
Corn contracts	Cost of goods sold	$	—	$	1,088,000

Natural gas contracts	Cost of goods sold	—		(446,000		)

Totals		$	—	$	642,000

7. LINE OF CREDIT

Agrinatural obtained a line of credit with lending institution in September 2012 which provided up to $600,000 until March 31, 2013. Interest was charged at 5.43%. On January 1, 2013, this line of credit was replaced by a note payable which is included in Note 8 below.

On May 17, 2013, the Company renegotiated its revolving term loan with AgStar to extend the maturity date of the revolving term loan to September 2016. Amounts borrowed by the Company under the term revolving term loan can be repaid and may be re-borrowed at any time prior to maturity date of the term revolving loan, provided that outstanding advances may not exceed the amount of the term revolving loan commitment. Amounts outstanding on the term revolving loan bear interest at a variable rate equal to the greater of a LIBOR rate plus 3.50% or 5.0%, payable monthly. At July 31, 2013, revolving term loan carried an interest rate of 5.00%. The Company also pays an unused commitment fee on the unused portion of the term revolving term loan commitment at the rate of 0.35% per annum, payable in arrears in quarterly installments during the term of the evolving term loan. At July 31, 2013, the Company had approximately $20.5 million available under the revolving term loan. The amount available under the revolving term loan is reduced by $2 million at October 31 st each year until September 2016 when the unpaid balance is due. The revolving term loan is secured by substantially all business assets and is subject to various financial and non-financial covenants as described in Note 8.

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8. DEBT FINANCING

Debt financing consists of the following:

	July 31, 2013		October 31, 2012
Term note payable to lending institution, see terms below	$	17,137,087	$	36,627,901

Assessments payable	2,758,529		2,895,151

Notes payable to electrical company	312,500		457,328

Corn oil recovery system note payable	750,835		—

Notes payable on pipeline assets (Agrinatural notes)	1,123,064		—

Subordinated Debt	1,407,000		—

Construction notes payable	—		1,891,194

Total	23,489,015		46,082,737

Less amounts due on demand or within one year	3,008,029		42,051,402

Net long term debt	$	20,480,986	$	4,031,335

At July 31, 2013, the Company was in compliance with certain covenants in the AgStar loan agreements. At October 31, 2012 and during 2013, the Company was out of compliance with certain covenants in the AgStar loan agreements including the minimum working capital amount, minimum tangible net worth amount, and the fixed charge coverage ratio, and reclassified the debt with AgStar to current. The Company failed to pay when due the required monthly principal payments on December 1, 2012, January 1, 2013, February 1, 2013, March 1, 2013, April 1, 2013, and May 1, 2013. In connection with a forbearance agreement dated April 12, 2013, the Company paid the December 2012 and January 2013 installments of principal. In connection with the renegotiated loan agreement with AgStar entered into on May 17, 2013, the Company has paid the required installments of principal that were due February 1, 2013, March 1, 2013, April 1, 2013, May 1, 2013, and June 1, 2013.

On December 21, 2012, the Company and AgStar entered into a forbearance agreement whereby the Company agreed to, among other things, sell substantially all plant assets to Guardian. AgStar also began charging a default interest premium on the AgStar loans of an additional 2.0%. Advances on the revolving term note were frozen until the Company entered into an asset sale agreement for substantially all plant assets. The forbearance agreement dated December 21, 2012 was subsequently amended and restated on January 22, 2013, February 12, 2013 and March 29, 2013, in order to permit the Company to close on the transactions contemplated by the asset purchase agreement dated January 22, 2013 between the Company and Guardian. The asset purchase agreement with Guardian was terminated by the Company on April 4, 2013. The forbearance agreement was amended and restated again on April 12, 2013 in order to accommodate certain proposals related to recapitalization and restructuring of the loans.

The forbearance agreement was amended and restated for a fifth time on May 10, 2013 in order to extend the forbearance period relating to the above-described covenant defaults and required monthly principal installment payments to permit the Company additional time to document and implement a written management, governance improvement and capitalization plan. On May 17, 2013, the Company entered into a Sixth Amended and Restated Master Loan Agreement and related loan documents with AgStar to replace and supersede the Fifth Amended and Restated Master Loan Agreement dated as of September 1, 2011, the Fifth Amended and Restated Forbearance Agreement dated May 10, 2013, and related loan documents. Under the Sixth Amended and Restated Master Loan Agreement, AgStar agreed to restructure the Term Loan and the Term Revolving Loan based upon the submission of a loan restructuring proposal and payment of approximately $1.4 million in cash for Term Loan principal payments in arrears and reduction of the Term Revolving Note.

Term Note

On May 17, 2013, the Company renegotiated its term loan with AgStar in the amount of $17.4 million. The Company must make equal monthly payments of principal and interest on the term loan based on a 10-year amortization, provided the entire principal balance and accrued and unpaid interest on the term loan is due and payable in full on the maturity date of September 1, 2016. In addition, the Company is required to make additional payments annually on debt for up to 25% of the excess cash flow, as defined by the agreement, up to $2 million per year. Through September 1, 2014, the loan bears interest at 5.75% as long as the Company is in compliance with their debt covenants.

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On September 1, 2014, the interest term loan will be adjusted to LIBOR plus 3.50% but not less than 5%. The loan agreements are secured by substantially all business assets and are subject to various financial and non-financial covenants that limit distributions and debt and require minimum debt service coverage, net worth, and working capital requirements. As described above, the Company was in compliance with the covenants of its master loan agreement with AgStar as of July 31, 2013 and reclassification of the debt previously included in current liabilities to long-term.

Convertible Secured Debt

On May 17, 2013, the Company’s Board of Governors loaned the Company approximately $1.4 million as part of the convertible secured debt. The convertible secured debt is subordinated to the AgStar debt. The notes bear interest at 7.25% and are due in May 2018. On October 1, 2014, or immediately prior to the effective time of any sale of all or substantially all of the Company assets, each holder has the right at the holder’s option to irrevocably convert all of such holder’s interim subordinated notes into Class A units of the Company, at the rate of $0.30 per Class A unit. The Company reserves the right to issue Class B units upon conversion if the principal balance of the 7.25% convertible secured debt exceeds the authorized Class A units at the conversion rate.

The convertible secured debt raise was not completed as of July 31, 2013. As of July 31, 2013, the Company was expecting to issue approximately $3,671,000 of additional convertible secured debt; however subscribers have agreed to lend approximately $6,524,000. The cash received from subscribers is being held in escrow, but will be released in the fourth quarter of fiscal 2013. The Company expects to return approximately $2,853,000 during the fourth quarter of fiscal 2013 to the subscribers.

Estimated annual maturities of debt at July 31, 2013 are as follows based on the most recent debt agreements:

August 1, 2013 — July 31, 2014	$	3,008,029
August 1, 2014 — July 31, 2015	2,688,634
August 1, 2015 — July 31, 2016	2,264,846
August 1, 2016 — July 31, 2017	2,264,808
August 1, 2017 — July 31, 2018	3,541,492
Thereafter	9,721,206

Total debt	$	23,489,015

9. LEASES

The Company leases equipment, primarily rail cars, under operating leases through 2017. Rent expense for the nine months ended July 31, 2013 and 2012 was approximately $1,313,000 and $1,400,000, respectively. Rent expense for the three months ended July 31, 2013 and 2012 was approximately $406,000 and $650,000, respectively.

At July 31, 2013, the Company had the following annual minimum future lease payments, which at inception had non-cancelable terms of more than one year:

August 1, 2013 — July 31, 2014	$	1,412,842
August 1, 2014 — July 31, 2015	847,014
August 1, 2015 — July 31, 2016	833,140
August 1, 2016 — July 31, 2017	831,600
August 1, 2017 — July 31, 2018	69,300

Total lease commitments	$	3,993,896

10. COMMITMENTS AND CONTINGENCIES

Forward Contracts

The Company has natural gas agreements with a minimum purchase commitment of approximately 1.6 million MMBTU per year until October 31, 2014.

Management Services Agreement

On July 31, 2013, Project Viking, L.L.C. (“Project Viking”) held a controlling interest in the Company. On July 31, 2013, Project Viking sold its interest to Granite Falls Energy, LLC (“GFE”), which is now considered a related party. GFE operates an ethanol plant in the Midwest. The Company entered into a Management Services Agreement with GFE. Under the Management Services Agreement, GFE agreed to supply its own personnel to act as part-time officers and managers of the Company for the positions of Chief Executive Officer, Chief Financial Officer, and Commodity Risk Manager. The initial term of the Management Services Agreement is three years. The Company agreed to pay GFE $35,000 per month for the first year of the Management Services Agreement.

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During years two and three of the agreement, the Company agreed to pay GFE 50% of the total salary, bonuses, and other expenses and costs incurred by GFE for the three management positions. At the expiration of the initial term, the agreement will automatically renew for successive one-year terms unless and until the Company or GFE gives the other party 90-days written notice of termination prior to expiration of the initial term or the start of a renewal term.

Termination of Marketer Agreement

On August 20, 2013, the Company gave notice to their marketer to terminate the agreements related to corn purchases as well as ethanol and distillers grains sales effective October 31, 2013. During the fourth quarter of fiscal year 2013, the Company anticipates entering into a marketing agreement with a new marketer for the sale of ethanol and distillers grains.

11 . MEMBERS’ EQUITY

As of July 31, 2013, the Company has authorized two classe s of membership units: Class A and Class B. At July 31, 2013, there are 46,697,107 Class A units issued and outstanding and 15,000,000 Class B units issued and outstanding. At October 31, 2012, there were 38,622,107 Class A units and -0- Class B units issued and outstanding. The total units issued and outstanding are 61,697,107 and 38,622,107 at July 31, 2013 and October 31, 2012, respectively . On July 31, 2013, the Company issued 8,075,000 Class A units and 15,000,000 Class B units for total proceeds of approximately $6.9 million. The Company is authorized to issue an aggregate of 80,000 ,000 units , of which 65,000,000 have been designated Class A units and 15,000,000 has been designated as Class B units. Members of the Company are holders of units who have been admitted as members and who hold at least 2,500 units. Any holder of units who is not a member will not have voting rights. Transferees of units must be approved by our board of governors to become members. Members are entitled to one vote for each unit held. Subject to the Member Control Agreement, all units share equally in the profits and losses and distributions of assets on a per unit basis.

12. SALE OF ASSETS

The Company entered into an asset purchase agreement on January 3, 2013, with FCA Co-op for the sale of the Company’s grain storage and handling facilities. The sale closed on February 1, 2013, for approximately $3.7 million. The net proceeds of the sale were used to repay AgStar debt.

The Company entered into an asset purchase agreement on January 22, 2013, with Guardian Energy for the sale of the ethanol assets. The purchase price was to be the sum of $55,000,000 plus closing net working capital, less the amount owed on the closing date under assumed debt. On April 4, 2013, the Company terminated the asset purchase agreement dated January 22, 2013 between the Company and Guardian.

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

This Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains, in addition to historical information, forward-looking statements that are based on our expectations, beliefs, intentions or future strategies. These statements are subject to risks and uncertainties that could cause actual results to differ materially from the statements because of certain factors, including those set forth under Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the period ended October 31, 2012 and under Part II, Item 1A. “Risk Factors” in our Quarterly Report on Form 10-Q for the period ended January 31, 2013 and April 30, 2013, as well as in other filings we make with the Securities and Exchange Commission. All forward-looking statements included herein are based on information available to us as of the date hereof, and we undertake no obligation to update any such forward-looking statements.

The following is a discussion and analysis of Heron Lake BioEnergy’s financial condition and results of operations as of and for the three and nine month periods ended July 31, 2013 and 2012. This section should be read in conjunction with the condensed consolidated financial statements and related notes in Item 1 of this report and the Company’s Annual Report on Form 10-K for the year ended October 31, 2012.

We prepared the following discussion and analysis to help readers better understand our financial condition, changes in our financial condition, and results of operations for the three and nine months ended July 31, 2013.

Overview

Heron Lake BioEnergy, LLC is a Minnesota limited liability company that owns and operates a dry mill corn-based, natural gas fired ethanol plant near Heron Lake, Minnesota. The plant has a stated capacity to produce 50 million gallons of denatured fuel grade ethanol and 160,000 tons of dried distillers’ grains (DDGS) per year. Our revenues are derived from the sale and distribution of our ethanol throughout the continental United States and in the sale and distribution of our distillers’ grains (DGS) locally, and throughout the continental United States. Our subsidiary, Lakefield Farmers Elevator, LLC, had grain facilities at Lakefield and Wilder, Minnesota that were sold on February 1, 2013. Our subsidiary, HLBE Pipeline Company, LLC, owns 73% of Agrinatural Gas, LLC, the pipeline company formed to construct, own, and operate a natural gas pipeline that provides natural gas to the Company’s ethanol production facility through a connection with the natural gas pipeline facilities of Northern Border Pipeline Company in Cottonwood County, Minnesota.

Our operating results are largely driven by the prices at which we sell ethanol and distillers grains and the costs related to their production, particularly the cost of corn. Historically, the price of ethanol tended to fluctuate in the same direction as the price of unleaded gasoline and other petroleum products. However, during fiscal 2010 and continuing into fiscal 2013, ethanol prices tended to move up and down proportionately with changes in corn prices. The price of ethanol can also be influenced by factors such as general economic conditions, concerns over blending capacities, and government policies and programs. The price of distillers grains is generally influenced by supply and demand, the price of substitute livestock feed, such as corn and soybean meal, and other animal feed proteins. Our largest component of cost of production is corn. The cost of corn is affected primarily by factors over which we lack any control such as crop production, carryout, exports, government policies and programs, and weather. The growth of the ethanol industry has increased the demand for corn. We believe that continuing increases in global demand will result in corn prices above historic averages. During the third quarter of fiscal year 2013 ended July 31, 2013, our average ethanol sales price was $2.45 per gallon. During the same period, our average corn purchase price was $6.77 per bushel.

Trends and Uncertainties Impacting Our Operations

Our current and future results of operation are affected and will continue to be affected by factors such as (a) volatile and uncertain pricing of ethanol and corn; (b) availability of corn that is, in turn, affected by trends such as corn acreage, weather conditions, and yields on existing and new acreage diverted from other crops; and (c) the supply and demand for ethanol, which is affected by acceptance of ethanol as a substitute for fuel, public perception of the ethanol industry, government incentives and regulation, and competition from new and existing construction, among other things. Other factors that may affect our future results of operation include those factors discussed in “Item 1. Business” and “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended October 31, 2012, “Part II, Item 1A Risk Factors” of our Quarterly Report on Form 10-Q for the period ended January 31, 2013 and April 30, 2013 and of this Form 10-Q, and in other filings we make with the Securities and Exchange Commission.

Critical Accounting Estimates

A description of our critical accounting estimates was provided in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the year ended October 31, 2012. At July 31, 2013, our critical accounting estimates continue to include those described in our Annual Report on Form 10-K. In addition, our analysis of future projections, resolution of debt terms and other assumptions in consideration of continuing as a going concern include critical accounting estimates.

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Results of Operations for the Three Months Ended July 31, 2013 and 2012

The following table shows summary information from our Condensed Consolidated Statements of Operations for the three months ended July 31, 2013 and 2012.

	Three Months			Three Months
	Ended			Ended
	July 31, 2013			July 31, 2012
	(Unaudited)			(Unaudited)

Revenues	$	45,583,441		$	41,908,904

Cost of Goods Sold	41,523,283			39,987,071

Gross Profit	4,060,158			1,921,833

Selling, General, and Administrative Expenses	674,200			714,906

Operating Income	3,385,958			1,206,927

Other Income (Expense)
Interest income	310			2,441
Interest expense	(755,532		)	(653,663		)
Other income	10,925			2,182
Total other expense, net	(744,297		)	(649,040		)


Net Income	2,641,661			557,887

Net Income Attributable to Noncontrolling Interest	(87,168		)	(87,289		)

Net Income Attributable to Heron Lake BioEnergy, LLC	$	2,554,493		$	470,598

Revenues

Revenues increased by 8.8% for the three months ended July 31, 2013 as compared to the three months ended July 31, 2012 due primarily to increased ethanol prices. Net ethanol revenues during the three months ended July 31, 2013 were approximately $36.4 million compared to approximately $32.1 million during the three months ended July 31, 2012. The average price we received for our ethanol increased by approximately 12% for the three months ended July 31, 2013 as compared to the three months ended July 31, 2012. Additionally, we sold approximately 2.1% more gallons of ethanol during the three months ended July 31, 2013 as compared to the three months ended July 31, 2012. There were no ethanol derivative gains or losses during the three months ended July 31, 2013 and 2012.

Total sales of DGS during the three months ended July 31, 2013 were approximately $7.8 million. DGS sales during the three months ended July 31, 2012 were $7.9 million. The average dried DGS price increased 9.9% for the three months ended July 31, 2013 as compared to the three months ended July 31, 2012, with an approximate 11.6% decrease in dried DGS sold during the three months ended July 31, 2013 as compared to the three months ended July 31, 2012.

Corn oil separation began in February 2012. Corn oil sales for the three months ended July 31, 2013 and 2012 were approximately $1.1 million and $0.9 million, respectively. Our quantity of corn oil sold increased approximately 27.4% for the three months ended July 31, 2013 as compared to the three months ended July 31, 2012.

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Cost of Goods Sold

Our costs of sales include, among other things, the cost of corn used in ethanol and DGS production (which is the largest component of costs of sales); natural gas, processing ingredients, electricity, and wages, salaries and benefits of production personnel. We use approximately 1.5 million bushels of corn per month at the plant.

The per bushel cost of corn increased approximately 0.1% in the three months ended July 31, 2013 as compared to the three months ended July 31, 2012. We had no losses or gains related to corn or natural gas derivative instruments for the three months ended July 31, 2013. We had a gain related to natural gas derivative instruments of approximately $119,000 for the three months ended July 31, 2012. We had a gain related to corn derivative instruments of approximately $862,000 for the three months ended July 31, 2012. We had an increased gross margin in the third quarter of fiscal 2013 as compared to the same period in 2012 due to increases in the prices of ethanol and DGS.

The cost of corn fluctuates based on supply and demand, which, in turn, is affected by a number of factors which are beyond our control. We expect our gross margin to fluctuate in the future based on the relative prices of corn and fuel ethanol. We may use futures and option contracts to minimize our exposure to movements in corn prices, but there is no assurance that these hedging strategies will be effective. As a result, gains or losses on derivative instruments do not necessarily coincide with the related commodity purchases. This may cause fluctuations in our statement of operations. While we do not use hedge accounting to match gains or losses on derivative instruments, we believe the derivative instruments provide an economic hedge.

Operating Expenses

Operating expenses consist of selling, general and administrative expense and include wages, salaries and benefits of administrative employees at the plant, insurance, professional fees and similar costs. Operating expense for the three months ended July 31, 2013 was approximately $674,000, a decrease of approximately 5.7% as compared to operating expense of approximately $715,000 for the three months ended July 31, 2012. These expenses represented 1.5% of total revenues for the three months ended July 31, 2013 and 1.7% of total revenues for the three months ended July 31, 2012. Although we are focused on increasing operating efficiencies, these expenses generally do not vary with the level of production at the plant.

Other Expense, Net

Other expense, net consists primarily of interest expense. Interest expense consists primarily of interest payments on our credit facilities described below. Interest expense, which was up 15.6% for the three months ended July 31, 2013, as compared to the three months ended July 31, 2012, is dependent on the balances outstanding and on interest rates, including an additional 2% default interest rate we paid on our AgStar loans. Of the total indebtedness at July 31, 2013 to AgStar, approximately $17.1 million includes interest at a fixed rate of 5.75%, and approximately $10.7 million includes interest at a variable rate, which at July 31, 2013 was 5.0%.

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Results of Operations for the Nine Months Ended July 31, 2013 and 2012

The following table shows summary information from our Condensed Consolidated Statements of Operations for the nine months ended July 31, 2013 and 2012.

	Nine Months			Nine Months
	Ended			Ended
	July 31, 2013			July 31, 2012
	(Unaudited)			(Unaudited)

Revenues	$	125,203,672		$	121,956,934

Cost of Goods Sold	119,568,050			118,668,185

Gross Profit	5,635,622			3,288,749

Selling, General, and Administrative Expenses	2,537,919			2,428,646

Settlement Expense	—			900,000

Operating Income (Loss)	3,097,703			(39,897		)

Other Income (Expense)
Interest income	17,063			9,299
Interest expense	(2,254,167		)	(1,943,578		)
Other income	30,198			34,136
Total other expense, net	(2,206,906		)	(1,900,143		)

Net Income (Loss)	890,797			(1,940,040		)

Net Income Attributable to Noncontrolling Interest	(254,999		)	(258,520		)

Net Income (Loss) Attributable to Heron Lake BioEnergy, LLC	$	635,798		$	(2,198,560	)

Revenues

Revenues increased by 2.7% for the nine months ended July 31, 2013 as compared to the nine months ended July 31, 2012 due primarily to increased dried DGS prices. Net ethanol revenues during the nine months ended July 31, 2013 were approximately $95.5 million compared to approximately $94.2 million during the nine months ended July 31, 2012. The average price we received for our ethanol increased by approximately 7.8% for the nine months ended July 31, 2013 as compared to the nine months ended July 31, 2012. However, we sold approximately 6.7% fewer gallons of ethanol during the nine months ended July 31, 2013 as compared to the nine months ended July 31, 2012. There were no ethanol derivative gains or losses during the nine months ended July 31, 2013 and 2012.

Total sales of DGS during the nine months ended July 31, 2013 were approximately $25.8 million. DGS sales during the nine months ended July 31, 2012 were approximately $22.3 million. The average dried DGS price increased 25.6% for the nine months ended July, 2013 as compared to the nine months ended July 31, 2012, with an approximate 7.2% decrease in dried DGS sold during the first nine months of fiscal year 2013 compared to fiscal year 2012.

Corn oil separation began in February 2012. Corn oil sales for the nine months ended July 31, 2013 and 2012 were approximately $2.9 million and $1.5 million, respectively. Our quantity of corn oil sold increased approximately 111% for the nine months ended July 31, 2013 as compared to the nine months ended July 31, 2012, although as noted above, we did not begin separating corn oil until February 2012.

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Cost of Goods Sold

The per bushel cost of corn increased approximately 8.7% in the nine months ended July 31, 2013 as compared to the nine months ended July 31, 2012. We had a gain related to corn derivative instruments of approximately $1.1 million for the nine months ended July 31, 2012. We had a loss related to natural gas derivative instruments of approximately $446,000 for the nine months ended July 31, 2012. We had an increased gross margin in the first nine months of fiscal 2013 as compared to the same period in 2012 due to increases in the prices of ethanol and DGS and an increase in the quantity of corn oil sold.

Operating Expenses

Operating expenses consist of selling, general and administrative expense and include wages, salaries and benefits of administrative employees at the plant, insurance, professional fees and similar costs. Operating expense for the nine months ended July 31, 2013 was approximately $2,538,000, an increase of approximately 4.5% as compared to operating expense of approximately $2,429,000 for the nine months ended July 31, 2012 due primarily to fees related to the planned plant asset sale. These expenses represented 2.0% of total revenues for the nine months ended July 31, 2013 and July 31, 2012. Although we are focused on increasing operating efficiencies, these expenses generally do not vary with the level of production at the plant. In addition, during the nine months ended July 31, 2012 we recorded a settlement expense of approximately $900,000 related to the settlement of our coal contract.

Other Expense, Net

Liquidity and Capital Resources

As of July 31, 2013, we had cash and equivalents of approximately $1.0 million, current assets of approximately $7.9 million and total assets of approximately $60.8 million.

Our principal sources of liquidity consist of cash provided by operations, cash and equivalents on hand, and available borrowings under our master loan agreement with AgStar. Under the master loan agreement, we have two forms of debt: a term note and a revolving term note. The total indebtedness to AgStar at July 31, 2013, was approximately $27.8 million, consisting of approximately $17.1 million under the term note and approximately $10.7 million under the revolving term note. These borrowings are made pursuant to the Sixth Amended and Restated Master Loan Agreement dated May 17, 2013 between the Company and AgStar. Under the Sixth Amended and Restated Master Loan Agreement, AgStar agreed to restructure the term loan and the term revolving loan based upon the submission of a loan restructuring proposal and payment of approximately $1.4 million in cash for term loan principal payments in arrears and reduction of the term revolving note. The Company also raised additional equity of approximately $6.9 million as of July 31, 2013, which was used to reduce the Company’s debt obligations to AgStar as of July 31, 2013.

With respect to the term loan, the Company must make equal monthly payments of principal and interest on the term loan based on a 10-year amortization, provided the entire principal balance and accrued and unpaid interest on the term loan is due and payable in full on the maturity date of September 1, 2016. In addition, the Company is required to make additional payments annually on debt for up to 25% of the excess cash flow, as defined by the agreement, up to $2 million per year. Through September 1, 2014, the loan bears interest at 5.75% as long as the Company is in compliance with its debt covenants. On September 1, 2014, the interest on the term loan will be adjusted to LIBOR plus 3.50%, but the total interest rate shall not be less than 5%.

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With respect to the revolving term loan, the loan matures in September 2016. Amounts borrowed by the Company under the term revolving loan can be repaid and may be re-borrowed at any time prior to maturity date of the term revolving loan, provided that outstanding advances may not exceed the amount of the term revolving loan commitment. Amounts outstanding on the term revolving loan bear interest at a variable rate equal to the greater of a LIBOR rate plus 3.50% or 5.0%, payable monthly. At July 31, 2013, the revolving term loan carried an interest rate of 5.0%. The Company also pays an unused commitment fee on the unused portion of the term revolving term loan commitment at the rate of 0.35% per annum, payable in arrears in quarterly installments during the term of the evolving term loan. At July 31, 2013, the Company had $10.6 million outstanding under the revolving term loan and an additional $9.9 million was available. The amount available under the revolving term loan is reduced by $2 million at October 31 each year until September 2016, when the unpaid balance is due.

Our loan agreements with AgStar are secured by substantially all business assets and are subject to various financial and non-financial covenants that limit distributions and debt and require minimum debt service coverage, net worth, and working capital requirements. The Company was in compliance with the covenants of its loan agreements with AgStar as of July 31, 2013. In the past, the Company’s failure to comply with the covenants of the master loan agreement and failure to timely pay required installments of principal has resulted in events of default under the master loan agreement, entitling AgStar to accelerate and declare due all amounts outstanding under the master loan agreement. If AgStar accelerated and declared due all amounts outstanding under the master loan agreement, the Company would not have adequate cash to repay the amounts due, resulting in a loss of control of our business or bankruptcy. There can be no assurance that the Company will be able to maintain compliance with its agreements with AgStar, raise additional capital, or improve its financial performance.

There is no assurance that our cash, cash generated from operations and, if necessary, available borrowing under our agreement with AgStar, will be sufficient to fund our anticipated capital needs and operating expenses, particularly if the sale of ethanol and DGS does not produce revenues in the amounts currently anticipated or if our operating costs, including specifically the cost of corn, natural gas and other inputs, are greater than anticipated. Due to current volatility in the ethanol and corn markets, our future profit margins might be tight or not exist at all.

Our principal uses of cash are to pay operating expenses of the plant and to make debt service payments on our long-term debt. During the nine months ended July 31, 2013, the Company paid debt of approximately $14.4 million and borrowed approximately $520,000 from AgStar. During this period the Company also raised approximately $1.4 million in convertible debt from persons serving on the Company’s Board of Governors and the Company raised approximately $6.9 million in member contributions. The Company also sold grain storage assets for approximately $3.7 million. As of July 31, 2013, the Company expects to raise approximately $3,671,000 of additional convertible secured debt during the fourth quarter of fiscal year 2013, which is being held in escrow at July 31, 2013.

The following table summarizes our sources and uses of cash and equivalents from our condensed consolidated statements of cash flows for the periods presented:

	Nine months Ended July 31
	2013			2012
Net cash provided by operating activities	$	2,638,461		$	1,648,374
Net cash provided by (used in) investing activities	3,459,945			(2,444,010		)
Net cash used in financing activities	(5,729,003		)	(4,661,810		)
Net increase (decrease) in cash and equivalents	$	369,403		$	(5,457,446	)

During the nine months ended July 31, 2013, operating activities provided approximately $2.6 million in cash. This consists primarily of the net income of approximately $0.9 million plus non-cash expenses including depreciation and amortization of approximately $3.0 million, decreases in inventory of approximately $1.3 million, decreases in accounts payable of $1.1 million, and increases of accounts receivable of $1.2 million.

During the nine months ended July 31, 2012, operating activities provided approximately $1.6 million. This consists primarily of the net loss of $1.9 million plus non-cash expenses including depreciation and amortization of $4.3 million, decreases in inventory of approximately $984,000, and decreases in accounts payable by approximately $2.0 million.

During the nine months ended July 31, 2013, we had cash flows provided by investing activities of approximately $3.5 million mainly attributable to the sale of grain storage assets for approximately $3.7 million. In the same period in 2012, we used approximately $2.4 million for capital expenditures. This consists primarily of costs associated with the conversion of our plant from coal-fired to natural gas and the installation of the natural gas pipeline.

During the nine months ended July 31, 2013, we used approximately $5.7 million in cash in financing activities. We made payments on our line of credit, net payments on our revolving term loan, and payment on long-term debt totaling approximately $14.4 million. We received proceeds from long-term debt, convertible debt, and member contributions totaling approximately $8.8 million.

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Our cash used in financing activities was greater than the approximately $4.7 million we used in financing activities in the same period in 2012, when we received approximately $707,000 in member contributions and paid approximately $5.6 million on long-term debt.

Outlook

Ethanol prices have been very volatile over the past nine months, and we expect to see that continue during 2013. There are many factors that will continue that volatility of prices during 2013, including amount of domestic ethanol production, the amount of ethanol exports and domestic usage, petroleum and gasoline prices, and the development of other alternative fuels. As of August 30, 2013, the Energy Information Administration (EIA) reported that ethanol production for the week was 240.8 million gallons, or a 12.54 billion gallon annualized rate.

Prices for DGS are also affected by a number of factors beyond our control such as the supply of and demand for DGS as an animal feed, prices of competing feeds, and perceptions of nutritional value of DGS as compared to those of competing feeds. We believe that current market prices for DGS can be sustained long-term as long as the prices of competing animal feeds remain steady or increase, livestock feeders continue to create demand for alternative feed sources such as distillers’ grains and the supply of distillers’ grains remains relatively stable. On the other hand, if competing commodity price values retreat and DGS supplies increase due to growth in the ethanol industry, DGS prices may decline.

Corn prices have been volatile due in part to higher demand from the renewable fuels industry. The expansion of ethanol productive capacity has brought about a substantial increase in demand for corn and thus in corn prices. The volatility is also a result of less than trend line yields in the U.S. last two years, thus impacting the corn supply. Due to increased exposure of ethanol, corn is now being viewed as an “energy commodity” as opposed to strictly a “grain commodity,” contributing to the upward pressure on corn prices. The USDA’s World Agricultural Supply and Demand Estimates published on August 12, 2013 projects domestic corn production of 13.76 billion bushels for the 2013 growing season, a decrease from previous estimates but still a significant increase over the estimate of 10.78 billion bushels produced during the 2012 growing season.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are subject to market risks concerning our debt financing and future prices of corn, natural gas, ethanol and distillers grains. We consider market risk to be the impact of adverse changes in market prices on our results of operations. In general, ethanol prices are affected by the supply and demand for ethanol, the cost of ethanol production, the availability of other fuel oxygenates, the regulatory climate and the cost of alternative fuels such as gasoline. The price of corn is affected by weather conditions and other factors affecting crop yields, farmer planting decisions and general economic, market and regulatory factors. From time to time, we may purchase corn futures and options to hedge a portion of the corn we anticipate we will need. In addition, we may contract for future physical delivery of corn. We are exposed to the full impact of market fluctuations associated with interest rates and commodity prices.

We are also subject to market risk on the selling prices of our distiller grains. These prices fluctuate seasonally when the price of corn or other cattle feed alternatives fluctuate in price.

As an example of our potential sensitivity to price changes, if the price of ethanol rises or falls $0.10 per gallon, our annual revenues may increase or decrease accordingly by approximately $5.8 million, assuming no other changes in our business. Additionally, if the price of corn rises or falls $0.25 per bushel, our annual cost of goods sold may increase or decrease by $5.5 million, again assuming no other changes in our business. During the quarter ended July 31, 2013, our average ethanol sales price was $2.45 per gallon, with basis. During the same period, our average corn purchase price was $6.77 per bushel, with basis. Our future earnings may be affected by changes in interest rates due to the impact those changes have on our interest expense on borrowings under our credit facilities. As of July 31, 2013, we had $10.6 million of outstanding borrowings with variable interest rates. With each 1% change in interest rates our annual interest expense would change by $106,000.

Item 4. Controls and Procedures

Effectiveness of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures were not effective. As previously reported in our Form 10-K for the year ended October 31, 2012, our management concluded that our disclosure controls and procedures were not effective as of October 31, 2012 due to a material weakness in internal control over financial reporting relating to the errors in pricing ethanol and distillers grains revenue and the effects of this revenue

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recognition error upon the financial statements and reports. This material weakness is not considered fully remediated as of July 31, 2013 because while remedial procedures have been implemented, they have not operated for an appropriate period and have not been tested to allow management to conclude that they are operating effectively. Accordingly, the Company’s disclosure controls and procedures are likewise not considered effective.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred in the fiscal nine months ended July 31, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, other than the implementation of additional controls and procedures to remediate the material weakness in internal control over financial reporting described above.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time in the ordinary course of business, Heron Lake BioEnergy, 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 most significant risk factors applicable to the Company are described in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the period ended October 31, 2012 and in Part II, Item 1A “Risk Factors” of our Quarterly Report on Form 10-Q for the period ended January 31, 2013. We also face the risk factors set forth below as well as additional risks and uncertainties, including risks and uncertainties not presently known to us, or that we currently deem immaterial, could also have an adverse effect on our business, financial condition and/or results of operations.

Project Viking owns a large percentage of our units, which may allow it to control or heavily influence matters requiring member approval, and Project Viking has been granted additional board rights under our member control agreement.

As of July 31, 2013, Project Viking, L.L.C. (“Project Viking”) beneficially owned 63.3% of our outstanding units. Project Viking is owned by Granite Falls Energy, LLC (“Granite Falls Energy”). As a result, Granite Falls Energy could significantly influence our management and affairs and all matters requiring member approval, including the approval of significant corporate transactions.

Additionally, our member control agreement gives members who hold significant amounts of equity in us the right to designate governors to serve on our board of governors. As of July 31, 2013, Project Viking has the right to appoint five persons to our nine-person board pursuant to this provision. With the right to designate a majority of our board, Project Viking influences the decisions of our board and our business.

Further, the interests of Project Viking may not coincide with our interests or the interests of our other members. For example, Granite Falls Energy owns and operates an ethanol production facility that could be considered our competitor. As a result of these and other potential conflicting interests, this could result in decisions with respect to us with which our members may disagree.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

At July 31, 2013, we were in compliance with the covenants of our Sixth Amended and Restated Master Loan Agreement with AgStar Financial Services, PCA (“AgStar”), which we entered into on May 17, 2013. However, prior to entering into the Sixth Amended and Restated Master Loan Agreement with AgStar, we were in default of covenants of our prior loan agreement with AgStar requiring us to maintain at least $5.0 million minimum working capital; at least $39.5 million of tangible net worth; and a fixed charge ratio of 1.20 to 1.00 or greater. Under this prior loan agreement, we also failed to make monthly principal payments to AgStar on February 1, 2013, March 1, 2013, April 1, 2013 and May 1, 2013. As a result of these defaults, we entered into multiple forbearance agreements with AgStar, under which AgStar forbear its rights. Under the Sixth Amended and Restated Master Loan Agreement, AgStar agreed to restructure our Term Loan and our Term Revolving Loan based upon our submission of a loan restructuring proposal and payment of approximately $1.4 million in cash for Term Loan principal payments in arrears and reduction of the Term Revolving Note. In addition, we met the required principal paydown of $5 million on July 31, 2013.

Item 4. Mine Safety Disclosures

None.

Table of Contents

Item 5. Other Information

None.

Item 6. Exhibits

The following exhibits are included in this report:

Exhibit No.		Exhibit

10.1		Assignment and Amendment Agreement dated July 2, 2013 by and among Heron Lake BioEnergy, LLC, Gavilon, LLC and Gavilon Global Ag Holdings, LLC. +

10.2		Subscription Agreement Including Investment Representations, dated July 31, 2013, by and between Heron Lake BioEnergy, LLC and Project Viking, L.L.C.

10.3		Subscription Supplement Agreement dated July 31, 2013, by and among Heron Lake BioEnergy, LLC, Granite Falls Energy, LLC and Project Viking, L.L.C.

10.4		Management Services Agreement effective as of July 31, 2013 between Granite Falls Energy, LLC and Heron Lake BioEnergy, LLC.

31.1		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act.

31.2		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act.

32		Certification pursuant to 18 U.S.C. § 1350.

101.1		The following materials from Heron Lake BioEnergy’s Quarterly Report on Form 10-Q for the quarterly period ended July 31, 2013, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements.

+ Certain portions of this exhibit have been redacted and filed on a confidential basis with the Commission pursuant to a request for confidential treatment under Rule 24b-2 under the Exchange Act. Spaces corresponding to the deleted portions are represented by brackets with asterisks [***].

Table of Contents

SIGNATURES

Pursuant to the requirements 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.

	HERON LAKE BIOENERGY, LLC

Date: September 16, 2013	/s/ Steve Christensen
	Steve Christensen
	Chief Executive Officer


Date: September 16, 2013	/s/ Stacie Schuler
	Stacie Schuler
	Chief Financial Officer

Exhibit 10.1

CERTAIN INFORMATION INDICATED BY [***] HAS BEEN DELETED FROM THIS EXHIBIT AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT UNDER RULE 24b-2.

ASSIGNMENT AND AMENDMENT AGREEMENT

THIS ASSIGNMENT AND AMENDMENT AGREEMENT dated as of July 2, 2013 (the “ Amendment ”), is made and entered into by Gavilon, LLC (“ Assignor ”), Gavilon Global Ag Holdings, LLC (“ Assignee ”), and Heron Lake Bioenergy, LLC (“ Producer ”).

RECITALS :

(a) Assignor and Producer previously entered into a Corn Supply Agreement (“ Corn Supply Agreement ”), an Ethanol and Distiller’s Grains Marketing Agreement (“ Marketing Agreement ”), and a Master Netting, Setoff, Credit and Security Agreement (“ Netting Agreement ”), each dated September 1, 2011 (collectively, the “ Agreements ”);

(b) Assignee and Producer are entering into a certain Risk Management Services Agreement of even date herewith (“ Risk Management Agreement ”).

AGREEMENT :

NOW THEREFORE, for and in consideration of the agreements herein made and for other good and valuable consideration, the parties hereto acknowledge and agree as follows:

1. Amendments . The Agreements are hereby amended as follows:

1.1 Revised Definition . The definition of “Storage Agreement” and all references thereto are hereby deleted from each of the Agreements; provided, however, that references to such term in the Netting Agreement shall refer instead to the Risk Management Agreement; provided, further that clause (iii) in Section 4.1 of the Netting Agreement shall specifically refer to Section 7(b) of the Risk Management Agreement.

1.2 Initial Term . Article 2.1 of the Corn Supply Agreement, and Article 2.1 of the Marketing Agreement, are each hereby replaced with the following:

“2.1 Term . Unless terminated earlier according to its terms, this Agreement shall commence on the Commencement Date and remain in effect until October 31, 2013 (the “ Initial Term ”) unless extended as set forth in Section 2.2.”

1.3 No Limited Corn Sales or Preferred Pricing . Section 3.9 of the Corn Supply Agreement is hereby deleted in its entirety, and Section 6.2.3 of the Marketing

Agreement shall be suspended during the term of the Risk Management Agreement.

1.4 No Risk Management or Market Services . Article 7 of the Corn Supply Agreement, and Article 9 of the Marketing Agreement, are each suspended during the term of the Risk Management Agreement.

1.5 Corn Supply Procedures . For purposes of corn origination and payment under the Corn Supply Agreement, it is agreed that: (i) Assignee’s form of contract, and in Assignee’s name only, must be used at all times, and (ii) payment under such contracts will be made directly by Assignee to the applicable growers.

1.6 Cross Default . The first sentence of Section 4.1 of the Netting Agreement is hereby amended to include the following additional events of default as giving rise to the close-out rights set forth therein: a default by Producer under Section 5.2 of the Netting Agreement and Producer fails to cure such default within ten (10) days after receiving written notice thereof from Assignee.

1.7 Netting of Payments . For purposes of Section 2 of the Netting Agreement it is hereby agreed that the Netting Statements (as defined therein), and the payments due thereunder, shall include fees and other amounts owed under the Risk Management Agreement.

1.8 Observer’s Rights . Section 5.2 of the Netting Agreement is hereby amended to grant Assignee the right to appoint one (1) Observer to Producer’s Board of Governors only (and not to any risk or other committees). Such Observer will however, as a matter of clarification, have the right to ask and to receive answers to questions during meetings of the Board of Governors.

1.9 Threshold Amount . The definition of “Threshold Amount” on Exhibit “A” (Definitions) of the Netting Agreement is hereby replaced with the following:

““Threshold Amount” means, with respect to Gavilon, $[***], and with respect to Producer, $[***]; provided that notwithstanding anything to the contrary contained herein, Gavilon may in its sole and reasonable discretion modify such Threshold Amount upon no less than ten (10) days written notice to Producer; provided further, however, that if an event of default has occurred and is continuing with respect to a Party, then such Party’s Threshold Amount shall be $0.”

Provided, however, the parties acknowledge and agree that the “Threshold Amount” is zero ($0) with respect to Producer as of the date hereof.

1.10 Gavilon Notices . The address for Gavilon under the Agreements for notices or other communications shall be:

If to Gavilon:	Gavilon Global Ag Holdings, LLC
	Eleven ConAgra Drive
	Omaha, NE 68102-5011
	Attn: Corey Dencklau
	Phone: (402) 889-4397

with a copy to:	Gavilon Global Ag Holdings, LLC
	Eleven ConAgra Drive
	Omaha, NE 68102-5011
	Attn: Legal Department
	Phone: (402) 889-4000

2. Assignment of the Agreements . Assignor hereby assigns its rights and delegates its obligations to Assignee under the Agreements, and Assignee hereby assumes such obligations from Assignor. Assignor is fully released and discharged from any and all liability or obligations that now exist or may hereafter arise under the Agreements. All references to “Gavilon” in the Agreements shall mean and refer to Assignee. The parties acknowledge that Assignor has notified Producer that Assignor and its ethanol marketing business will be retained by its current beneficial owners. Assignee shall directly or indirectly maintain the resources to perform its obligations under the Agreements.

3. Binding Effect/Successors and Assigns . Upon execution and delivery of this Amendment by the parties hereto, this Amendment shall become binding and effective. This Amendment shall inure to the benefit of and be binding on the parties hereto and their respective successors and assigns.

4. Counterparts . This Amendment may be executed in multiple counterparts, each of which shall be deemed an original and all of which taken together shall constitute one and the same instrument.

5. Defined Terms . All capitalized terms in this Amendment shall have the meaning ascribed to them in the respective Agreement, unless otherwise defined herein.

6. Conflicts . In the event of a conflict between the terms and conditions of the Agreements and the terms of this Amendment, the terms of this Amendment shall control. The parties hereto acknowledge and agree that the intent and purpose of this Amendment shall be considered and given full effect in any interpretation of the Agreements and, to this end, the Agreements are hereby modified accordingly. Except as modified by this Amendment, all terms and conditions of the Agreements shall remain in full force and effect.

7. Entire Agreement . This Amendment constitutes the entire agreement and understanding of the parties with respect to the subject matter hereto.

[Signature Page Follows]

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the day and year first above written.

GAVILON GLOBAL AG HOLDINGS, LLC		HERON LAKE BIOENERGY, LLC


By:	/s/ John W. Neppl	By:	/s/ Robert J. Ferguson
Name:	John W. Neppl	Name:	Robert J. Ferguson
Title:	CFO	Title:	CEO

GAVILON, LLC

By:	/s/ John W. Neppl
Name:	John W. Neppl
Title:	CFO

EXHIBIT 10.2

HERON LAKE BIOENERGY, LLC

SUBSCRIPTION AGREEMENT

INCLUDING INVESTMENT REPRESENTATIONS

THIS SUBSCRIPTION AGREEMENT (this “ Subscription Agreement ”) is entered into and made effective on July 31, 2013, by and between Heron Lake BioEnergy, LLC, a Minnesota limited liability company with its principal executive office located at 91246 390 th Avenue, P.O. Box 198, Heron Lake, Minnesota 56137 (the “ Company ”), and Project Viking, L.L.C., a Minnesota limited liability company (“ Subscriber ”).

W I T N E S S E T H

In consideration of the mutual promises contained herein, and other good and valuable consideration, Subscriber hereby agrees, represents and warrants as follows:

1. Agreement of Subscription.

a. Subscriber hereby subscribes to purchase ** 8,075,000 ** Class A capital units of the Company and ** 15,000,000 ** Class B capital units of the Company (collectively, the “ Units ”), which Units quantify membership interests in the Company, at a purchase price of $0.30 per Unit, upon the terms and conditions as set forth in this Subscription Agreement, for a Total Purchase Price for the Units of ** $6,922,500.00 ** . All capitalized terms used in this Subscription Agreement and not otherwise defined herein shall have the meaning ascribed to such terms in the Company’s Confidential Disclosure Statement dated June 11, 2013, including appendices (the “ Disclosure Statement ”).

b. This subscription is irrevocable. The Company will accept this subscription by having one of its officers countersign this Subscription Agreement and return a copy of the signature page to you to confirm acceptance. Upon acceptance, this Subscription Agreement is binding on Subscriber, and the obligations of Subscriber hereunder are unconditional.

c. Upon the acceptance of this Subscription Agreement, Subscriber agrees to deliver by wire transfer on the same business day of the acceptance the amount of the Total Purchase Price for the Units (100% payment is due upon Subscription). Subscriber agrees that the Units shall be governed by and that Subscriber is bound by the Company’s Member Control Agreement dated effective September 23, 2004, as amended August 30, 2011, a copy of which is included in the Disclosure Statement as Appendix B (the “ Member Control Agreement ”). Subscriber acknowledges that Subscriber is a current member of the Company and therefore has received a copy of the Disclosure Statement including the Member Control Agreement.

d. Subscriber acknowledges and agrees that 100% of Subscriber’s purchase price of the Units constitutes “AT-RISK” capital and will not be placed into any type of escrow. Immediately following acceptance of this Subscription by the Company and tender of the payment for the Units, the Company will use such funds to pay down the Company’s term revolver note with AgStar Financial Services, PCA (“ AgStar ”). Subscriber acknowledges that the payment of the proceeds of this subscription to AgStar is the specified use of the funds from this subscription.

e. Upon acceptance of this Subscription Agreement and tender of full payment of the entire subscription amount, the Company will issue the Units to Subscriber for the Units purchased hereunder

HERON LAKE BIOENERGY, LLC	JULY 31, 2013
	PRIVATE PLACEMENT
	SUBSCRIPTION AGREEMENT

and issue a certificate to Subscriber for the Units purchased hereunder, dated as of the date of such acceptance and full payment. Subscriber acknowledges and agrees that Subscriber is bound by the Company’s Articles of Organization, a copy of which is included in the Disclosure Statement as Appendix A (the “ Articles ”) and the Member Control Agreement.

2. Representations and Warranties of Subscriber.

In consideration of the Company’s offer to sell the Units, and in order to induce the Company to sell and issue the Units to Subscriber, Subscriber hereby represents and warrants to the Company and its agents as follows:

a. SEC Reporting Company and Reporting Obligations; Information About the Company, the Units and the Notes Offering. Subscriber acknowledges that the Company is a public reporting company under the Securities Exchange Act of 1934, and that Subscriber has immediate reporting obligations under such Act as a result of its purchase of the Units hereunder and Subscriber’s ownership of membership interests in the Company and the number of Units purchased. Subscriber, or its representative(s), has received, read and understands the business, financial and operating information, and the risk factors affecting the Company and its business and the value of the Units being purchased hereunder, as described in or set forth in the periodic reports and schedules filed by the Company with the SEC (including all exhibits and financial statement schedules attached thereto or included therewith), including but not limited to: (1) FORM 10-K Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “ 34’ Act ”) for the fiscal year ended October 31, 2012; (2) FORM 10-Q Quarterly reports under Section 13 or 15(d) of the Act for the fiscal quarters ended January 31, 2013 and April 30, 2013; (3) the SCHEDULE 14A Definitive Proxy Statement relating to merger or acquisition and Additional Definitive Proxy soliciting materials and Rule 14a-12 materials; and (4) all FORM 8-K reports filed in the past twelve months, including but not limited to the Form 8-K reports filed in connection with the termination of the Asset Purchase Agreement entered into with Guardian Energy, the amendments to the forbearance agreements and related loan agreements between the Company and AgStar Financial Services, PCA, and the amended and restated loan agreement and interim subordinated loan agreements entered into on May 17, 2013. In addition, Subscriber acknowledges it has received the Company’s unaudited, non-public, financial statements for May 31, 2013 and June 30, 2013 and the 7-month and 8-month periods then ended, by reason of its appointees to the Company’s Board of Governors. Without limiting the foregoing, Subscriber acknowledges that the Company has affirmative covenants and payment obligations to AgStar in its loan agreements with AgStar, and that there are no assurances that the covenants and payment obligations will be met, that the Company will not violate loan covenants or payment obligations in the future, or that AgStar will not declare an event of default and exercise all of their rights and remedies under the loan agreement if the Company cannot cure any such defaults or violations.

Subscriber acknowledges and represents and warrants to the Company that Subscriber has received and carefully read: (i) the Company’s Confidential Disclosure Statement dated June 11, 2013, including appendices; (ii) the form of Indenture dated as of , 2013 among the Company and U.S. Bank National Association attached as Appendix E to the Disclosure Statement (the “Indenture”); (iii) the form of Note to be delivered under and governed by the Indenture attached as Exhibit A to the Indenture; (iv) the form of Indenture Subordination Agreement dated effective as of , 2013 by and between AgStar Financial Services, PCA and U.S. Bank National Association; and (v) all other information incorporated by reference into the Disclosure Statement relating to the Company, its business, or the Company’s offering of its 7.25% Secured Subordinated Notes due 2018 (the “ Notes ”) pursuant to the terms and conditions of the Disclosure Statement (the “ Notes

Offering ”), as supplemented in accordance with the Subscription Supplement Agreement referenced herein. Subscriber acknowledges and understands that the Company will amend the Notes Offering and require subscribers to the Notes to confirm their subscription in accordance with the Subscription Supplement Agreement of even date herewith by and among Subscriber, the Company, and Granite Falls Energy, LLC (“ Subscription Supplement Agreement ”).

b. Access to Information. Subscriber represents that it or its representatives has been given access to full and complete information regarding the Company and has had an opportunity to obtain, and has received, any and all additional information deemed necessary by Subscriber in order to form a decision regarding an investment in the Company, and Subscriber has utilized such access to Subscriber’s satisfaction. As a result, Subscriber believes it has sufficient knowledge about the business, management and financial affairs of the Company, the Company’s ethanol plant and subsidiaries and the operations thereof, the planned used of proceeds of this subscription, the terms and conditions of this Subscription Agreement, the Notes Offering described in the Disclosure Statement, the planned amendment and confirmation procedures with respect to the Notes Offering, the Articles and Member Control Agreement, the terms and conditions of the purchase of Units contemplated hereby, and any other relevant matters, to make an informed investment decision regarding an investment in the Company and the purchase of Units contemplated hereby.

c . High Degree of Risk . Subscriber realizes that an investment in the Units involves a high degree of risk, including, but not limited to, the risks of receiving no return on the investment and of losing Subscriber’s entire investment in the Company.

d. Ability to Bear the Risk . Subscriber is able to bear the economic risk of investment in the Units, including the total loss of such investment.

e. No Market for Units; Restrictions on Transfer . Subscriber realizes that (i) there are substantial restrictions on the transfer of the Units, both under the Securities Act and State Laws, as well as under the Articles and the Member Control Agreement; (ii) there is not currently, and it is unlikely that in the future there will exist, a public market for the Units; and (iii) accordingly, for the above and other reasons, Subscriber may not be able to liquidate an investment in the Units for an indefinite period. Subscriber realizes that the Units have not been registered for sale under the Securities Act of 1933, as amended (the “ Securities Act ”) or applicable state securities laws (the “ State Laws ”). Subscriber acknowledges and agrees that the Units may be sold only pursuant to registration under the Securities Act and State Laws, or an opinion of counsel acceptable to the Company that such registration is not required, and in accordance with the Articles and the Member Control Agreement.

f. Suitability . Subscriber believes that the investment in the Units is suitable for the undersigned based upon Subscriber’s investment objectives and financial needs, and Subscriber has adequate means for providing for his, her or its current financial needs and personal contingencies and has no need for liquidity of investment with respect to the Units. Subscriber has such knowledge and experience in financial and business matters that he, she or it is capable of evaluating the merits and risks of an investment in the Units or Subscriber has obtained, to the extent Subscriber deems necessary, his, her or its own professional advice with respect to the risks inherent in the investment in the Units, and the suitability of the investment in the Units in light of Subscriber’s financial condition and investment needs.

g. Investment Intent . Subscriber has been advised that the Units are not being registered under the Securities Act or the relevant State Laws but are being offered and sold pursuant to exemptions from such laws and that the Company’s reliance upon such exemptions is predicated in part on

Subscriber’s representations to it as contained herein. Subscriber represents and warrants that the Units are being purchased for Subscriber’s own account and for Subscriber’s investment and without the intention of reselling or redistributing the same, that Subscriber has made no agreement with others regarding any of the Units and that Subscriber’s financial condition is such that it is not likely that it will be necessary to dispose of any of the Units in the foreseeable future. Subscriber is aware that, in the view of the Securities and Exchange Commission, a purchase of the Units with an intent to resell by reason of any foreseeable specific contingency or anticipated change in market values, or any change in the condition of the Company, or in connection with a contemplated liquidation or settlement of any loan obtained for the acquisition of the Units and for which the Units were pledged as security, would represent an intent inconsistent with the representations set forth above. Subscriber further represents and agrees that if, contrary to the foregoing stated intentions, Subscriber should later desire to dispose of or transfer any of the Units in any manner, he, she or it shall not do so without first obtaining the consent of the Company as required by the Company’s Articles and the Member Control Agreement and (i) the opinion of counsel satisfactory to the Company that such proposed disposition or transfer lawfully may be made without the registration of the Units pursuant to the Securities Act and applicable State Laws, or (ii) such registration (it being expressly understood that the Company shall not have any obligation to register such Units for such purpose).

h. Brokers or Finders . Subscriber has not taken any action that will cause the Company to incur, directly or indirectly, any liability for brokerage or finders’ fees or agents’ commissions or any similar charges in connection with this Subscription Agreement.

i. Tax Liability . Subscriber has reviewed with Subscriber’s own tax advisors the tax consequences of this investment and the transactions contemplated by this Subscription Agreement, and has and will rely solely on such advisors and not on any statements or representations of the Company or any of its agents. Subscriber understands that Subscriber (and not the Company) shall be responsible for Subscriber’s own tax liability that may arise as a result of this investment or the transactions contemplated by this Subscription Agreement.

j. Residency. Subscriber specifically represents and warrants to the Company that Subscriber is a resident of the State of Minnesota ( please complete) and is not a resident of any other State.

Please check one indicating the basis for Subscriber’s residency:

o		Subscriber is an individual that has, at the time of the offer and sale to him or her, his or her principal residence in Minnesota.

x		Subscriber is a corporation, partnership, trust or other form of business organization that has, at the time of the offer and sale to it, its principal office within Minnesota.

o		Subscriber is a corporation, partnership, trust or other form of business organization that is organized for the specific purpose of acquiring Units and all of the beneficial owners of that organization are residents of the State of Minnesota.

STOP : Subscriber must be a resident of the State of Minnesota in order to be eligible to subscribe for Units. If Subscriber is not a resident of Minnesota or is a resident of another State, Subscriber may not subscribe for Units.

3. Accredited Status .

SECTION 3 IS REQUIRED IN CONNECTION WITH THE EXEMPTIONS FROM THE SECURITIES ACT AND STATE LAWS BEING RELIED ON BY THE COMPANY WITH RESPECT TO THE OFFER AND SALE OF THE UNITS. SUBJECT TO SECURITIES LAWS REQUIREMENTS, ALL FINANCIAL INFORMATION IN SECTION 3 WILL BE KEPT CONFIDENTIAL, AND WILL BE REVIEWED ONLY BY THE COMPANY AND ITS COUNSEL, EXCEPT AS DISCLOSURE MAY BE REQUIRED OR COMPELLED UNDER APPLICABLE SECURITIES LAWS. The undersigned agrees to furnish any additional information that the Company or its counsel deems reasonably necessary in order to verify the responses set forth below.

Subscriber represents and warrants as follows (EACH SUBSCRIBER MUST COMPLETE. PLEASE CHECK ALL THAT APPLY — YOU MUST BE AN ACCREDITED INVESTOR TO PURCHASE THE NOTE ):

INDIVIDUALS

o (a) Subscriber (hereinafter in this Section 3, “the undersigned”) is an individual with a net worth, or a joint net worth together with his or her spouse, in excess of $1,000,000. (In calculating net worth, the persons primary residence shall not be included as an asset, and indebtedness that is secured by the person’s primary residence, up to the estimated fair market value of the primary residence at the time of the sale of the securities, shall not be included as a liability, except that if the amount of such indebtedness outstanding at the time of sale of securities exceeds the amount outstanding 60 days before such time, other than as a result of acquisition of the primary residence, the amount of such excess shall be included as a liability. Indebtedness that is secured by the person’s primary residence in excess of the estimated fair market value of the primary residence at the time of the sale of securities shall be included as a liability. You may include equity in personal property and real estate, excluding your primary residence, cash, short-term investments, stock and securities. Equity in personal property and real estate, excluding your primary residence, should be based on the fair market value of such property minus debt secured by such property.)

o (b) The undersigned is an individual that had an individual income in excess of $200,000 in each of the prior two years and reasonably expects an income in excess of $200,000 in the current year.

o (c) The undersigned is an individual that had with his/her spouse joint income in excess of $300,000 in each of the prior two years and reasonably expects joint income in excess of $300,000 in the current year.

o (d) The undersigned is a director or executive officer or general partner (or its equivalent) of the Company.

ENTITIES

o (e) The undersigned, if other than an individual, is an entity all of whose equity owners meet one of the tests set forth in (a) through (d) above. (If relying on this category alone, each equity owner must complete a separate copy of this Subscription Agreement .)

x (f) The undersigned is an entity, and is an “Accredited Investor” as defined in Rule 501(a) of Regulation D under the Securities Act. This representation is based on the following (check one or more, as applicable):

o (i) The undersigned (or, in the case of a trust, the undersigned trustee) is a bank or savings and loan association as defined in Sections 3(a)(2) and 3(a)(5)(A), respectively, of the Securities Act acting either in its individual or fiduciary capacity.

o (ii) The undersigned is an insurance company as defined in Section 2(13) of the Securities Act.

o (iii) The undersigned is an investment company registered under the Investment Company Act of 1940 or a business development Company as defined in Section 2(a)(48) of that Act.

o (iv) The undersigned is a Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958.

o (v) The undersigned is an employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974 and either (check one or more, as applicable):

o (aa) the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such Act, which is either a bank, savings and loan association, insurance Company, or registered investment adviser; or

o (bb) the employee benefit plan has total assets in excess of $5,000,000; or

o (cc) the plan is a self-directed plan with investment decisions made solely by persons who are “Accredited Investors” as defined under the Securities Act.

o (vi) The undersigned is a private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940.

x (vii) The undersigned has total assets in excess of $5,000,000, was not formed for the specific purpose of acquiring securities of the Company and is one or more of the following (check one or more, as appropriate):

o (aa) an organization described in Section 501(c)(3) of the Internal Revenue Code; or

x (bb) a corporation or limited liability company; or

o (cc) a Massachusetts or similar business trust; or

o (dd) a partnership.

o (viii) The undersigned is a trust with total assets exceeding $5,000,000, which was not formed for the specific purpose of acquiring securities of the Company and whose purchase is directed by a person who has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the investment in the Units.

4. Entities.

If Subscriber is an entity, the individual signing on behalf of such entity and the entity jointly and severally agree and certify that:

a. if entity is accredited solely by reason of the category described in Section 3(f)(vii) or (viii) above, then the undersigned entity was not organized for the specific purpose of acquiring the Units; and

b. this Subscription Agreement has been duly authorized by all necessary action on the part of the undersigned entity, has been duly executed by an authorized officer or representative of the undersigned entity, and each is a legal, valid, and binding obligation of the undersigned entity enforceable in accordance with its terms.

5. Relationship to Brokerage Firms.

(Please answer the following questions by checking the appropriate response.)

a. o YES x NO: Are you a director, officer, partner, branch manager, registered representative, employee, shareholder of, or similarly related to or employed by a brokerage firm?

b. o YES x NO: Is your spouse, father, mother, father-in-law, mother-in-law, or any of your brothers, sisters, brothers-in-law, sisters-in-law or children, or any relative which you support, a director, officer, partner, branch manager, registered representative, employee, shareholder of, or similarly related to or engaged by, a brokerage firm?

c. o YES x NO: Does Subscriber own voting securities of any brokerage firm?

d. o YES x NO: If the undersigned is an entity, is any director, officer, partner or 5% owner of the undersigned also a director, officer, partner, branch manager, registered representative, employee, shareholder of, or similarly related to or employed by, a brokerage firm?

e. If the answer to any of the above items is “YES”, please supply details below:

6. Securities Law Exemptions.

Subscriber acknowledges that the offer and sale of the Units has not been registered under the Securities Act, or any state securities laws and that the Company will offer and sell the Units and the Units will be issued to Subscriber in reliance on exemptions from the registration requirements of the Securities Act and exemptions under applicable state securities laws and in reliance on the representations, warranties and agreements made by Subscriber herein. Without limiting the foregoing, the Units were offered and sold in reliance on exemptions from federal and state securities laws including without limitation section 4(2) of the Securities Act covering nonpublic offers and sales and section 3(a)(11) and Rule 147 of the Securities Act covering intrastate offers and sales of securities. Accordingly, Subscriber agrees not to sell, pledge, distribute, offer for sale, transfer or otherwise dispose of the Units in the absence of: (i) an effective registration statement under the Securities Act as to the Units and registration or qualification of the Units under any applicable federal or state securities laws then in effect; or (ii) an opinion of counsel, satisfactory to the Company, that such registration and qualification are not required. Additionally, the Units may be sold or transferred only to persons resident of the State of Minnesota during the period in which the Notes are being offered and sold by the Company and for a period of nine months from the date of last sale by the Company of such securities.

7. Restrictive Legend.

In addition to the restrictions to transfer of the Units contained in the Articles and Member Control Agreement, and any corresponding restrictive legends required thereunder, Subscriber also agrees that the Company shall place a restrictive legend on any statement of interest prepared by the Company with respect to the Units containing substantially the following language:

The securities represented by this Statement of Interest have not been registered under the Securities Act of 1933, as amended (the “Act”) or under applicable state securities laws and are also subject to a Subscription Agreement. The securities may not be sold, transferred or pledged in the absence of such registration, unless pursuant to an exemption from the registration requirements of the Act and applicable state securities laws. The Company reserves the right to require an opinion of counsel satisfactory to it before effecting any transfer of the securities. Without limiting the foregoing, the Units were offered and sold in reliance on section 4(2) of the Act and section 3(a)(11) and Rule 147 of the Act covering intrastate offers and sales of securities. Accordingly, the Units may be sold or transferred only to persons resident of the State of Minnesota during the period in which the Notes are being offered and sold by the Company and for a period of nine months from the date of last sale by the Company of such securities.

8. Miscellaneous.

a. Survival of Representations and Warranties; Indemnification . Subscriber understands the meaning and legal consequences of the agreements, representations and warranties contained herein, agrees that such agreements, representations and warranties shall survive and remain in full force and effect after the execution hereof and payment for the Units, and further agrees to indemnify and hold harmless the Company and each current and future employee, agent and member of the Company from and against any and all loss, damage or liability due to, or arising out of, a breach of any agreement, representation or warranty of the undersigned contained herein.

b. No Assignment or Revocation; Binding Effect . Neither this Subscription Agreement, nor any interest herein, shall be assignable by Subscriber without prior written consent of the Company.

Subscriber hereby acknowledges and agrees that Subscriber is not entitled to cancel, terminate or revoke this Subscription Agreement and that it shall survive the death, incapacity, dissolution or bankruptcy of Subscriber. The provisions of this Subscription Agreement shall be binding upon and inure to the benefit of the parties hereto, and their respective heirs, legal representatives, successors and assigns.

c. Choice of Law . This Subscription Agreement shall be construed and interpreted in accordance with Minnesota law, without regard to its choice of law or conflicts of law provisions.

9. Representations and Warranties of the Company.

In consideration of Subscriber’s agreement to purchase the Units, the Company represents and warrants to Subscriber as follows:

a. Existence . The Company is a duly organized and validly existing limited liability company under the laws of the State of Minnesota.

b. Good Standing . The Company is in good standing under the laws of the State of Minnesota and there are no proceedings or actions pending to limit or impair any of its powers, rights, privileges, or to dissolve it.

c. Due Authorization and Approval . The execution, delivery and performance of this Subscription Agreement and the consummation of the transactions contemplated hereby have been duly authorized by proper corporate action of the Company and do not contravene the Articles or Member Control Agreement or contractual restriction binding on or affecting the Company.

d. Class B Units . Neither the Company nor its Board of Governors has increased the minimum ownership requirements of or placed other membership restrictions on the holders of Class B Units. The Class B Units issued pursuant to this Subscription Agreement are identical to the Company’s Class A Units with respect to all rights and privileges.

e. Units . Upon receipt of full payment for the Units, the Units shall be duly authorized, fully-paid, validly issued and non-assessable Units of the Company.

10. Additional Agreements.

a. Subscription Supplement Agreement; Voting Agreement to Waive Purchase Option . As a material part of the consideration for each party to enter into and accept this Subscription Agreement, the parties acknowledge that they have entered into the Subscription Supplement Agreement and the Voting Agreement to Waive Purchase Option contemporaneously with this Subscription Agreement, and all respective representations, warranties, agreements and covenants of the parties thereunder shall be in addition to, and not limited by, superseded, or replaced by, the representations, warranties, agreements and covenants of the parties hereunder.

* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *

SIGNATURE

/s/ Ron Fagen
Subscriber (Signature)		Subscriber (Signature, if more than one investor)


Project Viking, LLC
Print Name of Subscriber		Print Name of Subscriber (If more than one investor)


/s/ Ron Fagen, President & Managing Member
Name and Title of Signatory (for entities)

Address:


501 W. Highway 212


P.O. Box 159


Granite Falls, MN 56241

NOTE : Please be certain to complete the Subscriber Information Page attached hereto and, if Subscriber is an entity, the attached Certificate of Signatory.

ACCEPTANCE OF SUBSCRIPTION AND AGREEMENT TO TERMS

The Company hereby accepts the subscription evidenced by this Subscription Agreement including Investment Representations, effective as of July 31, 2013.

HERON LAKE BIOENERGY, LLC


By:	/s/ Robert Ferguson
		Its:	CEO

SUBSCRIBER INFORMATION

Project Viking LLC
(Please print name(s) in which the Note is to be issued)


25-1922419
Taxpayer I.D. No.				Taxpayer I.D. No.
				(If more than one investor)


501 W. Hwy 212 — P.O. Box 159
Address

City: Granite Falls		State:	MN	Zip Code:56241

Telephone Number: (320) 564-3324


Name of Authorized Representative (if other than individual): Ron or Diane Fagen


Form of Ownership : (check one)


o	Individual Ownership			o	Tenants in Common

o	Joint Tenants (JTWROS)			o	Corporation

x	Limited Liability Company			o	Trust (Signature and title pages of Trust Agreement and all amendments must be enclosed)

				Trustee Name:
				Trust Date:

				o	Other: Provide information below.

CERTIFICATE OF SIGNATORY

(To be completed if Units are being subscribed for by an Entity)

I, Ron Fagen, am the President & Managing Member of Project Viking, LLC (the “Entity”).

I certify that I am empowered and duly authorized by the Entity to execute and carry out the terms of this Subscription Agreement and to purchase and hold the Units pursuant to the terms of this Subscription Agreement and the Company’s Articles and the Member Control Agreement, and to act on behalf of the Entity with respect to any actions or consents of the Entity required thereunder or this Subscription Agreement. I further certify that this Subscription Agreement and such actions or consents been duly and validly executed on behalf of the Entity and each constitutes a legal and binding obligation of the Entity.

IN WITNESS WHEREOF, I have set my hand hereto effective July 31, 2013.

	/s/ Roland J. Fagen
	(Signature)


	President & Managing Member
	(Title)


	Roland J. Fagen
	(Please Print Name)

EXHIBIT 10.3

SUBSCRIPTION SUPPLEMENT AGREEMENT

This Subscription Supplement Agreement (this “ Agreement ”) is made and entered into as of July 31, 2013 (the “ Effective Date ”), by and among Heron Lake BioEnergy, LLC (the “ Company ”), Granite Falls Energy, LLC, a Minnesota limited liability company (“ GFE ”) and Project Viking, L.L.C., a Minnesota limited liability company (“ Project Viking ”) (each of the Company, GFE and Project Viking, a “ Party ” to this Agreement, and collectively, the “ Parties ”).

RECITALS

WHEREAS, on the Effective Date, Project Viking subscribed for 8,075,000 Class A capital units and 15,000,000 Class B capital units of the Company (collectively, the “ Purchased Units ”), at a purchase price of $0.30 per capital unit, upon the terms and conditions set forth in a Subscription Agreement of even date herewith (the “ Viking Subscription Agreement ”), for a total purchase price for the Purchased Units of $6,922,500.00;

WHEREAS, immediately following execution and delivery of the Viking Subscription Agreement to the Company, acceptance by the Company, and delivery by wire transfer of the total purchase price for the Units by Project Viking, GFE acquired and fully-paid for 100% of the membership interests of Project Viking (including all governance rights and financial rights) from Roland J. Fagen and Diane K. Fagen pursuant to a Membership Interest Purchase Agreement of even date herewith, said acquisition effective on the Effective Date;

WHEREAS, to supplement the Viking Subscription Agreement, the Parties desire to make certain representations and warranties to one another as provided in this Agreement;

WHEREAS, the Company, GFE and Project Viking have reached agreement with respect to the appointment of governors to the Company’s Board of Governors (the “ Board ”), the voting of any Class A Units or Class B Units including the Purchase Units (collectively, the “ Units ”) held by Project Viking on certain matters, and certain other governance matters, as provided in this Agreement;

WHEREAS, the Company is also offering a maximum of $12 million in aggregate principal amount of promissory notes (the “ Offering ”) titled “7.25% Secured Subordinated Notes due 2018” (the “ Notes ”) pursuant to the terms of that certain Confidential Disclosure Statement dated June 11, 2013, as supplemented on June 21, 2013 (the “ Disclosure Statement ”);

NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto, intending to be legally bound hereby, agree as follows:

1. Governance Agreements . The Company, Project Viking, GFE each agree as follows:

a. The Company acknowledges and agrees that following the issuance of the Purchased Units to Project Viking on the Effective Date, Project Viking owns

***24,080,949*** Class A Units of the Company and ***15,000,000*** Class B Units of the Company, for a total of ***39,080,949*** Units of the Company, which number of Units held by Project Viking constitutes a majority of the Units outstanding as of the Effective Date.

b. As of the close of business on the Effective Date, under Section 5.3(a)(iv) of the Member Control Agreement of the Company as amended through August 30, 2011 (the “ Member Control Agreement ”), a copy of which was attached to the Disclosure Statement as Appendix B, Project Viking is entitled to appoint five (5) governors to the Board.

c. One of the five (5) elected governors currently serving on the Board of Governors of the Company shall resign from the Board, effective as of the close of business on the Effective Date. The written resignation shall be made in writing and shall be delivered to the acting President of the Board on August 1, 2013, and said resignation shall not require acceptance of resignation to make it effective. The elected governor who resigns shall serve as an alternate to the remaining four (4) elected governors.

d. Project Viking hereby provides written notice to the Board and the Company that Kenton Johnson and Steve Core are removed from the Board, effective as of close of business on the Effective Date. Project Viking hereby appoints the following five (5) governors to the Board pursuant to Section 5.3(a)(iv) of the Member Control Agreement, effective as of the close of business on the Effective Date: Paul Enstad, Rodney Wilkison, Dean Buesing, Marten Goulet, and Shannon Johnson. Project Viking hereby appoints Leslie Bergquist and David Thompson to serve as alternates to the five (5) Project Viking appointed governors.

e. Alternates will receive notice of all Board meetings and all information provided the Board. Alternates shall be entitled to attend all meeting of the Board. Alternates shall not be entitled to vote at Board meetings, provided that alternates may participate in Board meetings, and provided further that alternates shall serve as replacement governors and shall be entitled to vote at any Board meeting at which the appointed governor or elected governor for which the alternate is serving as alternate is absent.

f. Project Viking shall cause each governor it has a right to appoint under Section 5.3(a)(iv) to vote in favor of the Specified Amendments and in favor of such matters as are necessary to call a meeting of the members as soon as practicable following the Effective Date to consider the Specified Amendments and provide a Board recommendation to vote in favor of the Specified Amendments. The term “ Specified Amendments ” shall mean (i) an amendment to Section 5.1(c) of the Member Control Agreement to add those actions identified in Section 5.1(d)(i)-(iv) of the Member Control Agreement to the actions, agreements, instruments or items specified in Section 5.1(c) that require the affirmative vote of at least two-thirds of the voting power of the governors in office, (ii) an amendment to Section 5.1(k) of the Member Control Agreement to add provisions consistent with this Agreement relating to alternates acting

in the place and stead of absentee governors, and (iii) and amendment to Section 6.2(a) to delete the last sentence thereof.

g. A t any meeting, and at every adjournment or postponement thereof, with respect to outstanding Units owned beneficially or of record by Project Viking, Project Viking shall: (i) appear at such meeting or otherwise cause such Units to be counted as present thereat for purposes of establishing a quorum; (ii) vote or cause to be voted such Units in favor of the Specified Amendments and any action required in furtherance thereof; and (iii) vote or cause to be voted, or execute consents in respect of, such Units against any proposal, action or transaction presented to the members of the Company (regardless of any recommendation of the Board) or in respect of which vote or consent of Project Viking is requested or sought (A) that could reasonably be expected to prevent or materially impede or delay the effectiveness of the Specified Amendments (including any proposal to amend Section 5.1(c) of the Member Control Agreement in a manner other than the Specified Amendments), (B) to change in any manner the voting rights of the Units or the appointment rights of Members or their Affiliates, or (C) to alter or amend in any manner Section 5.6 or Section 5.8 with respect to contracts or transactions between the Company and Governors or their Affiliates.

h. Until the approval of the Specified Amendments by members, Project Viking shall cause each governor it has a right to appoint under Section 5.3(a)(iv) to vote in favor of any action identified in Section 5.1(d)(i)-(iv) of the Member Control Agreement only if at least one elected governor then serving on the Board also votes in favor of such action.

i. Project Viking hereby covenants and agrees that, except for actions taken in furtherance of this Agreement, Project Viking (i) has not entered, and shall not enter at any time while this Agreement remains in effect, into any voting agreement or voting trust with respect to the Units owned beneficially or of record by Project Viking or its Affiliates; and (ii) has not granted, and shall not grant at any time while this Agreement remains in effect, a proxy, consent or power of attorney with respect to the Units owned beneficially or of record by Project Viking or its Affiliates that is inconsistent with Project Viking or its appoint governors obligations under this Agreement. During the term of this Agreement, Project Viking shall not take any action that would in any way restrict, limit or interfere with the performance of Project Viking’s obligations hereunder or the effectiveness of the Specified Amendments as contemplated hereby on a timely basis.

j. GFE shall cause Project Viking to act in compliance with its covenants and obligations under this Agreement and the Viking Subscription Agreement.

2. Company Representations and Warranties . The Company represents and warrants to Project Viking that:

a. The Company is authorized to issue 80,000,000 capital units, of which 65,000,000 capital units are designated as Class A Units and 15,000,000 capital units are designated Class B Units. Immediately prior to the Effective Date, 38,622,107 Class A

Units are issued and outstanding and no Class B Units are issued and outstanding. Following completion of the Offering and the issuance of the Purchased Units to Project Viking pursuant to the Viking Subscription Agreement, and assuming Project Viking elects to convert its Interim Subordinated Note in the amount of $102,000.00 to capital units, Project Viking shall own, on a fully diluted basis, a majority of the issued and outstanding capital units of the Company.

b. The Company has placed no increased minimum ownership requirements or other membership restrictions on the holders of Class B Units.

c. Other than the Viking Subscription Agreement, there are no outstanding subscriptions, options, warrants, calls, contracts, demands, commitments, convertible securities or other agreements or arrangements of any character or nature whatever under which the Company is obligated to issue any securities of any kind representing an ownership interest in the Company, except for subscriptions for approximately $6,650,000 in principal amount of Notes (“Member and Non-Member Subscriptions”) currently held in escrow, $1,407,000 in principal amount of Interim Subordinated Notes (as defined in the Disclosure Statement) to be exchanged for an equal principal amount of Notes, and the Units issuable upon conversion of the Notes. With respect to Member and Non-Member Subscriptions currently held in escrow or subscriptions for Notes subsequently received by the Company, the Company shall accept no more than $3,670,500 of such subscriptions. For the sake of clarity, such maximum amount does not include the principal amount of the Interim Subordinated Notes or any exchange for Notes therefor.

d. Within ten (10) days following the Effective Date, the Company will initiate a confirmation/re-subscription process with all Member and Non-Member Subscriptions and holders of the Interim Subordinated Notes by: (i) providing such persons and the other members of the Company a supplement to the Disclosure Statement that describes (1) the change of ownership of Project Viking and its material terms, (2) the Viking Subscription Agreement, (3) the material terms of this Agreement including exhibits, (4) updated AgStar information, and (5) such other material information determined by the Company; and (ii) allowing such persons to (1) confirm / re-subscribe their subscription or Interim Subordinated Notes for Notes pursuant to the terms of the Offering under the Disclosure Statement, as supplemented or amended, or (2) elect to convert the principal amount of their subscription or Interim Subordinated Notes into a subscription for capital units, at the rate of $0.30 per unit. The subscription payments of such persons (other than the holders of the Interim Subordinated Notes, who shall not have the right to rescind their obligation to exchange the Interim Subordinated Notes for Notes under the Offering or capital units) who do not affirmatively confirm / re-subscribe their subscription by the end of the confirmation / re-subscription period (which shall be no later than August 31) shall be returned promptly to the subscriber from escrow without interest or deduction.

e. At the end of the confirmation / re-subscription period, the Company will accept all confirmed / re-subscribed subscriptions in the Offering for Notes or capital units in the original order in which the subscription was received, on a first-come, first-

served basis, to purchase $3,670,500 in principal amount of Notes or capital units, such that the Company shall issue a maximum of $5,077,500 in principal amount of Notes or capital units (at $0.30 per unit) in the Offering, including the Notes exchanged for the $1,407,00 in Interim Subordinated Notes, but excluding the Purchased Units issued to Project Viking pursuant to the Viking Subscription Agreement. If the principal amount of confirmed / re-subscribed subscriptions of Member and Non-Member Subscriptions is less than $3,670,500, the Company shall continue to offer Notes pursuant to the terms of the Offering in the Disclosure Statement (as supplemented or amended). The Company shall not issue more than $5,077,500 in principal amount of Notes or capital units (at $0.30 per unit) in the Offering, including the Notes exchanged for the $1,407,000 in Interim Subordinated Notes.

f. Neither the offer nor the issuance or sale of the Purchased Units or the Notes constitutes an event, under any anti-dilution provisions of any securities issued or issuable by the Company or any agreements with respect to the issuance of securities by the Company, which will either increase the number of Units issuable pursuant to such provisions or decrease the consideration per Units to be received by the Company pursuant to such provisions. No holder of any security of the Company is entitled to any preemptive or similar rights to purchase any securities of the Company, except as provided in the Notes.

g. The Company has no outstanding or contingent obligations to repurchase or redeem any of its securities from holders thereof except for the exchange of Interim Subordinated Notes for Notes. The Company is not a party or subject to any agreement or understanding, and to the knowledge of the Company, there is no agreement or understanding, that effects or relates to transfers, voting or the giving of written consents with respect to any security of the Company, or by any member of the Board, except for the Member Control Agreement and this Agreement.

h. All corporate action necessary to the issuance and delivery of the Purchased Units to Project Viking has been taken by the Company or will be taken by the Company on or prior to the Effective Date. When (i) the terms of the Notes have been established in accordance with the Indenture in the form attached as Appendix E to the Disclosure Statement, (ii) the Indenture has been validly executed and delivered by the Company and the trustee thereunder and (iii) the Notes have been executed, issued, delivered and authenticated in accordance with the terms of the Indenture and the applicable subscription agreement against the receipt of requisite consideration therefor provided for therein, the Notes will constitute legal, valid and binding obligations of the Company, except as enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or similar laws generally affecting the rights of creditors and subject to general equity principles. With respect to the Units issuable upon conversion of the Notes, when the Units have been issued and delivered in accordance with the terms of the Note, such Units will be validly issued, fully paid and non-assessable.

i. The execution, delivery and performance of this Agreement has been duly authorized and approved by proper corporate action of the Company, and does not

contravene the Articles of Organization or Member Control Agreement of the Company or any law or contractual restriction binding on or affecting the Company.

j. As of the date hereof, the Company does not have any liabilities, obligations or commitments, except for liabilities, obligations or commitments which (i) are described in, set forth or referenced in the periodic reports and schedules filed by the Company with the SEC (including all exhibits and financial statements and financial statement schedules attached thereto or included therewith) or the unaudited financial statements that are referred to or referenced in Section 2.a. of the Viking Subscription Agreement, (ii) fully-covered by insurance, except for reasonable deductibles or self-insured retention levels, (iii) incurred in the ordinary course of business consistent with past practices, (iv) are described in, set forth or referenced in the Disclosure Statement, as supplemented or amended, including all appendices, (v) arise under this Agreement or the Viking Subscription Agreement, (vi) individually or in the aggregate would not have a material adverse effect on the business, property, operations or financial condition of the Company, or (vii) which have otherwise been disclosed to GFE or its representatives.

k. As of the date hereof, the Company is in compliance in all material respects with all applicable laws the violation of which would have a material adverse effect on the Company and its business as currently conducted. As of the date hereof, the Company has all material licenses and permits required by law or otherwise necessary for the proper operation of its business as currently conducted, and all of such licenses and permits are in full force and effect.

l. Since the date of the Disclosure Statement, the Company’s ethanol plant has operated in the ordinary course of business consistent with past practice and its nameplate capacity, ordinary wear and tear excepted.

m. Notwithstanding anything herein or in the Viking Subscription Agreement to the contrary, except for the due authorization and approval representation and warranty made by the Company under Section 2.h. hereof, no warranty or representation is made regarding any shareholder or member claim asserting breach of fiduciary duty by the Board or its governors or violation of the Member Control Agreement or applicable law in connection with the Offering or the Viking Subscription Agreement or this Agreement or the absence thereof.

3. Representations of GFE and Project Viking .

a. GFE and Project Viking each represent and warrant to the Company that as of the Effective Date, GFE has acquired and fully-paid for 100% of the membership interests of Project Viking, GFE has sole voting and dispositive power over all of the Units and Interim Subordinated Notes held by Project Viking, with no limitations, qualification or restrictions on such rights imposed by Roland J. Fagen, Diane K. Fagen or any other person as a result of the sale and transfer to GFE from Roland J. Fagen and Diane K. Fagen of 100% of the membership interests in Project Viking.

b. In consideration of the Company’s offer to sell and sale and issuance of the Purchased Units to Project Viking, GFE hereby represents and warrants and covenants to the Company each of the representations, warranties and covenants set forth in Sections 2, 3, 5, 6, 7, 8 and 10 of the Viking Subscription Agreement, including without limitation that GFE has received and carefully read the Disclosure Statement and appendices thereto.

c. GFE represents and warrants to the Company that the execution, delivery and performance of this Agreement has been duly authorized and approved by proper corporate action of GFE, and does not contravene GFE’s organizational documents or any law or contractual restriction binding on or affecting GFE.

d. Project Viking represents and warrants to the Company that the execution, delivery and performance of the Viking Subscription Agreement and this Agreement has been duly authorized and approved by proper corporate action of Project Viking, and does not contravene Project Viking’s organizational documents or any law or contractual obligation or restriction binding on or affecting Project Viking.

4. Management Agreement . GFE and the Company agree to execute and enter into the Management Services Agreement attached hereto as Exhibit A , effective as of the Effective Date.

5. Agrinatural Gas, LLC . GFE, the Company, and Project Viking each agree to execute and deliver the Voting Agreement to Waive Purchase Option in the form attached hereto as Exhibit B .

6. Specific Performance . Each Party acknowledges and agrees that irreparable injury to the other Parties hereto would occur in the event any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached and that such injury may not be adequately compensable by the remedies available at law (including the payment of money damages). It is accordingly agreed that each Party (the “ Moving Party ”) shall each be entitled to specific enforcement of, and injunctive relief to prevent any violation of, the terms hereof, without the requirement to post bond or other security, and no other Party hereto will take action, directly or indirectly, in opposition to the Moving Party seeking such relief on the grounds that any other remedy or relief is available at law or in equity. Each of the Parties hereto irrevocably agrees that any legal action or proceeding with respect to this Agreement for specific performance or for recognition and enforcement of any judgment in respect of this Agreement shall be brought and determined exclusively in the state or federal court of Minnesota and any state or federal appellate court therefrom within the State of Minnesota or the Eighth Judicial Circuit. Each of the Parties hereto hereby irrevocably submits, with regard to any such action or proceeding for itself and in respect of its property, generally and unconditionally, to the personal jurisdiction of the aforesaid courts and agrees that it will not bring any such action in any court other than the aforesaid courts. Each of the Parties hereto hereby irrevocably waives, and agrees not to assert in any such action or proceeding, (a) any claim that it is not personally subject to the jurisdiction of the above-named courts for any reason, (b) any claim that it or its property is exempt or immune from jurisdiction of any such court or from any such legal process commenced in such courts (whether through service of notice, attachment prior to judgment,

attachment in aid of execution of judgment, execution of judgment or otherwise) and (c) to the fullest extent permitted by applicable legal requirements, any claim that (i) the suit, action or proceeding in such court is brought in an inconvenient forum, (ii) the venue of such suit, action or proceeding is improper or (iii) such action may not be enforced in or by such courts. This Section 6 is not the exclusive remedy for any violation of this Agreement.

7. Severability . If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. It is hereby stipulated and declared to be the intention of the Parties that the Parties would have executed the remaining terms, provisions, covenants and restrictions without including any of such which may be hereafter declared invalid, void or unenforceable. In addition, the Parties agree to use their best efforts to agree upon and substitute a valid and enforceable term, provision, covenant or restriction for any of such that is held invalid, void or enforceable by a court of competent jurisdiction.

8. Governing Law . This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Minnesota without reference to the conflict of laws principles thereof. Notwithstanding any provision of the Member Control Agreement to the contrary, and except for actions brought under Section 6 of this Agreement, the Parties agree to resolve disputes arising out of or relating to this Agreement or the Viking Subscription Agreement pursuant to this Section 8. If any dispute arises out of or relates to this Agreement or the Viking Subscription Agreement, the parties agree first to try in good faith to settle the dispute by mediation under the Commercial Mediation Rules of the American Arbitration Association, before resorting to arbitration. Thereafter, any remaining unresolved controversy or claim arising out of or relating to this Agreement or the Viking Subscription Agreement, or the performance or breach thereof, shall be settled by binding arbitration pursuant to the Commercial Arbitration Rules of the American Arbitration Association; PROVIDED, that this Section 8 shall not require use of the American Arbitration Association (only that such Rules as modified by this Section 8 shall be followed). The arbitration shall be conducted in the State of Minnesota. Any award rendered shall be final and conclusive upon the parties and a judgment thereon may be entered in any court having competent jurisdiction. The cost and expense of the arbitrator and location costs shall be borne equally by the parties to the dispute. All other costs and expenses, including reasonable attorney’s fees and expert’s fees, of all parties incurred in any dispute which is determined and/or settled by arbitration pursuant to this Section 8 shall be borne by the party incurring such cost and expense.

9. Counterparts . This Agreement may be executed in two or more counterparts, each of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each of the Parties and delivered to the other Parties (including by means of electronic delivery or facsimile).

10. Entire Agreement; Amendment and Waiver; Successors and Assigns; Third Party Beneficiaries. This Agreement contains the entire understanding of the Parties hereto with respect to its subject matter. There are no restrictions, agreements, promises, representations, warranties, covenants or undertakings between the Parties other than those expressly set forth

herein. No modifications of this Agreement can be made except in writing signed by an authorized representative of each the Company, GFE and Project Viking. No failure on the part of any Party to exercise, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of such right, power or remedy by such Party preclude any other or further exercise thereof or the exercise of any other right, power or remedy. All remedies hereunder are cumulative and are not exclusive of any other remedies provided by law. The terms and conditions of this Agreement shall be binding upon, inure to the benefit of, and be enforceable by the Parties hereto and their respective successors, heirs, executors, legal representatives, and permitted assigns. No Party shall assign this Agreement or any rights or obligations hereunder without, with respect to Project Viking or GFE, the prior written consent of the Company, and with respect to the Company, the prior written consent of Project Viking and GFE. This Agreement is solely for the benefit of the Parties hereto and is not enforceable by any other persons.

IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the duly authorized signatories of the Parties as of the date hereof.

	HERON LAKE BIOENERGY, LLC

	By:	/s/ Robert Ferguson

	Its:	CEO

	Name:	Robert J. Ferguson


	GRANITE FALLS ENERGY, LLC

	By:	/s/ Paul Enstad

	Its:	Chairman

	Name:	Paul Enstad


	PROJECT VIKING, L.L.C.

	By:	/s/ Paul Enstad

	Its:	President

	Name:	Paul Enstad

EXHIBIT 10.4

MANAGEMENT SERVICES AGREEMENT

(INDEPENDENT CONTRACTOR AGREEMENT)

This MANAGEMENT SERVICES AGREEMENT (“Agreement”) is made and entered into to be effective as of the 31 st day of July, 2013, by and between Granite Falls Energy, LLC, a Minnesota Limited Liability Company (“GFE”) and Heron Lake BioEnergy, LLC, a Minnesota Limited Liability Company (“Heron”) and is as follows:

RECITALS

1. WHEREAS, GFE currently owns and operates an ethanol facility; and Heron currently owns and operates an ethanol facility; and

2. WHEREAS, Heron desires to obtain management services; and

3. WHEREAS, each requires terms and conditions as necessary to protect each company’s confidential/proprietary/trade secret information; and such terms and conditions as will cause all management employees to respect the separate interests and objectives of each company; and

4. WHEREAS, the parties have had discussions regarding such management services, have reached agreement as to the same, and wish to put their understandings and agreements in writing.

NOW, THEREFORE, for good and valuable consideration, the parties agree as follows:

1. MANAGEMENT SERVICES . GFE shall provide management services to Heron with respect to the following job descriptions and titles:

a. Positions Provided by GFE to Heron . GFE shall provide to Heron the following management services, to-wit:

i. Chief Executive Officer (CEO);

ii. Chief Financial Officer (CFO); and

iii. Commodity Risk Manager.

b. Time Commitment .

i. Each person providing services shall devote such time as is reasonably necessary to perform the services for Heron.

ii. Each person shall use their best efforts when performing work for Heron.

iii. Approximate hours worked per week by each position shall be disclosed at semi-annual meetings and reported to Heron no less than semi-annually.

c. Reporting and Organization . Each person filling one of the above described positions shall report as follows:

i. The CEO shall report directly to the Heron Board of Directors.

ii. The Heron Board of Directors reserves the right to require, from time to time, any of the above named persons to do such work or make such reports directly to or for the Heron Board.

iii. The CEO shall be solely responsible for hiring and firing of persons providing the management services as described herein.

iv. Nothing herein is intended to create an employment contract, or guaranty of employment, or a guaranty of employment for any length of time to any person. Each person providing management services hereunder shall, at all times, remain the employee of GFE designated to provide services as stated herein.

2. TERM AND TERMINATION . The initial term of this Agreement, subject to the remaining terms and conditions hereof, shall be for three years from the effective date as stated in the preamble hereof. With respect to the term and termination hereof:

a. Evergreen . At the expiration of the initial term, this Agreement shall continue from year to year under its then existing conditions unless and until a party hereto gives the other no less than ninety (90) days written notice of termination prior to expiration of the initial term or of the one year extension then in effect.

b. Termination for Cause . Notwithstanding the foregoing, this Agreement may be terminated for cause, as follows:

i. If a party seeks to terminate this Agreement for cause, it shall deliver to the other party written notice of termination; which notice shall describe the basis for determining cause exists; and which notice shall provide 30 days notice and opportunity to cure.

In the event that basis for determining cause has not been cured to the reasonable satisfaction of the party giving notice within 30 days, then the party may deliver notice that this Agreement has been terminated.

ii. Cause means:

A. A material breach of this Agreement. Material breach shall be: a failure of a party (to include failure of the person being provided by a party) to comply with applicable laws or regulations; a willful breach by a party (to include a person being provided by a party) of a term of this Agreement; or acts or conduct by a party (to include a person being provided by a party) which demonstrates intentional misconduct, reckless misconduct or grossly negligent misconduct.

B. A deadlock in the management of Heron. Deadlock shall be the occurrence of disagreements between the Board of Heron which, in the opinion of the GFE Board, has impaired the ability of the management team to carry out the policies and/or procedures as directed by one or both Boards of Directors.

c. Return of Confidential Information . Upon termination each party shall return to the other all of the other’s Confidential Information that may be in possession of the returning party.

d. Surviving Obligations . Payment of any reimbursement obligations which have accrued and are unpaid as of the date of termination, together with the obligations of the parties as set forth at Sections 4 — 7 hereof, shall survive termination hereof. In all other respects the obligations of the parties to each other shall cease upon termination hereof.

3. REIMBURSEMENT . The parties intend and agree that compensation by Heron to GFE shall occur as follows:

a. Compensation . GFE shall be responsible for and shall directly pay salary, wages, and/or benefits to the persons providing the management services hereunder.

b. Payment for Management Services . Heron shall pay GFE Thirty-five Thousand and no/100 Dollars ($35,000.00) per month for the first year for the management services provided hereunder. For years two and three, Heron shall pay GFE one-half (1/2) of the total salary, bonuses, and other +expenses and costs (including all benefits and tax contributions) incurred by GFE for the three management positions described at paragraph 1(a).

Such will be paid on an estimated monthly basis with a “true up” occurring as soon as possible at the end of each fiscal year of GFE.

c. Reimbursement of Costs . Any costs incurred in providing the management services, outside the scope of normal duties and activities, shall be reimbursed by Heron to GFE at reasonable and customary rates of reimbursement. (Such to include, but not be limited to, mileage, hotel rooms, etc.)

d. Payment . Payment by Heron to GFE for all amounts due GFE, shall occur on the 10 th day of each month. Payments for any partial month(s) of services shall be prorated.

4. SEPARATE RIGHTS AND RESPONSIBILITIES OF GFE AND HERON . The parties agree that to the following reservation of their separate rights and statement of their separate responsibilities, to-wit:

a. Separate Authority . Nothing herein shall be construed as a grant of authority by GFE as to Heron, or by Heron as to GFE, to make any management or other business decision for the other; or to exercise or seek to exercise a controlling influence over any management policies of the other.

b. Preserve Competition . GFE and Heron acknowledge that they are competing business entities with different ownership. The CEO and CFO shall be advised by GFE to observe all laws related to price and/or competition in carrying out this Agreement; and to implement such processes to ensure ongoing compliance with such laws by all employees providing management services hereunder.

c. Insurance . During the term hereof each party shall maintain Workers’ Compensation Insurance at statutory limits; as well as comprehensive liability insurance for all injuries or property damage which may occur on account of services performed hereunder — with such insurance having mutually acceptable terms and limits; with each party being named as an additional insured of the other (except regarding the Worker’s Compensation policy whereby each party shall add the Alternate Employer endorsement to the respective Worker’s Compensation policy naming the other party as the Alternate Employer); with such policies having an endorsement of no cancellation without notice to both parties hereto; and said policies having a Waiver of Subrogation on all policies, including the property, where allowed by law.

5 CONFIDENTIALITY AND COMPETITION COVENANTS . With respect to confidentiality and competition covenants, the parties agree:

a. Confidentiality . With respect to confidentiality:

i. Each person providing management services hereunder shall protect from unauthorized disclosure — either to third parties (with respect to management services), or to GFE or Heron as the case may be (with respect to information that is beyond the scope of management service) — information which GFE and/or Heron consider non-public, confidential, or proprietary in nature. Such non-public, confidential, and/or proprietary information (collectively “Confidential Information”) may include, without limitation, customer lists, contracts, planning and financial information, business plans and strategies, marketing plans, development plans, technical and business information, customer information, pricing information, sales information, any formulas/devices/methods/techniques, or other information which has independent economic value because of not being generally known, and which GFE or Heron, as the case may be, has protected through reasonable efforts regarding maintenance of secrecy.

ii. The parties agree that Confidential Information shall not include: information that, at the time of disclosure hereunder, is in the public domain; information that, after disclosure hereunder, enters the public domain other than by breach of this Agreement or the obligation of confidentiality stated herein; information that, prior to disclosure hereunder, was already in a party’s possession, either without limitation on disclosure to others or subsequently becoming free of such limitation; information obtained by either party from a third party having an independent right to disclose the information; information that is available through discovery by independent research without use of or access to the confidential information acquired from the other party; information disclosed upon the order of a court or other authorized governmental entity, or pursuant to other legal requirements — provided that prior to such disclosure, the disclosing party shall first timely inform the other party of such disclosure request so that the other party may seek a protective or equivalent order for non-disclosure — and provided that the disclosing party shall limit any such disclosure to the greatest extent permitted by law.

iii. The persons performing services pursuant to this Agreement shall sign Confidentiality Agreements binding each such person to the confidentiality obligations set forth above.

b. No Solicitation . GFE hereby warrants to Heron and Heron hereby warrants to GFE that each shall not, directly or indirectly, either for itself

or for any other person, firm or corporation solicit for employment, retain or employ any present employee of the other party, or request, induce or advise any employee to leave the employ of or cease affiliation with the other party.

c. The provisions as set forth in this Section 5 shall survive termination of this Agreement for a period of three (3) years.

6. INDEMNIFICATION . From and after the date hereof, and except as otherwise provided for herein:

a. GFE Indemnification of Heron . GFE shall indemnify, defend and hold harmless Heron against: (i) all losses, claims, damages, costs, expenses, liabilities or judgments or amounts that are paid in settlement of or in connection with any claim, action, suit, proceeding or investigation to the extent the same is caused in whole or in part by GFE, (ii) or, on account of a breach of GFE’s obligations hereunder.

b. Heron Indemnification of GFE . Heron shall indemnify, defend and hold harmless GFE against: (i) all losses, claims, damages, costs, expenses, liabilities or judgments or amounts that are paid in settlement of or in connection with any claim, action, suit, proceeding or investigation to the extent the same is caused in whole or in part by Heron, (ii) or, on account of a breach of Heron’s obligations hereunder.

c. Limitations on Indemnification Obligation . Neither Heron nor GFE shall be required to indemnify the other for any direct claim by the other that it has suffered consequential damages or lost profits; nor shall the requirement to indemnify extend to consequential damages or lost profits claimed by a third party and which — but for this Section 6(c) — would be included in the indemnification obligations listed at Sections 6(a) and 6(b) above.

d. Survival of Obligations . The provisions of this Section 6 shall survive the termination of this Agreement.

7. DISPUTE RESOLUTION . Any controversy, claim or dispute arising out of or relating to this Agreement or the breach hereof, including a dispute arising out of the negotiation, formation and execution of this Agreement, and the interpretation of this Agreement, shall be resolved as follows:

a. Meet and Confer . The Dispute Resolution Team (“DRT”) of GFE shall meet and confer — in person — with the DRT of Heron to discuss the controversy, claim or dispute in an attempt to resolve differences and reach

agreement. Each party may elect to be represented by counsel or other professional advisors at such meeting. The meeting shall occur as soon as reasonably possible, but no later than ten (10) days from a written notice by a party to the other the dispute, and the request for a meeting of the Boards.

b. Mediation . If the controversy, claim or dispute is not resolved by a face-to-face meeting of the respective DRTs, then the DRTs shall meet with a neutral mediator in an attempt to reach a mediated settlement. The mediator shall be jointly agreed to by the parties and if they cannot agree, the court for Lyon County, Minnesota, shall be petitioned and shall appoint the mediator. Such mediation shall occur within twenty-one (21) business days of when the mediator is selected.

c. Arbitration . If the controversy is not resolved by mediation, then the controversy shall be resolved by resort to binding arbitration conducted pursuant to Minnesota Statutes and subject to the following additional requirements:

i. Arbitration and proceeds related thereto shall be venued in Lyon County, Minnesota. The District Court in and for Lyon County, Minnesota shall have jurisdiction to direct the arbitration process; and to preserve the status quo of the parties during the pondery of arbitration.

ii. The arbitration shall proceed as a private arbitration, without involvement of the American Arbitration Association, but otherwise pursuant to the then existing Rules of the American Arbitration Association applicable to commercial disputes.

iii. Each DRT shall pick an arbitrator and the two arbitrators shall pick a neutral third arbitrator.

iv. The arbitration shall occur within sixty (60) days of the appointment of the final arbitrator.

v. The determination of the arbitrators shall be final and binding and each party waives the right to appeal any such decision. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. The arbitrators shall decide who shall pay the costs and expenses associated with arbitration. Each party shall pay their own attorneys’ fees related to the arbitration.

d. Role of DRT . The Dispute Resolution Team of each party shall consist of that party’s then existing Committee of Disinterested Persons together with that party’s Executive Committee. Each party’s DRT shall represent it

during the dispute resolution proceedings; and the DRT shall make recommendations for final decisions regarding dispute resolution to its Board. The final decision on such recommendation shall, however, be reserved to and made by the respective Boards of the parties.

8. FORCE MAJEURE . The performance of a party may be excused upon the occurrence of a Force Majeure event. A Force Majeure event shall be fire, flood, storm, act of God, governmental action or intervention, or other circumstance which is beyond the reasonable control of the party claiming the event and which renders the performance of this Agreement by a party hereto impossible. A party affected by a Force Majeure event shall not be relieved of performance unless such party has used reasonable efforts to remedy the conditions giving rise to such event; and unless and until such party has given written notice of the occurrence of such event. Either party may terminate this Agreement upon not less than thirty (30) days prior written notice if the Force Majeure event has been continuously in existence for a period of ninety (90) days.

9. MISCELLANEOUS .

a. Independent Contractors . At all times during this Agreement, GFE and its employees shall be deemed independent contractors. Nothing herein shall be construed to create a partnership, joint venture, agency, or any other form of business relationship between GFE and Heron. GFE and Heron acknowledge that their Agreement is strictly contractual in nature.

b. Further Assurance . Each party agrees to execute and deliver all further instruments, legal opinions and documents, and take all further action not inconsistent with the provisions of this Agreement that may be reasonably necessary to complete performance of a party’s obligations hereunder and to effectuate the purposes and intent of this Agreement.

c. Notice . Any and all notices provided for herein shall be given in writing by registered or certified mail, postage prepaid, which shall be addressed by either party and delivered to the other at its then existing registered office — with the initial address for notice being as follows:



i. If To GFE:	Granite Falls Energy, LLC Attn: Chairman of the Board of Directors
	Address:	15045 Hwy. 23 SE
		P. O. Box 216
		Granite Falls, MN 56241-0216


ii. If To Heron:
	Heron Lake BioEnergy, LLC

	Attn: Chairman of the Board of Directors
	Address:	91246 390th Avenue
		Heron Lake, MN 56137

d. Binding Effect . This Agreement shall be binding upon the successors, legal representatives and assigns of the parties hereto, all of whom, regardless of the number of intervening transfers, shall be bound in the same manner as the parties hereto.

e. No Assignment . This Agreement shall not be assigned by either party except upon the written consent of the other party. Nothing in this Agreement, express or implied, is intended to confer upon any other person any rights or remedies under or by reason of this Agreement.

f. Integration and Amendment . This Agreement supersedes and takes precedence over any previous agreement entered into between the parties hereto, whether written or oral, regarding the matters covered herein. This Agreement sets forth the entire understanding of the parties and may not be amended, altered or modified except by written agreement between the parties.

g. Severability . Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement, or affecting the validity or unenforceability of any of the other terms of this Agreement in any other jurisdiction. In the event a term or provision is invalid or unenforceable, a Court or Arbitrators (as the case may be) are granted the authority to construe, interpret, or modify this Agreement in a manner which is intended to remedy such invalidity or unenforceability while giving effect, to the greatest extent possible, to all remaining terms and provisions hereof.

h. No Waiver . Any waiver of any of terms and/or conditions of this Agreement by a party shall not be construed to be a general waiver of such terms and/or conditions; and no waiver shall be effective absent the written agreement of the parties.

i. Counter Parts . This Agreement may be executed in one or more counterparts, all of which, taken together, shall be deemed one and the same Agreement. Facsimile or electronic signatures shall be deemed original signatures for all purposes.

j. Captions . The captions herein are inserted for the convenience of reference only and shall be ignored in the construction or interpretation hereof.

k. Governing Law . This Agreement shall be construed, interpreted and enforced in accordance with the laws of the State of Minnesota.

IN WITNESS WHEREOF, each party hereto has executed this Agreement effective as of the date first above written.

GRANITE FALLS ENERGY, LLC


By:	/s/ Paul Enstad

	Its:	Chairman


HERON LAKE BIOENERGY, LLC


By:	/s/ Robert Ferguson

	Its:		CEO

Exhibit 31.1

CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a)

I, Steve Christensen, certify that:

1. I have reviewed this Form 10-Q of Heron Lake BioEnergy, LLC and Subsidiaries;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: September 16, 2013	/s/ Steve Christensen
	Steve Christensen, Chief Executive Officer
	(Principal Executive Officer)

Exhibit 31.2

CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a)

I, Stacie Schuler, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Heron Lake BioEnergy, LLC and Subsidiaries;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant, as of, and for, the periods presented in this report;

a) Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: September 16, 2013	/s/ Stacie Schuler
	Stacie Schuler, Chief Financial Officer
	(Principal Financial Officer)

Exhibit 32

CERTIFICATION

The undersigned certify pursuant to 18 U.S.C. § 1350, that:

(1) The accompanying quarterly report on Form 10-Q for the period ended July 31, 2013, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and

(2) The information contained in the accompanying report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: September 16, 2013	/s/ Steve Christensen
	Steve Christensen, Chief Executive Officer


Date: September 16, 2013	/s/ Stacie Schuler
	Stacie Schuler, Chief Financial Officer