Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the quarterly period ended July 31, 2014
OR
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.   ý   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).   ý    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   ý
(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   ý   No
As of September 15, 2014 , there were 62,932,107 Class A units and 15,000,000 Class B units issued and outstanding.



 

Table of Contents

INDEX
 
 
Page No.
PART I. FINANCIAL INFORMATION
 
PART II. OTHER INFORMATION
 



 

Table of Contents

PART I.  FINANCIAL INFORMATION
 
Item 1.  Financial Statements
HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
 
July 31, 2014
 
October 31, 2013
 
(Unaudited)
 
 
ASSETS
 
 
 
Current Assets
 
 
 
Cash
$
1,151,791

 
$
543,238

Restricted cash
241,800

 

Accounts receivable
6,801,999

 
749,426

Inventory
6,201,340

 
5,604,309

Prepaid expenses
270,326

 
952,271

Total current assets
14,667,256

 
7,849,244

 
 
 
 
Property and Equipment
 
 
 
Land and improvements
9,111,838

 
9,111,838

Plant buildings and equipment
72,905,614

 
71,275,334

Vehicles and other equipment
611,976

 
611,976

Office buildings and equipment
610,791

 
612,151

Construction in progress
2,464,033

 
1,394,191

 
85,704,252

 
83,005,490

Accumulated depreciation
(34,553,750
)
 
(31,335,218
)
Net Property and Equipment
51,150,502

 
51,670,272

 
 
 
 
Other Assets
 
 
 
Other intangible assets, net
169,833

 
218,370

Other assets
712,504

 
1,056,031

Total other assets
882,337

 
1,274,401

 
 
 
 
Total Assets
$
66,700,095

 
$
60,793,917

 
 
 
 

Notes to Condensed Consolidated Unaudited Financial Statements are an integral part of this Statement.
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HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Condensed Consolidated Balance Sheet
 
July 31, 2014
 
October 31, 2013
 
(Unaudited)
 
 
LIABILITIES AND MEMBERS’ EQUITY
 
 
 
Current Liabilities
 
 
 
Current maturities of long-term debt
$
955,752

 
$
3,371,575

Accounts payable
4,744,492

 
1,300,727

Commodity derivative instruments
85,487

 

Accrued expenses
364,115

 
389,608

Total current liabilities
6,149,846

 
5,061,910

 
 
 
 
Long-Term Debt,  net of current maturities
9,772,607

 
28,181,155

 
 
 
 
Members’ Equity
 
 
 
Members' Equity attributable to Heron Lake BioEnergy, LLC: 77,932,107 and 64,812,107 units issued and outstanding at July 31, 2014 and October 31, 2013, respectively.
50,011,532

 
27,142,275

Noncontrolling interest
766,110

 
408,577

Total members’ equity
50,777,642

 
27,550,852

 
 
 
 
Total Liabilities and Members’ Equity
$
66,700,095

 
$
60,793,917


Notes to Condensed Consolidated Unaudited Financial Statements are an integral part of this Statement.
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HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
 
Three Months
Ended
 
Three Months
Ended
 
July 31, 2014
 
July 31, 2013
 
(Unaudited)
 
(Unaudited)
Revenues
$
39,082,103

 
$
45,583,441


 
 
 
Cost of Goods Sold
30,790,088

 
41,523,283


 
 
 
Gross Profit
8,292,015

 
4,060,158


 
 
 
Selling, General, and Administrative Expenses
777,274

 
674,200

 
 
 
 
Operating Income
7,514,741

 
3,385,958


 
 
 
Other Income (Expense)
 

 
 

Interest income
220

 
310

Interest expense
(656,507
)
 
(755,532
)
Other income
17,166

 
10,925

Total other expense, net
(639,121
)
 
(744,297
)

 
 
 
Net Income
6,875,620

 
2,641,661


 
 
 
Net Income Attributable to Noncontrolling Interest
89,866

 
87,168


 
 
 
Net Income Attributable to Heron Lake BioEnergy, LLC
$
6,785,754

 
$
2,554,493


 
 
 
Weighted Average Units Outstanding - Basic
69,137,382

 
38,875,678


 
 
 
Net Income Per Unit Attributable to Heron Lake BioEnergy, LLC - Basic (Class A and B)
$
0.10

 
$
0.07


 
 
 
Weighted Average Units Outstanding - Diluted
78,394,634

 
42,741,063


 
 
 
Net Income Per Unit Attributable to Heron Lake BioEnergy, LLC - Diluted (Class A and B)
$
0.09

 
$
0.06


Notes to Condensed Consolidated Unaudited Financial Statements are an integral part of this Statement.
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HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
 
Nine Months Ended
 
Nine Months Ended
 
July 31, 2014
 
July 31, 2013
 
(Unaudited)
 
(Unaudited)
Revenues
$
119,141,711

 
$
125,203,672


 
 
 
Cost of Goods Sold
96,066,933

 
119,568,050


 
 
 
Gross Profit
23,074,778

 
5,635,622


 
 
 
Selling, General, and Administrative Expenses
2,460,719

 
2,537,919

 
 
 
 
Operating Income
20,614,059

 
3,097,703


 
 
 
Other Income (Expense)
 
 
 
Interest income
658

 
17,063

Interest expense
(1,457,086
)
 
(2,254,167
)
Other income
48,636

 
30,198

Total other expense, net
(1,407,792
)
 
(2,206,906
)

 
 
 
Net Income
19,206,267

 
890,797


 
 
 
Net Income Attributable to Noncontrolling Interest
273,010

 
254,999


 
 
 
Net Income Attributable to Heron Lake BioEnergy, LLC
$
18,933,257

 
$
635,798


 
 
 
Weighted Average Units Outstanding - Basic
66,259,166

 
38,706,942


 
 
 
Net Income Per Unit Attributable to Heron Lake BioEnergy, LLC - Basic (Class A and B)
$
0.29

 
$
0.02


 
 
 
Weighted Average Units Outstanding - Diluted
78,546,004

 
40,000,140


 
 
 
Net Income Per Unit Attributable to Heron Lake BioEnergy, LLC - Diluted (Class A and B)
$
0.24

 
$
0.02



Notes to Condensed Consolidated Unaudited Financial Statements are an integral part of this Statement.
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HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
 
Nine Months Ended
 
Nine Months Ended
 
July 31, 2014
 
July 31, 2013
 
(Unaudited)
 
(Unaudited)
Cash Flow From Operating Activities
 

 
 

Net income
$
19,206,267

 
$
890,797

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
3,308,173

 
3,034,267

Change in fair value of commodity derivative instruments
(206,744
)
 

            Write off of deferred loan costs included within interest expense
328,595
 

Change in operating fair value of operating assets and liabilities:
 

 
 

Restricted cash
(241,800
)
 
139,045

Accounts receivable
(6,052,573
)
 
(1,220,360
)
Inventory
(597,031
)
 
1,285,415

Prepaid expenses and other assets
655,773

 
(312,197
)
Accounts payable
3,443,765

 
(1,148,989
)
Accrued expenses
59,030

 
(29,517
)
Commodity derivative instruments
292,231

 

Net cash provided by operating activities
20,195,686

 
2,638,461

 
 
 
 
Cash Flows from Investing Activities
 

 
 

Capital expenditures
(2,698,762
)
 
(268,724
)
  Proceeds from disposal of property and equipment

 
3,728,669

Net cash provided by (used in) investing activities
(2,698,762
)
 
3,459,945

 
 
 
 
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 long-term debt
(16,681,371
)
 
(13,870,555
)
  Release of restricted cash

 
65,259

Member contributions

 
6,922,500

Payments on convertible subordinated debt
(207,000
)
 

  Distributions to non-controlling interest

 
(38,932
)
Deferred financing fees

 
(254,485
)
Net cash used in financing activities
(16,888,371
)
 
(5,729,003
)
 
 
 
 
Net increase in cash
608,553

 
369,403

 
 
 
 
Cash - Beginning of period
543,238

 
653,361

 
 
 
 
Cash - End of period
$
1,151,791

 
$
1,022,764

 
 
 
 
Supplemental Disclosure of Cash Flow Information
 

 
 

Interest expense paid
$
1,173,443

 
$
2,253,814

 
 
 
 
Supplemental Disclosure of Non-Cash Activities
 

 
 

Cancellation of accrued distribution to noncontrolling interest
$
84,523

 
$

Distribution to noncontrolling interest in accrued expenses
$

 
$
46,187

Conversion of subordinated debt to Class A Units
$
3,936,000

 
$


Notes to Condensed Consolidated Unaudited Financial Statements are an integral part of this Statement.
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Heron Lake BioEnergy, LLC and Subsidiaries
Notes to Condensed Consolidated Unaudited Financial Statements
July 31, 2014




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, 2013 , 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 per year.  In addition, the Company produces and sells distillers grains with solubles and corn oil as co-products of ethanol production. Additionally, the Company, through a majority owned subsidiary, operates a natural gas pipeline that provides natural gas to the Company's ethanol production facility.
 
Principles of Consolidation
 
The financial statements as of July 31, 2014 include the accounts of Heron Lake BioEnergy, LLC and its wholly owned subsidiary, 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.

The financial statements as of October 31, 2013 include the accounts of the Company's formerly wholly owned subsidiary, Lakefield Farmers Elevator, LLC. Lakefield Farmers Elevator, LLC sold substantially all of its assets during the second quarter of 2013.

All significant intercompany balances and transactions are eliminated in consolidation.
 
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 and valuation of commodity forward contract 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.


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Heron Lake BioEnergy, LLC and Subsidiaries
Notes to Condensed Consolidated Unaudited Financial Statements
July 31, 2014



Noncontrolling Interest
 
Amounts recorded as noncontrolling interest on the balance sheets 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 5 years expiring October 31, 2016, with two renewal options for 5 year periods. On July 1, 2014, the Company entered into amendment of its natural gas transportation agreement dated May 13, 2011 with Agrinatural in which the Company agreed on an early exercise of one of the two automatic five-year term renewals thereby extending the term of the transportation agreement to October 31, 2021.

The Company previously declared a distribution to noncontrolling interest members for approximately $85,000 .  This amount was recorded within accrued expenses at October 31, 2013.  During the six month period ended April 30, 2014, the Company canceled this distribution.

Revenue Recognition

Revenue from sales is recorded when title transfers to the customer, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists, and the sales price is fixed or determinable. The title transfers when the product is loaded into the railcar or truck, the customer takes ownership and assumes risk of loss.

In accordance with the Company's agreements for the marketing and sale of ethanol and related products, marketing fees and commissions due to the marketers are deducted from the gross sales price as earned. These fees and commissions are recorded net of revenues as they do not provide an identifiable benefit that is sufficiently separable from the sale of ethanol and related products. Shipping costs incurred by the Company in the sale of ethanol are not specifically identifiable and as a result, are recorded based on the net selling price reported to the Company from the marketer. Shipping costs incurred by the Company in the sale of ethanol related products are included in cost of goods sold.

2.    RISKS AND 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 70% - 80% of total revenues and corn costs average 70% - 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.
 
3.    INVENTORY
 
Inventory consisted of the following:
 
 
 
July 31,
2014
 
October 31,
2013
 
 
Raw materials
$
1,770,298

 
$
632,790

 
 
Work in process
704,826

 
845,628

 
 
Finished Goods
2,604,999

 
3,324,166

 
 
Supplies
1,121,217

 
801,725

 
 
Total
$
6,201,340

 
$
5,604,309

 



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Heron Lake BioEnergy, LLC and Subsidiaries
Notes to Condensed Consolidated Unaudited Financial Statements
July 31, 2014



4.      DERIVATIVE INSTRUMENTS
 
As of July 31, 2014 , the total notional amount of the Company’s outstanding corn derivative instruments was approximately 3,450,000 bushels that were entered into to hedge forecasted corn purchases through May 2015. There may be offsetting positions that are shown on a net basis that could lower the notional amount of positions outstanding as disclosed above.
 
The following tables provide details regarding the Company’s derivative instruments at July 31, 2014 , none of which are designated as hedging instruments:

 
 
 
Balance Sheet location
 
Assets
 
Liabilities
 
 
Corn contracts
 
Commodity derivative instruments
 
$

 
$
85,487

 
 
The Company did not have any outstanding derivative positions at October 31, 2013.
 
The following tables provide details regarding the gains and losses from Company’s derivative instruments in statements of operations, none of which are designated as hedging instruments:

 
 
Statement of
 
Three Months Ended July 31,
 
 
 
Operations Locations
 
2014
 
2013
 
 
Corn contracts
Cost of goods sold
 
$
(125,461
)
 
$

 

 
 
Statement of
 
Nine Months Ended July 31,
 
 
 
Operations Locations
 
2014
 
2013
 
 
Corn contracts
Cost of goods sold
 
$
206,744

 
$

 
 
5.     FAIR VALUE

The following table provides information on those derivative liabilities measured at fair value on a recurring basis at July 31, 2014 :
 
 
Fair Value Measurement Using
Financial Liabilities:
Carrying Amount in Balance Sheet
July 31, 2014
Quoted Prices in Active Markets
(Level 1)
Significant Other Observable Inputs
(Level 2)

Significant unobservable inputs
(Level 3)
Commodity derivative instruments
$85,487
$85,487
$—
$—

The Company did not have any assets or liabilities measured at fair value on a recurring basis at October 31, 2013.

HLBE determines the fair value of commodity derivative instruments by obtaining fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the Chicago Board of Trade market and New York Mercantile Exchange.

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Heron Lake BioEnergy, LLC and Subsidiaries
Notes to Condensed Consolidated Unaudited Financial Statements
July 31, 2014



6.    DEBT FINANCING
 
Debt financing consists of the following:
 
 
July 31, 2014
 
October 31,
2013
Term note payable to lending institution, see terms below. 
$

 
$
16,577,641

Revolving term loan to lending institution, see terms below. 
7,486,628

 
5,979,876

Assessments payable.
2,440,743

 
2,604,678

Note payable to electrical company. 
237,500

 
293,750

Note payable on pipeline assets (Agrinatural), see terms below. 

 
1,013,132

Note payable to noncontrolling interest member of Agrinatural.
300,000

 
300,000

Corn oil recovery system note payable.
263,488

 
640,653

Subordinated convertible debt.

 
4,143,000

Total
10,728,359

 
31,552,730

Less amounts due on demand or within one year
955,752

 
3,371,575

Net long term debt
$
9,772,607

 
$
28,181,155


Term Note Payable

The Company had a term loan with AgStar Financial Services, FCLA ("AgStar").  The Company was making equal monthly payments of principal and interest of approximately $223,000 on the term loan based on a 10 -year amortization, provided the entire principal balance and accrued and unpaid interest on the term loan was due and payable in full on the maturity date of September 1, 2016.  On July 30, 2014, using funds from the Credit Facility that the Company executed with AgStar, the Company repaid the entire outstanding balance of our credit facilities under the Sixth Amended and Restated Master Loan Agreement dated May 17, 2013 with AgStar.

Revolving Term Loan

The Company had a three -year revolving term loan commitment in the amount of $18.5 million , under which AgStar agreed to make periodic advances to the Company up to this original amount until September 1, 2016.

On July 29, 2014, the Company entered into a new master loan agreement and related loan documents (the “Credit Facility”) the with AgStar Financial Services, FCLA (“AgStar”). The Credit Facility provides the Company with a new comprehensive revolving term loan commitment in the amount of $28 million (the “Revolving Term Loan”), under which AgStar agreed to make one or more advances to the Company for use by the Company to repay the Company's debt currently outstanding with AgStar, provide a loan financing to Agrinatural Gas, LLC, the Company's indirect subsidiary, provide working capital to the Company, and pay fees and expenses in connection with the Company's refinancing. Following the loan closing, the Company had approximately $7.5 million outstanding on the Revolving Term Loan.

Amounts borrowed by the Company under the Revolving Term Loan and repaid or prepaid may be re-borrowed at any time prior to the March 1, 2022 maturity date. Under the terms of the Credit Facility, the Revolving Term Loan commitment is scheduled to decline by $3.5 million annually, beginning on March 1, 2015 and each anniversary date thereafter. Interest on the Revolving Term Loan accrues at a variable rate equal to 3.25% above the One-Month London Interbank Offered Rate (“ LIBOR ”) Index rate. The Company may elect to enter into a fixed interest rate on this loan at various times throughout the term of the loan as provided in the loan agreements. The Company also agreed to pay an unused commitment fee on the unused portion of the Revolving Term Loan commitment at the rate of 0.50% per annum. The Revolving Term Loan is subject to a prepayment fee for any prepayment on the Term Loan prior to July 1, 2016 due to refinancing. The Credit Facility contains customary covenants. The loan is secured by substantially all of the Company assets including a subsidiary guarantee.

As part of the Credit Facility closing, we entered into an Administrative Agency Agreement with CoBank, ACP (“CoBank”). CoBank purchased a participation interest in the AgStar loans and was appointed the administrative agent for the purpose of servicing the loans. As a result, CoBank will act as the agent for AgStar with respect to the Credit Facility.


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Heron Lake BioEnergy, LLC and Subsidiaries
Notes to Condensed Consolidated Unaudited Financial Statements
July 31, 2014



Note Payable on Pipeline Assets (Agrinatural)

The Company had a note payable to a lending institution for the construction of the pipeline assets of Agrinatural. The note was initially due in December 2011, however, was subsequently converted in February 2012 to a term loan with a three year repayment period. During November 2013, the note payable was refinanced with the lending institution with additional borrowings of approximately $759,000 being made. Amounts outstanding on the term loan were to bear interest at 5.29% , payable monthly, with a maturity in December 2016. The term loan was secured by substantially all assets of Agrinatural. The note was paid off in full on July 29, 2014 by Agrinatural.

Subordinated Convertible Debt

On May 17, 2013, the Company’s Board of Governors loaned the Company approximately $ 1.4 million as part of the subordinated convertible debt offering. An additional $3.7 million was raised as part of a subordinated convertible debt offering during September 2013. The convertible secured debt was subordinated to the AgStar debt. The notes were to bear interest at 7.25% and were due in October 1, 2018. On October 1, 2014, or immediately prior to the sale of all or effectively all of the Company assets, each note was convertible into Class A stock at a rate of $0.30 per Class A unit. The Company reserved the right to issue Class B units upon conversion if the principal balance of the convertible debt exceeded the authorized Class A units at the conversion date. At the issuance, each debt holder had the option to convert to Class A units. As a result, holders elected to convert $934,500 in September 2013 for 3,115,000 Class A units.

On May 2, 2014, the Company issued a notice that the Company intended to redeem all of the outstanding principal amount of the subordinated convertible notes on July 1, 2014. The announced redemption was pursuant to the Company's "optional redemption" right in the indenture governing the notes. The outstanding principal balance of $4,143,000 , could be redeemed at a redemption price equal to 100% of the aggregate principal amount plus accrued and unpaid interest to, but excluding, the redemption date. The Company's obligation to pay the redemption price on the redemption date was subject to the right of the holders of the notes to elect to convert the principal amount of their notes into capital units of the Company at a conversion rate of $0.30 per unit.

As of the close of business on June 20, 2014, the last day to elect conversion, note holders holding an aggregate principal amount of $3,936,000 of Notes elected to convert their Notes into units of the Company. On July 1, 2014, the Company issued 13,120,000 Class A units of the Company to the holders of the Notes electing conversion and redeemed the remaining $207,000 of the Notes at par value. In addition, on the same day, the Company paid accrued and unpaid interest through July 1, 2014 to all note holders, including those electing conversion, per the terms of the Notes and the Indenture. Following the issuance of the Class A units described above, the Company has a total of 62,932,107 Class A units and 15,000,000 Class B units issued and outstanding, for an aggregate total of 77,932,107 units issued and outstanding.

Estimated annual maturities of debt at July 31, 2014 are as follows based on the most recent debt agreements:
 
 
2015
$
955,752

 
 
2016
410,383

 
 
2017
404,207

 
 
2018
336,341

 
 
2019
7,809,647

 
 
After 2019
812,029

 
 
Total long-term debt
$
10,728,359

 
 
Related Party Demand Promissory Note

Agrinatural Gas, LLC was loaned $500,000 from Granite Falls Energy, LLC, a related party, during July 2014. The demand promissory note accrued interest at 5.29% and payment was due in full on or before July 31, 2014. Agrinatural Gas, LLC paid the balance in full, including accrued interest, in July 2014.

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Heron Lake BioEnergy, LLC and Subsidiaries
Notes to Condensed Consolidated Unaudited Financial Statements
July 31, 2014




7.    COMMITMENTS AND CONTINGENCIES
 
Forward Contracts

At July 31, 2014 , the Company had basis contracts for forward corn purchase commitments for approximately 2,898,000 bushels for deliveries through January 2015.

At July 31, 2014 , the Company had forward contracts to sell approximately $12,812,000 of ethanol for various delivery periods from August 2014 through March 2015 which approximates 19% of its anticipated ethanol sales during that period.

At July 31, 2014 , the Company had forward contracts to sell approximately $2,042,000 of distillers grains for delivery in August 2014 through March 2015 which approximates 15% of its anticipated distillers grain sales during that period.

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

8.       MEMBERS’ EQUITY
 
The Company is authorized to issue 80,000,000 capital units, of which 65,000,000 have been designated Class A units and 15,000,000 have 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.

On July 1, 2014, the Company issued 13,120,000 Class A units of the Company to the holders of the Notes electing conversion. Following the issuance of the Class A units described above, the Company has a total of 62,932,107 Class A units and 15,000,000 Class B units issued and outstanding, for an aggregate total of 77,932,107 units issued and outstanding as of July 31, 2014 . On October 31, 2013, there were 49,812,107 Class A units issued and outstanding and 15,000,000 Class B units issued and outstanding, for an aggregate total of 64,812,107 .

9.       LEASES

The Company leases equipment, primarily rail cars, under operating leases through 2017. Rent expense for these leases was approximately $503,000 and $1,327,000 for the three and nine months ended July 31, 2014 , respectively.  



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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
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 month periods ended July 31, 2014 , compared to the same periods of the prior fiscal year. This section should be read in conjunction with the condensed consolidated unaudited financial statements and related notes in Item 1 of this report and the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2013 .

Disclosure Regarding Forward-Looking Statements

This report contains historical information, as well as forward-looking statements regarding our business, financial condition, results of operations, performance and prospects. All statements that are not historical or current facts are forward-looking statements. You can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” and similar expressions intended to identify forward-looking statements. Forward-looking statements are subject to a number of known and unknown risks, uncertainties and other factors, many of which may be beyond our control, and may cause actual results, performance or achievements to differ materially from those projected in, expressed or implied by forward-looking statements. Certain of these risks and uncertainties are described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended October 31, 2013 and in this Form 10-Q. We do not undertake any duty to update forward-looking statements after the date they are made or to conform forward-looking statements to actual results or to changes in circumstances or expectations. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits, completely and with the understanding that our actual future results may be materially different from what we currently expect. We qualify all of our forward-looking statements by these cautionary statements.

Available Information

Our website address is www.heronlakebioenergy.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available, free of charge, on our website under the link “SEC Filings,” as soon as reasonably practicable after we electronically file such materials with, or furnish such materials to, the Securities and Exchange Commission. The contents of our website are not incorporated by reference in this Quarterly Report on Form 10-Q.

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. References to "we," "us," "our", "Heron Lake BioEnergy", "HLBE", and the "Company" refer to Heron Lake BioEnergy, LLC.

Our ethanol plant has a nameplate capacity of 50 million gallons per year and a permitted capacity of approximately 59.2 million gallons per year. We are currently operating above our stated nameplate capacity and intend to continue to take advantage of the additional production allowed pursuant to our permit as long as we believe it is profitable to do so.

On July 1, 2014, the Company redeemed all of the outstanding 7.25% Subordinated Secured Notes due 2018 (the "Notes"), approximately $4,140,000 aggregate principal amount, by issuing 13,120,000 Class A units of the Company to the holders of approximately $3,936,000 principal amount of the Notes that elected conversion of the principal to units and paid cash to redeem the remaining $207,000 principal amount of the Notes. On the same day, the Company paid accrued and unpaid interest through July 1, 2014 to all note holders, including those electing conversion, per the terms of the Notes and the Indenture. The Company paid the cash redemption and accrued and unpaid interest from its cash on-hand. Details of redemption of the Notes is provided below in the section below entitled " PART I - Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations  - Liquidity and Capital Resources; Indebtedness ".

On July 29, 2014, the Company entered into an intercompany loan agreement and related loan documents (the “Loan Agreement”) with Agrinatural Gas, LLC (“Agrinatural”).  Agrinatural is a pipeline company formed to construct, own, and operate a natural gas pipeline that provides natural gas to the Company’s ethanol plant through a connection with the natural gas pipeline facilities of Northern Border Pipeline Company in Cottonwood County, Minnesota. The Company owns 73% of Agrinatural through the Company’s wholly-owned subsidiary HLBE Pipeline Company, LLC. The remaining

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27% is owned by Rural Energy Solutions, LLC. Under the Loan Agreement, the Company agreed to make a five-year term loan in the principal amount of $3.05 million to Agrinatural (the "Agrinatural Loan") for use by Agrinatural to repay its outstanding debt and provide working capital to Agrinatural. Details of Loan Agreement with Agrinatural and the Agrinatural Loan are provided below in the section below entitled " PART I - Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations  - Liquidity and Capital Resources; Indebtedness ".

On July 29, 2014, the Company entered into a new master loan agreement and related loan documents (the "Credit Facility") the with AgStar Financial Services, FCLA ("AgStar").  The Credit Facility provides the Company with a new comprehensive revolving term loan commitment in the amount of $28 million (the "Term Revolving Loan"). Following the loan closing, we had approximately $7.5 million outstanding on the Term Revolving Loan under the Credit Facility which was primarily used to pay off our outstanding debt to AgStar under our prior master loan agreement and fund the Agrinatural Loan. The changes to our credit facilities and the loan to Agrinatural are described in more detail below in the section entitled " PART I - Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations  - Liquidity and Capital Resources; Indebtedness ".

In July 2013, Granite Falls Energy, LLC ("Granite Falls" or "GFE") acquired a controlling interest in the Company from Project Viking, L.L.C. ("Project Viking"). GFE, now a related party, owns an ethanol plant located in Granite Falls, Minnesota. As of September 15, 2014 , GFE owns approximately 50.6% of our outstanding membership units, a decrease from its prior ownership percentage of 60.8% due to our issuance of units as part of the redemption of the Notes. Notwithstanding this dilution, GFE retained its right to appoint five (5) of the nine (9) governors to our board of governors under our member control agreement as it continues to own a majority of the Company.    

In July 2013, the Company also entered into a Management Services Agreement with GFE.  Under the Management Services Agreement, GFE agreed to supply its own personnel to act as our Chief Executive Officer, Chief Financial Officer, and Commodity Risk Manager.  The initial term of the Management Services Agreement expires in July 2016, but automatically renews for successive one-year terms unless either party gives the other party written notice of termination prior to expiration of the then current term.

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. We have contracted with Eco-Energy, LLC to market all of our ethanol, Gavilon Ingredients, LLC to market our distillers grains and Renewable Products Marketing Group, LLC to market our corn oil.

The primary raw material used in the production of ethanol at our plant is corn.  We generally do not have long-term, fixed price contracts for the purchase of corn. Rather, we typically purchase our corn directly from grain elevators, farmers, and local dealers within approximately 80 miles of Heron Lake, Minnesota.
 
The primary source of energy in our manufacturing process is natural gas. We have a facilities agreement with Northern Border Pipeline Company which allows us access to an existing interstate natural gas pipeline located approximately 16 miles north from our plant. We have a transportation agreement with Agrinatural, a pipeline company formed to construct, own, and operate the natural gas pipeline that provides natural gas to our ethanol plant. Our wholly-owned subsidiary, HLBE Pipeline Company, LLC, owns 73% of Agrinatural Gas.
    
We expect to have sufficient cash generated by continuing operations and current lines of credit to fund our operations. However, should we experience unfavorable operating conditions in the ethanol industry that prevent us from profitably operating the ethanol plant, we may need to seek additional funding.

Trends and Uncertainties Impacting Our Operations
      
Our current 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.


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The demand for ethanol is affected by what is commonly referred to as the “blending wall” which is the threshold at which the Renewable Fuel Standard (RFS) volume requirement exceeds the demand for E10 (10% ethanol and 90%gasoline) gasoline. E10 is the most common ethanol blend sold and the only blend the EPA has approved for use in all American automobiles. There is growing availability of E85 (85% ethanol and 15% gasoline) for use in flexible fuel vehicles. In addition, the industry has been working to introduce E15 to the retail market since the EPA issued final approval in 2012 for the sale and use of E15 ethanol blends in light duty passenger vehicles model year 2001 and newer. Since that time, our application with the EPA to register ethanol for use in making E15 has also been approved, as well as 81 other fuel manufacturers according to EPA data. However, wide spread adoption of E15 is hampered by regulatory and infrastructure hurdles in many states, as well as consumer acceptance. To date only thirteen states have approved the commercial sale of E15. As such, we do not anticipate that E15 will impact ethanol demand or pricing in the near term. Rather, management believes consumer acceptance of E15 and flex fuel vehicles, along with continued growth of E85, is necessary before ethanol can achieve any market growth beyond the blend wall. As industry production capacity reaches the blend wall, the supply of ethanol in the market may surpass the demand which in turn may negatively impact prices.

The RFS requires a certain amount of renewable fuels be used each year in the United States, however, the EPA can adjust the renewable volume obligation (RVO) in certain circumstances through its rulemaking authority. In November 2013, the EPA issued a proposed rule that would reduce the 2014 RVO to 13.0 billion gallons of corn-based renewable fuel. As proposed, the 2014 RVO would be 1.4 billion gallon below the statutory RVO for 2014 and 800 million gallons less than the 2013 RVO, marking the first time the corn-based renewable fuel and total renewable fuel RVOs have been set below the legislated target. The proposal was subject to a 60-day comment period which ended in January 2014 during which the EPA received over 340,000 public comments and drew strong opposition from biofuels groups. On August 22, 2014, the final 2014 RVO rule was sent by the EPA to the Office of Management and Budget (OMB) for review. As of this filing, the proposed final rule is not publicly available, however, EPA administrator Gina McCarthy has previously stated that the final 2014 RVO would include changes from the November proposal but neither she nor the EPA has elaborated on the degree of changes. The final rule is expected to be released sometime this fall, however, OMB has up to 90 days, or more if an extension is granted, to complete its interagency review. Until the final rule is published, management expects continued uncertainty for ethanol demand for 2014. Moreover, further delay in the release of the final rule also creates uncertainty in ethanol demand in 2015 as the delay in the 2014 rule will likely cause delay in the final 2015 rule, which is due by November 30, 2014. If the final rule includes a significant decrease in the 2014 RVO similar to the EPA's November proposed rule, demand for ethanol in 2015 and beyond could be reduced due to blenders' carryover of renewable fuel credits in excess of the RVO into future years.

High demand on the rail industry due to high volumes of corn, oil and coal rail shipments and a harsh winter that saw record cold and snow has resulted in significant industry-wide delays and logistical problems. These delays have caused many ethanol plants to slow or suspend production due to inability to secure railcars to transport their ethanol to market. Our plant has not experienced any material delays from the rail congestion problems. Recently, rail congestion and delays have lessened, however, industry concerns remain that the existing backlog will be resolved before anticipated record corn and soybean harvest place additional stress on the rail transportation network. Management believes that slower rail shipping may continue through late spring 2015 and may continue to impact ethanol producers unless rail shipping capacity increases to meet the increased demand. If rail delays and congestion continue, we may begin to see material impacts to our plant if we run out of ethanol storage capacity and we are forced to reduce or cease production.

Other factors that may affect our future results of operation include those factors below in our Results of Operations of this Form 10-Q and those discussed in “Item 1. Business” and “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended October 31, 2013, and in other filings we make with the Securities and Exchange Commission.
 


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Results of Operations for the Three Months Ended July 31, 2014 and 2013
 
The following table shows summary information from the results of our operations and the approximate percentage of revenues, costs of goods sold, operating expenses and other items to total revenues in our Condensed Consolidated Statements of Operations for the three months ended July 31, 2014 and 2013 .
 
 
 
Three Months Ended
 
 
 
Three Months Ended
 
 
 
 
 
July 31, 2014
 
%
 
July 31, 2013
 
%
 
 
Income Statement Data
(Unaudited)
 
 
 
(Unaudited)
 
 
 
 
Revenues
$
39,082,103

 
100.0
 %
 
$
45,583,441

 
100.0
 %
 
 
Cost of Goods Sold
30,790,088

 
78.8
 %
 
41,523,283

 
91.1
 %
 
 
Gross Profit
8,292,015

 
21.2
 %
 
4,060,158

 
8.9
 %
 
 
Selling, General, and Administrative Expenses
777,274

 
2.0
 %
 
674,200

 
1.5
 %
 
 
Operating Income
7,514,741

 
19.2
 %
 
3,385,958

 
7.4
 %
 
 
Other Expense, net
(639,121
)
 
(1.6
)%
 
(744,297
)
 
(1.6
)%
 
 
Net Income
6,875,620

 
17.6
 %
 
2,641,661

 
5.8
 %
 
 
Net Income Attributable to Noncontrolling Interest
89,866

 
0.2
 %
 
87,168

 
0.2
 %
 
 
Net Income Attributable to Heron Lake BioEnergy, LLC
$
6,785,754

 
17.4
 %
 
$
2,554,493

 
5.6
 %
 
 
Revenues
 
Approximately 99% of our revenues from operations come from three sources: sales of fuel ethanol, sales of distillers grains and sales of corn oil. The remaining miscellaneous other revenues are made up of incidental sales of syrup, a by-product of the ethanol production process, and revenues from Agrinatural. Revenues decreased by 14.3% for the three months ended July 31, 2014 as compared to the three months ended July 31, 2013 due primarily to decreases in the average prices received for our ethanol and distillers grains.  Our results of operations will continue to be affected by volatility in the commodity markets. In the event that we experience a prolonged period of negative operating margins, our liquidity may be negatively impacted.

The following table shows the sources of our revenue for the three months ended July 31, 2014 :

 
 
 
Amount
 
Percent of Total Revenues
 
 
Ethanol sales
 
$
31,074,476

 
79.5
%
 
 
Distillers grains sales
 
 
6,872,290

 
17.6
%
 
 
Corn oil sales
 
 
914,165

 
2.3
%
 
 
Miscellaneous other
 
 
221,172

 
0.6
%
 
 
    Total Revenues
 
$
39,082,103

 
100.0
%
 


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The following table shows the sources of our revenue for the three months ended July 31, 2013 :
 
 
 
 
 
Amount
 
Percent of Total Revenues
 
 
Ethanol sales
 
$
36,417,998

 
79.9
%
 
 
Distillers grains sales
 
 
7,788,313

 
17.1
%
 
 
Corn oil sales
 
 
1,100,000

 
2.4
%
 
 
Miscellaneous other
 
 
277,130

 
0.6
%
 
 
    Total Revenues
 
$
45,583,441

 
100.0
%
 

Ethanol

Net ethanol revenues were approximately $31.1 million  during the three months ended July 31, 2014 compared to approximately $36.4 million during the three months ended July 31, 2013 .  The average price we received for our ethanol decreased by approximately 14.4% for the quarter ended July 31, 2014 as compared to the quarter ended July 31, 2013 . However, the decrease in the price per gallon we received was slightly mitigated by an increase of approximately 0.3% more gallons of ethanol sold during the three months ended July 31, 2014 as compared to the three months ended July 31, 2013 .  There were no ethanol derivative gains or losses during the three months ended July 31, 2014 and 2013 .

Management attributes the drop in ethanol prices to continuing lower corn prices, which impacts the market price of ethanol. Management anticipates that ethanol prices will continue to change in relation to changes in corn and energy prices. However, ethanol prices have been somewhat buoyed by continuing rail delays and a stronger export market which has resulted in tighter ethanol inventories. Rail congestion and delays continue due to increased demand and rail infrastructure limitations. Management anticipates that current backlogs will continue through spring next year or longer if the rail system experiences further stress due to the anticipated record grain harvest this fall. Management anticipates that ethanol prices will continue to face downward pressures through the remainder of 2014 due to the anticipated record grain harvest and anticipated lower corn prices. Despite these downward pressures, ethanol margins have remained favorable as the decline in corn prices has outpaced the decline in ethanol prices. Management anticipates that the favorable price spread between ethanol and corn will continue until the supply and demand balance for ethanol returns to more traditional levels.

Distillers Grains
 
Total sales of distillers grains during the three months ended July 31, 2014 were approximately $6.9 million compared to sales of $7.8 million during the three months ended July 31, 2013 . The average distillers grains price decreased 27.4% for the quarter ended July 31, 2014 as compared to the quarter ended July 31, 2013 , which was partially mitigated by an increase of approximately 21.6% in distillers grains sold during the three months ended July 31, 2014 as compared to the three months ended July 31, 2013 .
 
Management believes these lower distillers grains prices are primarily a result of the decline in the price of corn, as market prices for distillers grains tend to move directionally with the prices of other livestock feed products. We anticipate that the market price of our dried distillers grains will continue to trend lower tracking changes in the price of corn. In addition, if plants that have suspended or reduced production due to rail shipping bottlenecks are able to resume or increase production, distillers grains prices may be negatively impacted.

Further recent changes in export demand for distillers grains by China have negatively impacted distillers grains prices. In June 2014, China stopped issuing permits for the import of distillers dried grains from the US due to the presence of a unapproved GMO corn trait in some distillers grains shipments. The GMO trait has been approved in the US and a number of other countries but not in China. At present, there is no reliable method to test for this trait in distillers grains and no mechanism in the US to meet other certification requirements imposed by China for imports of distillers grains that may contain the unapproved GMO trait. The ethanol industry and US government are examining China's actions to determine appropriate responses as many in the industry and trade community believe these actions are due more to protecting China's own farmers than concerns regarding this GMO trait. Management cannot estimate the effect China's actions will have on the overall distillers grains market long term. This could reduce distillers grains prices in the domestic market by decreasing worldwide demand for distillers grains.


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Table of Contents

Corn Oil

Corn oil sales for the three months ended July 31, 2014 were down approximately 16.9% compared to corn oil sales for the same period in 2013 . Management attributes this decline to decreased corn oil prices which is due primarily to lower corn prices and excess supplies of corn oil relative to demand. Management expects continued lower corn oil prices due to oversupply. Management believes the oversupply in the corn oil market stems, in part, from the diminished demand for corn oil from the biodiesel industry and the resumed production by ethanol plants that had suspended or reduced operations due to rail congestion. The biodiesel industry has been signficantly impacted by the expiration of the biodiesel blenders' tax credit and uncertainty regarding the biodiesel RVOs for 2014 under the RFS, which has resulting in declining demand for biodiesel. Corn oil prices could experience further decreases due to oversupply unless additional demand can be created.

Cost of Goods Sold
 
Our costs of sales include, among other things, the cost of corn and natural gas (which are the two largest components of costs of sales), as well as processing ingredients, electricity, and wages, salaries and benefits of production personnel. Our costs of sales as a percentage of revenues were 78.8% and 91.1% for the three months ended July 31, 2014 and the three months ended July 31, 2013 , respectively. Our gross margin for the three months ended July 31, 2014 increased to 21.2% from 8.9% for the three months ended July 31, 2013 .
    
Corn

The volume of corn we processed was up 6.0% for the three months ended July 31, 2014 as compared to the same period of fiscal year 2013 due to reduced production in 2013 when margins were poor. Although corn prices trended upwards during the three months ended July 31, 2014 , overall we experienced a decrease in corn prices of approximately 30.3% the same period of 2013 . This decrease in corn price is largely attributable to the record 2013 corn harvest and sufficient local supplies. Management expects that corn prices will stay lower through the remainder of our fiscal year due to 2014 corn crop projections and that there will be adequate local supply for our plant operations. The USDA's Crop Production report published on August 12, 2014 increased the USDA's prior projections for US corn production to 14.0 billion bushels for the 2014 growing season, with 1.3 billion bushels of corn production forecasted for Minnesota. If realized, this would be the highest corn production on record for the US. Management expects there to be an adequate corn supply available in our area to operate the ethanol plant and that prices during our 2014 fiscal year may be lower due to plentiful supply. However, corn prices may be volatile in the future depending on weather, world supply and demand, current and anticipated stocks, and other factors.

We had losses related to corn derivative instruments of $125,461 for the three months ended July 31, 2014 , which increased cost of sales, compared to no gains or losses related to corn derivative instruments for the same period of 2013 . We recognize the gains or losses that result from the changes in the value of our derivative instruments from corn in cost of goods sold as the changes occur.  As corn prices fluctuate, the value of our derivative instruments are impacted, which affects our financial performance. We anticipate continued volatility in our cost of goods sold due to the timing of the changes in value of the derivative instruments relative to the cost and use of the commodity being hedged. 

Natural Gas

For the three months ended July 31, 2014 , we experienced an increase of approximately 23.3% in our overall natural gas costs compared to the same period of 2013 due to higher prices. Management anticipates that natural gas prices will continue to hold steady. However, if the natural gas industry experiences production problems, supply disruptions from hurricane activity, or if there are large increases in natural gas demand that limits the amount of gas that can be injected into storage ahead of winter demand, we may experience significant increases in natural gas prices.

Selling, General, and Administrative Expenses
 
Selling, general and administrative expenses include wages, salaries and benefits of administrative employees at the plant, insurance, professional fees and similar costs. Selling, general and administrative expenses for the three months ended July 31, 2014 increased 15.3% compared to the three months ended July 31, 2013 .  Despite the significant increase from period to period, as a percentage of total revenues selling, general and administrative expenses only increased slightly to 2.0% for the three months ended July 31, 2014 , as compared to 1.5% for three months ended July 31, 2013 .  Although we are focused on increasing operating efficiencies, these expenses generally do not vary with the level of production at the plant.
 

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Operating Income (Loss)

Our income from operations for the three months ended July 31, 2014 was approximately $7.5 million compared to a income of $3.4 million for the same period 2013 . This increase resulted from increased production and the improvement of our net margin between the price we received for ethanol and the cost of corn and natural gas used in manufacturing.

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 down 13.1% for the three months ended July 31, 2014 , as compared to the three months ended July 31, 2013 , is
dependent on the balances outstanding and on interest rates, including an additional 2% default interest rate we accrued on our AgStar loans during the three months ended July 31, 2013 . This default rate was not in effect during the three months ended July 31, 2014 . Interest expense for the three months ended July 31, 2014 , includes a write off of deferred financing costs of approximately $329,000 for the subordinated convertible debt and refinancing our senior debt facilities.

Results of Operations for the Nine Months Ended July 31, 2014 , and 2013
 
The following table shows summary information from our Condensed Consolidated Statements of Operations for the nine months ended July 31, 2014 and 2013 .

 
 
Nine Months Ended
 
 
 
Nine Months Ended
 
 
 
 
 
July 31, 2014
 
%
 
July 31, 2013
 
%
 
 
Income Statement Data
(Unaudited)
 
 
 
(Unaudited)
 
 
 
 
Revenues
$
119,141,711

 
100.0
 %
 
125,203,672

 
100.0
 %
 
 
Cost of Goods Sold
96,066,933

 
80.6
 %
 
119,568,050

 
95.5
 %
 
 
Gross Profit
23,074,778

 
19.4
 %
 
5,635,622

 
4.5
 %
 
 
Selling, General, and Administrative Expenses
2,460,719

 
2.1
 %
 
2,537,919

 
2.0
 %
 
 
Operating Income
20,614,059

 
17.3
 %
 
3,097,703

 
2.5
 %
 
 
Other Expense, net
(1,407,792
)
 
(1.2
)%
 
(2,206,906
)
 
(1.8
)%
 
 
Net Income
19,206,267

 
16.1
 %
 
890,797

 
0.7
 %
 
 
Net Income Attributable to Noncontrolling Interest
273,010

 
0.2
 %
 
254,999

 
0.2
 %
 
 
Net Income Attributable to Heron Lake BioEnergy, LLC
$
18,933,257

 
15.9
 %
 
$
635,798

 
0.5
 %
 

Revenues
 
The following table shows the sources of our revenue for the  nine months ended July 31, 2014 :

 
 
 
Amount
 
Percent of Total Revenues
 
 
Ethanol sales
 
$
93,680,047

 
78.6
%
 
 
Distillers grains sales
 
 
21,903,611

 
18.4
%
 
 
Corn oil sales
 
 
2,486,882

 
2.1
%
 
 
Miscellaneous other
 
 
1,071,171


0.9
%
 
 
    Total Revenues
 
$
119,141,711

 
100.0
%
 


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The following table shows the sources of our revenue for the  nine months ended July 31, 2013 :

 
 
 
Amount
 
Percent of Total Revenues
 
 
Ethanol sales
 
$
95,470,167

 
76.3
%
 
 
Distillers grains sales
 
 
25,817,466

 
20.6
%
 
 
Corn oil sales
 
 
2,900,000

 
2.3
%
 
 
Miscellaneous other
 
 
1,016,039

 
0.8
%
 
 
    Total Revenues
 
$
125,203,672

 
100.0
%
 

Revenues decreased slightly, down by 4.8% for the nine months ended July 31, 2014 as compared to the nine months ended July 31, 2013 .  However, our gross margin improved dramatically comparing the nine months ended July 31, 2014 to the same period in 2013 due to increases in the volume of ethanol sold and significant decreases in the average price per bushel of corn processed.
 
Net ethanol revenues during the nine months ended July 31, 2014 were approximately 1.9% less than net ethanol revenues for the nine months ended July 31, 2013 . Additionally, the average price we received for our ethanol for nine months ended July 31, 2014 decreased by approximately 11.9% from the average price received for nine months ended July 31, 2013 and volume of ethanol sold increased by 11.3% from period to period.  There were no ethanol derivative gains or losses during the nine months ended July 31, 2014 and 2013 .
 
Total sales of distillers grains during the nine months ended July 31, 2014 were down approximately 15.2% from total distillers grains sales during the nine months ended July 31, 2013 . In addition, the average price for our distillers grains for the nine months ended July 31, 2014 decreased 25.2% compared to the same period of 2013 . The decrease in the average price was partially offset by an increase of 13.4% in the total volume of distillers grains sold during the nine months ended July 31, 2014 compared to the same period of 2013 .

Total sales of corn oil during the nine months ended July 31, 2014 were down approximately 14.2% from total corn oil sales during the nine months ended July 31, 2013 . This decrease was primarily due to a decrease in the average price for our corn oil for the nine months ended July 31, 2014 compared to the same period of 2013 .

Cost of Goods Sold
 
Our costs of sales include, among other things, the cost of corn used in ethanol and distillers grains production (which is the largest component of costs of sales); natural gas, processing ingredients and electricity. Over the last nine months, on average we have used approximately 1.8 million bushels of corn per month at the plant.
 
The per bushel cost of corn decreased approximately 30.5% in nine months ended July 31, 2014 as compared to the nine months ended July 31, 2013 .  We had a gain related to corn derivative instruments of $206,744 for the nine months ended July 31, 2014 . There were no corn derivative gains or losses during the nine months ended July 31, 2013 .
 
Selling, General and Administrative Expenses
 
Selling, general and administrative expense for the nine months ended July 31, 2014 decreased approximately 3.0% compared to our selling, general and administrative expenses for the nine months ended July 31, 2013 due primarily to fees related to the planned plant asset sale, and the sale of the Lakefield Farmers Elevator.  These expenses represented 2.1% and 2.0% of total revenues for the nine months ended July 31, 2014 and 2013 , respectively.   
 
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 down 35.4% for the nine months ended July 31, 2014 , as compared to the nine months ended July 31, 2013 , is dependent on the balances outstanding and on interest rates, including an additional 2% default interest rate we paid on our AgStar loans during the nine months ended July 31, 2013 . Interest expense for the nine months ended July 31, 2014 , includes a write off of deferred financing costs of approximately $329,000 for the subordinated convertible debt and refinancing our senior debt facilities.


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Changes in Financial Condition for the Nine Months Ended July 31, 2014

The following table highlights our financial condition at July 31, 2014 and October 31, 2013 :

 
 
July 31, 2014
 
October 31, 2013
 
 
Current Assets
$
14,667,256

 
$
7,849,244

 
 
Total Assets
$
66,700,095

 
$
60,793,917

 
 
Current Liabilities
$
6,149,846

 
$
5,061,910

 
 
Long-Term Debt
$
9,772,607

 
$
28,181,155

 
 
Members' Equity Attributable to Heron Lake BioEnergy, LLC
$
50,011,532

 
$
27,142,275

 
 
Non-Controlling Interest
$
766,110

 
$
408,577

 


Our total current assets increased by approximately $6.8 million at July 31, 2014 compared to October 31, 2013 . This increase is due to an increase in trade accounts receivable of approximately $6.1 million at July 31, 2014 as compared to October 31, 2013 , which was slightly offset by a decrease of approximately $682,000 in prepaid expenses at July 31, 2014 compared to October 31, 2013 . Trade accounts receivable increased because we were awaiting payment for a larger quantity of our products at  July 31, 2014  compared to  October 31, 2013 due to our change of ethanol marketers from Gavilon, LLC to Eco-Energy, LLC in November 2013. We also experienced a slight increase in cash on hand of approximately $600,000 and inventory of approximately $600,000 at July 31, 2014 as compared to October 31, 2013 .

Total current liabilities totaled approximately $6.1 million at July 31, 2014 , an increase of approximately $1.1 million from October 31, 2013 . This increase was primarily due to an increase in our accounts payable of approximately $3.4 million at July 31, 2014 as compared to October 31, 2013 , which was partially offset by a decrease of $2.4 million current liabilities of our long-term debt. The increase in our accounts payable is due to the termination of our corn supply agreement with Gavilon, our former procurement contractor. Since terminating the corn supply agreement, we buy our own corn and are no longer netting corn purchases with sales of ethanol and distillers grain. The decrease in the current liability of our long-term debt was a result of the redemption of our subordinated convertible debt effective July 1, 2014.

Our long-term debt decreased approximately $18.4 million from October 31, 2013 to July 31, 2014 . The decrease is due to payments on our AgStar debt facilities and the conversion and redemption of the subordinated convertible debt as discussed above.

Members’ equity attributable to Heron Lake BioEnergy, LLC increased approximately $22.9 million at July 31, 2014 as compared to October 31, 2013 . The increase was directly related to the net income attributable to the Company of approximately $18.9 million for the nine months ended July 31, 2014 and the conversion of approximately $3.9 million in principal amount into Class A units of the Company when the Company redeemed its subordinated convertible debt effective July 1, 2014.



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Liquidity and Capital Resources

Our principal sources of liquidity consist of cash provided by operations, cash and equivalents on hand, and available borrowings under our credit facility with AgStar. Our principal uses of cash are to pay operating expenses of the plant and to make debt service payments on our long-term debt.

Cash Flows

As of July 31, 2014 , we had cash of approximately $1.2 million , current assets of approximately $14.7 million and total assets of approximately $66.7 million . The following table summarizes our sources and uses of cash and equivalents from our unaudited condensed consolidated statements of cash flows for the periods presented:
 
 
 
Nine Months Ended 
 July 31,
 
 
 
2014
 
2013
 
 
Net cash provided by operating activities
$
20,195,686

 
$
2,638,461

 
 
Net cash (used in) provided by investing activities
$
(2,698,762
)
 
$
3,459,945

 
 
Net cash used in financing activities
$
(16,888,371
)
 
$
(5,729,003
)
 
 
Net increase in cash
$
608,553

 
$
369,403

 
 
Operating Cash Flows . During the nine months ended July 31, 2014 , operating activities provided approximately $20.2 million in cash, as compared to $2.6 million for the nine months ended July 31, 2013 . This improvement consists primarily of generating a net income of approximately $19.2 million for the nine months ended July 31, 2014 as compared to a net income of $0.9 million for the same period of 2013 . Currently, our capital needs are being adequately met through cash flows from our operating activities and our currently available credit facilities.
 
Investing Cash Flows . During the nine months ended July 31, 2014 , we had capital expenditures of approximately $2.7 million . In the same period in 2013 , we received approximately $3.7 million attributable to proceeds from the sale of grain storage assets.  
 
Financing Cash Flows . During the nine months ended July 31, 2014 , we used approximately $16.9 million in cash in financing activities which consisted of payments on our long term debt of $16.7 million and payments on the convertible subordinated debt of $207,000. In the same period in 2013 , we made payments of $13.9 million on our long term debt and $480,000 on our line of credit and had proceeds of $520,000 from long term debt.

Indebtedness

Refinancing of AgStar Credit Facilities

On July 29, 2014, we entered into a new comprehensive credit facility with AgStar Financial Services, FCLA (“AgStar”).  The new comprehensive credit facility consists of a $28 million term revolving loan with a maturity date of March 1, 2022.  In exchange for this new comprehensive credit facility, we executed a mortgage in favor of AgStar covering all of our real property and granted AgStar a security interest in all of our equipment and other assets.  Our new credit facility with AgStar is subject to numerous covenants requiring us to maintain various financial ratios.
 
At the time we executed the new credit facility with AgStar, we repaid the entire outstanding balance of our prior credit facilities with AgStar.  Our credit facilities with AgStar prior to the payoff included our term note and a revolving term note.  At the loan closing, we paid off the $7.5 million balance of the revolving term note. There was no outstanding balance on the prior AgStar term note at loan closing.  AgStar canceled its prior mortgage and security interest in all of our assets.  We currently have no further obligations under our prior AgStar credit facilities. For additional information related to the repayment of the term note and a revolving term note under our prior AgStar master loan agreement, see Note 6 included herein as part of the Notes to the Condensed Consolidated Unaudited Financial Statements.


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Revolving Term Note

We have a total of $28 million available under the new revolving term loan with AgStar.  Interest on this loan accrues at 3.25% above the One-Month London Interbank Offered Rate (LIBOR) Index rate.  The interest rate is subject to weekly adjustment.  We may elect to enter into a fixed interest rate on this loan at various times throughout the term of the loan as provided in the loan agreements.  The maximum principal amount of this loan decreases by $3.5 million annually starting on March 1, 2015 and continuing thereafter until maturity.  In the event any amount is outstanding on this loan in excess of the new credit limit, we agreed to repay principal on the loan until we reach the new credit limit.  We agreed to pay an annual fee of 0.5% of the unused portion of this loan.  The revolving term loan is subject to a prepayment fee for any prepayment on the Term Loan prior to July 1, 2016 due to refinancing. As of July 31, 2014 , we had approximately $7.5 million outstanding on this loan and the interest rate was 3.41% per year and approximately $20.5 million available to be drawn.
    
For additional information related to the the revolving term note, see Note 6 included herein as part of the Notes to the Condensed Consolidated Unaudited Financial Statements.

Administrative Agency Agreement
    
As part of the Credit Facility closing, we entered into an Administrative Agency Agreement with CoBank, ACP (“CoBank”). CoBank purchased a participation interest in the AgStar loan and was appointed the administrative agent for the purpose of servicing the loans.     

Subordinated Convertible Debt

On May 2, 2014, we issued a notice to U.S. Bank that we intended to redeem all of the outstanding 7.25% Secured Subordinated Notes due 2018 (the “Notes”) on July 1, 2014. The announced redemption was pursuant to the Company's "optional redemption" right in the indenture governing the notes. A notice of the redemption was mailed to Note holders by the trustee on May 23, 2014. The outstanding principal balance of $4.1 million would be redeemed at a redemption price equal to 100% of the aggregate principal amount plus accrued and unpaid interest to interest to, but excluding, the
redemption date. The Company's obligation to pay the redemption price on the redemption date was subject to the right of the holders of the notes to elect to convert the principal amount of their Notes into capital units of the Company at a conversion rate of $0.30 per unit.
 
As of the close of business on June 20, 2014, the last day to elect conversion, note holders holding an aggregate principal amount of approximately $3.9 million of Notes elected to convert their Notes into units of the Company. On July 1, 2014, the Company issued 13,120,000 Class A units of the Company to the holders of the Notes electing conversion and redeemed the remaining $207,000 of the Notes at par value. In addition, on the same day, the Company paid accrued and unpaid interest through July 1, 2014 to all note holders, including those electing conversion, per the terms of the Notes and the Indenture.

Following the issuance of the Class A units described above, the Company has a total of 62,932,107 Class A units and 15,000,000 Class B units issued and outstanding, for an aggregate total of 77,932,107 units issued and outstanding.

Other Credit Arrangements

In addition to our primary credit arrangement with AgStar and our subordinated convertible debt, we have other material credit arrangements and debt obligations.

In October 2003, we entered into an industrial water supply development and distribution agreement with the City of Heron Lake, Jackson County, and Minnesota Soybean Processors. In consideration of this agreement, the Company and Minnesota Soybean Processors are allocated equally the debt service on $735,000 in water revenue bonds that were issued by the City to support this project that mature in February 2019. The parties have agreed that prior to the scheduled expiration of the agreement, they will negotiate in good faith to replace the agreement with a further agreement regarding the                 

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wells and related facilities. In May 2006, we entered into an industrial water supply treatment agreement with the City of Heron Lake and Jackson County. Under this agreement, we pay monthly installments over 24 months starting January 1, 2007 equal to one years' debt service on approximately $3.6 million in water revenue bonds, which will be returned to the Company if any funds remain after final payment in full on the bonds and assuming we comply with all payment obligations under the agreement. As of July 31, 2014 , there was a total of $2.4 million in outstanding water revenue bonds. We classify our obligations under these bonds as assessments payable. The interest rates on the bonds range from 0.50% to 8.73%.

To fund the purchase of the distribution system and substation for the plant, we entered into a loan agreement with Federated Rural Electric Association pursuant to which we borrowed $600,000 by a secured promissory note. Under the note the Company is required to make monthly payments to Federated Rural Electric Association of $6,250 consisting of principal and an annual fee of 1% beginning on October 10, 2009. In exchange for this loan, Federated Rural Electric Association was granted a security interest in the distribution system and substation for the plant. The balance of this loan at July 31, 2014 was $237,500 .

We financed our corn oil separation equipment from the equipment vendor. We pay approximately $40,000 per month on this debt, conditioned upon revenue generated from the corn oil separation equipment. The monthly payment includes implicit interest of 5.57% until maturity in May 2015. The note is secured by the corn oil separation equipment. The balance of this loan at July 31, 2014 was approximately $263,400.

We also have a note payable to the minority owner of Agrinatural Gas, LLC in the amount of $300,000 at July 31, 2014 . Interest on the note is 5.43% and the note has a maturity date in October 2014.

The Company had a note payable in connection with the construction of its pipeline assets. This loan was initially due in December 2011, but was converted in February 2012 to a term loan with a three-year repayment period. In November 2013, the note payable was refinanced with the lending institution with additional borrowings of approximately $759,000 being made. The note was paid off in full on July 29, 2014 by Agrinatural using funds loaned to Agrinatural by the Company described below.

Loans to Agrinatural

Loan from the Company

On July 29, 2014, the Company entered into an intercompany loan agreement and related loan documents with Agrinatural. Under the loan agreement, the Company agreed to make a five-year term loan in the principal amount of $3.05 million to Agrinatural for use by Agrinatural to repay approximately $1.4 million of its outstanding debt and provide approximately $1.6 million of working capital to Agrinatural. Interest on the term loan accrues at a variable rate equal to the One-Month LIBOR rate plus 4.0%, with the interest rate capped and not to exceed 6.0% per annum.  The interest rate
is subject to weekly adjustment.  Prior to January 1, 2015, Agrinatural is required to pay only monthly interest on the term loan.  Commencing January 1, 2015, Agrinatural is required to make monthly installments of principal plus accrued interest. The entire principal balance and accrued and unpaid interest on the term loan is due and payable in full on December 1, 2019. 

In exchange for the Loan Agreement, the Agrinatural executed a Security Agreement granting the Company a first lien security interest in all of Agrinatural's equipment and assets and a Collateral Assignment assigning the Company all of Agrinatural's interests in its contracts, leases, easements and other agreements. In addition, Rural Energy Solutions, LLC, the minority owner of Agrinatual ("RES"), executed a guarantee under which RES guaranteed full payment and performance of 27% of Agrinatural's obligations to the Company.


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Table of Contents

Loan from Granite Falls Energy

Agrinatural was loaned $500,000 from Granite Falls Energy, LLC, which owns approximately 50.6% of our outstanding membership units, during July 2014. The demand promissory note accrued interest at 5.29% and payment was due in full on or before July 31, 2014. Agrinatural paid the balance full, including accrued interest, on July 29, 2014.

Critical Accounting Estimates
 
Management uses estimates and assumptions in preparing our financial statements in accordance with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. We believe that of our significant accounting policies summarized in Note 1 to our condensed financial statements included with this Form 10-Q. At July 31, 2014 , our critical accounting estimates continue to include those described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2013 . Management has not changed the method of calculating and using estimates and assumptions in preparing our condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States of America.

Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements.
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
We are exposed to the impact of market fluctuations associated with interest rates and commodity prices as discussed below. We have no exposure to foreign currency risk as all of our business is conducted in U.S. Dollars. We use derivative financial instruments as part of an overall strategy to manage market risk. We use cash, futures and option contracts to hedge changes to the commodity prices of corn, ethanol and natural gas. We do not enter into these derivative financial instruments for trading or speculative purposes, nor do we designate these contracts as hedges for accounting purposes pursuant to the requirements of Generally Accepted Accounting Principles ("GAAP").

Interest Rate Risk

We are exposed to market risk from changes in interest rates. Exposure to interest rate risk results primarily from our credit facilities with AgStar. The specifics of these credit facilities are discussed in greater detail in “ Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Indebtedness.”


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Below is a sensitivity analysis we prepared regarding our income exposure to changes in interest rates. The sensitivity analysis below shows the anticipated effect on our income from a 10% adverse change in interest rates for a one-year period.

 
Outstanding Variable Rate Debt at July 31, 2014
 
Interest Rate at July 31, 2014
Interest Rate Following 10% Adverse Change
Approximate Adverse Change to Income
 
 
$
7,486,628

 
3.41%
3.76%
$26,203
 

Commodity Price Risk

We seek to minimize the risks from fluctuations in the prices of raw material inputs, such as corn and natural gas, and finished products, such as ethanol and distillers grains, through the use of hedging instruments. In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate. Although we believe our hedge positions accomplish an economic hedge against our future purchases and sales, management has chosen not to use hedge accounting, which would match the gain or loss on our hedge positions to the specific commodity purchase being hedged. We are using fair value accounting for our hedge positions, which means as the current market price of our hedge positions changes, the realized or unrealized gains and losses are immediately recognized in our cost of goods sold or as an offset to revenues. The immediate recognition of hedging gains and losses under fair value accounting can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged.

As corn prices move in reaction to market trends and information, our income statement will be affected depending on the impact such market movements have on the value of our derivative instruments. Depending on market movements, crop prospects and weather, these price protection positions may cause immediate adverse effects, but are expected to produce long-term positive growth for us.

A sensitivity analysis has been prepared to estimate our exposure to ethanol, corn and natural gas price risk. Market risk related to these factors is estimated as the potential change in income resulting from a hypothetical 10% adverse change in the fair value of our corn and natural gas prices and average ethanol price as of July 31, 2014 , net of the forward and future contracts used to hedge our market risk for corn and natural gas usage requirements. The results of this analysis, which may differ from actual results, are as follows:
 
 
Estimated Volume Requirements for the next 12 months (net of forward and futures contracts)
Unit of Measure
Hypothetical Adverse Change in Price as of July 31, 2014
Annual Adverse Change to Income
Natural Gas
1,655,000

MMBTU
10.00
%
$809,000
Ethanol
52,500,000

Gallons
10.00
%
$10,395,000
Corn
20,050,000

Bushels
10.00
%
$6,416,000

Item 4. Controls and Procedures
 
Effectiveness of Disclosure Controls and Procedures
 
In connection with the preparation of this Quarterly Report on Form 10-Q, our Chief Executive Officer, Steve Christensen, and our Chief Financial Officer, Stacie Schuler, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of July 31, 2014 . In making this evaluation, our management considered the matters relating to the previously reported material weaknesses and our remediation of those material weaknesses as discussed below. Although, we have either remediated or or implemented the activities we believe are necessary to remediate the material weaknesses in our internal control over financial reporting as of July 31, 2014 , we have not yet finalized the testing of the operating effectiveness of our remediation activities. Therefore, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of July 31, 2014 .


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Remediation of Previously Reported Material Weaknesses

In our Annual Report on Form 10-K for the year ended October 31, 2013 and in our subsequent quarterly report on Form 10-Q for the quarters ended January 31, 2014, management concluded that our internal control over financial reporting was not effective for such period because of the following material weaknesses identified in such reports. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

Financial Statement Close Process

We did not have adequate financial reporting and close procedures. As previously reported in our Form 10-K for the year ended October 31, 2013 , during fiscal 2013, we experienced turnover in our finance group impacting our financial close process. In July 2013, the Company entered into a management agreement with Granite Falls Energy to provide, among other things, assistance with our finance and accounting functions. In addition, we have implemented enhanced procedures and controls to remediate this weakness.

Revenue Recognition

We did not maintain effective controls to ensure that revenues were recognized in accordance with generally accepted accounting principles. Specifically, effective controls were not designed and in place to ensure the completeness, accuracy and timeliness of pricing certain ethanol and distillers grains sales transactions. This control deficiency resulted in restatement adjustments to our interim condensed financial information for quarter ended July 31, 2012. In July 2013, the Company entered into a management agreement with Granite Falls Energy to provide, among other things, assistance with our finance and accounting functions. Subsequently, we have implemented new revenue recognition models and related internal controls to remediate this weakness.

Changes in Internal Control over Financial Reporting
 
Our management, including our principal executive officer and principal financial officer, have reviewed and evaluated any changes in our internal control over financial reporting that occurred during the quarter ended July 31, 2014 . During the quarter ended July 31, 2014 , management has completed implementation of the changes as described above in " Remediation of Previously Reported Material Weaknesses ". Management believes the remediation measures that we have implemented have had a positive impact on our internal control over financial reporting and that the controls with respect to the financial statement close process and revenue recognition were appropriately designed at July 31, 2014 . However, the timing of our testing and evaluation of the operating effectiveness of our internal controls limited management’s ability to conclude that such controls were operating effectively for a reasonable period of time prior to July 31, 2014 . We anticipate that the testing and evaluation of the operating effectiveness of our internal controls will be completed by the time we file our annual report on Form 10-K for the fiscal year ended October 31, 2014.

PART II. OTHER INFORMATION
 
Item 1. Legal Proceedings.
 
From time to time in the ordinary course of business, the Company 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
 
There have been no material changes to the risk factors disclosed in Item 1A of our Form 10-K for the fiscal year ended October 31, 2013 . 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.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
On May 2, 2014, we issued a notice to U.S. Bank that we intend to redeem all of the 7.25% Secured Subordinated Notes due 2018, outstanding principal balance of $4.1 million (the “Notes”), on July 1, 2014. A notice of the redemption was mailed to Note holders by the trustee on May 23, 2014. The Company's obligation to pay the redemption price on the redemption date was subject to the right of the holders of the notes to elect to convert the principal amount of their notes into capital units of the Company at a conversion rate of $0.30 per unit.

As of the close of business on June 20, 2014, the last day to elect conversion, note holders holding an aggregate principal amount of approximately $3.9 million of Notes elected to convert their Notes into units of the Company. On July 1, 2014, the Company issued 13,120,000 Class A units of the Company to the holders of the Notes electing conversion per the terms of the Notes and the indenture.

Following the issuance of the Class A units described above, the Company has a total of 62,932,107 Class A units and 15,000,000 Class B units issued and outstanding, for an aggregate total of 77,932,107 units issued and outstanding.
  
The Class A Units issued in this transaction have not been registered under the Securities Act of 1933, as amended and may not be offered or sold in the United States in the absence of an effective registration statement or exemption from the registration requirements under the Act. The Class A units were issued solely to former holders of the Notes upon conversion pursuant to the exemption from registration provided under Section 3(a)(9) of the Act. This exemption is available to the Company because the units were exchanged by the Company with its existing security holders in accordance with the terms of the indenture governing the Notes with no commission or other remunerations being paid or given for soliciting such an exchange. Based on representations from each note holder, including a representation that each such recipient is an accredited investor, the Company believes that the issuance of the Class A units is also exempt from registration under Section 4(2) of the Act, as a transaction by an issuer not involving a public offering.
    
Item 3. Defaults Upon Senior Securities
 
None.
 
Item 4. Mine Safety Disclosures
 
None.

Item 5.  Other Information
 
None.

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Item 6. Exhibits
 
The following exhibits are included in this report:
 
Exhibit
No.
 
Exhibit
 
 
 
10.1
 
Loan Agreement dated July 29, 2014 by and between Agrinatural Gas, LLC, and Heron Lake BioEnergy, LLC*
 
 
 
10.2
 
Promissory Note dated July 29, 2014 between Heron Lake BioEnergy, LLC, as Holder, and Agrinatural Gas, LLC, as Borrower
 
 
 
10.3
 
Security Agreement dated July 29, 2014 by and between Agrinatural Gas, LLC, and Heron Lake BioEnergy, LLC*
 
 
 
10.4
 
Collateral Assignment dated July 29, 2014 by and between Agrinatural Gas, LLC, and Heron Lake BioEnergy, LLC*
 
 
 
10.5
 
Guaranty dated July 29, 2014 by Rural Energy Solutions, LLC, guarantor, in favor of Heron Lake BioEnergy, LLC*
 
 
 
10.6
 
Master Loan Agreement dated July 29, 2014 by and between AgStar Financial Services, FLCA and Heron Lake BioEnergy, LLC*
 
 
 
10.7
 
$28,000,000 Revolving Term Loan Supplement dated July 29, 2014 by and between AgStar Financial Services, FLCA and Heron Lake BioEnergy, LLC*
 
 
 
10.8
 
Security Agreement dated July 29, 2014 between Heron Lake BioEnergy, LLC and AgStar Financial Services, FLCA and CoBank, ACB*
 
 
 
10.9
 
Real Estate Mortgage, Assignment of Rents and Profits and Fixture Financing Statement dated July 29, 2014 by and between AgStar Financial Services, FLCA, CoBank, ACB and Heron Lake BioEnergy, LLC*
 
 
 
10.10
 
Guaranty dated July 29, 2014 by HLBE Pipeline Company, LLC in favor of AgStar Financial Services, FLCA*
 
 
 
10.11
 
Security Agreement dated July 29, 2014 between HLBE Pipeline Company, LLC and AgStar Financial Services, FLCA and CoBank, ACB*
 
 
 
31.1
 
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Exchange Act.*
 
 
 
31.2
 
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Exchange Act.*
 
 
 
32.1
 
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350*
 
 
 
32.2
 
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350*
 
 
 
101.1
 
The following materials from Heron Lake BioEnergy’s Quarterly Report on Form 10-Q for the quarterly period ended July 31, 2014, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements.**
 
* Filed herewith.
** Furnished herewith.



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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 15, 2014
/s/ Steve A. Christensen
 
Steve Christensen
 
Chief Executive Officer
 
 
Date: September 15, 2014
/s/ Stacie Schuler
 
Stacie Schuler
 
Chief Financial Officer


29



LOAN AGREEMENT
DATED: JULY 29, 2014

This Loan Agreement (“Agreement”) is between Agrinatural Gas, LLC, a Delaware Limited Liability Company (hereinafter “Agrinatural”), and Heron Lake BioEnergy, LLC, a Minnesota Limited Liability Company, with an office located in Heron Lake, Minnesota (hereinafter “Heron Lake”).

WHEREAS, Agrinatural desires to obtain a loan from Heron Lake; and

WHEREAS, Heron Lake desires to provide a loan to Agrinatural under certain terms and conditions; and

NOW, THEREFORE, in consideration of the loan granted at the time of signing this Agreement and other good and valuable consideration, including the mutual reliance hereon, Agrinatural and Heron Lake agree as follows:

1)     Compliance with Terms and Conditions . Agrinatural shall comply with the terms of all validly executed Notes, collateral security documents (whether relating to personal property and/or real property) and any other documents of every type and description related to its loan with Heron Lake as such currently exists and as such arises in the future.

2)     Execution of Additional Documents upon Request . Agrinatural agrees that upon request it shall execute all documents reasonably necessary to grant and perfect the Loan and a Mortgage/Lien on all assets of Agrinatural. Such additional documents may include, without limitation, one or more real estate mortgages, one or more supplemental security agreements, financing statements, assignments, agreements and other documents.

3)     Cross-Collateralization . Simultaneous with execution hereof, Agrinatural shall execute a Security Agreement granting a security interest in all assets of Agrinatural to Heron Lake to secure any and all debt now or hereafter owed by Agrinatural to Heron Lake. Upon the request of Heron Lake, Agrinatural shall grant a Mortgage/security interest in all property of every type and nature and all such property shall serve as collateral for all indebtedness owed by Agrinatural to Heron Lake.

4)     Inspections . Heron Lake may enter upon any location where Agrinatural assets are located to inspect such assets as granted as collateral to Heron Lake; provided that such inspections shall occur at reasonable times and upon advance notice to Agrinatural and

1



further subject to observance by Heron Lake of all appropriate protocol for security and safety.

5)     Collateral Security . If requested by Heron Lake, Agrinatural shall grant mortgages/liens to Heron Lake on the following collateral of Agrinatural:

a)
Such Security Agreements as shall grant Heron Lake a first priority lien on all of Agrinatural’s personal property including, but not limited to, all inventory, supplies, accounts, goods, chattel paper, equipment, instruments, investment property, documents, deposit accounts, Letter of Credit rights, general intangibles, contracts, etc., as all defined in Article 9 of the Minnesota Uniform Commercial Code.

b)
Upon request of Heron Lake, Agrinatural shall grant Heron Lake a first position security interest in and to an Assignment for purposes of security of all rights and obligations of contracts and agreements incidental to Agrinatural’s business operations, including, but not limited to, any agreements regarding the delivery and/or sale of natural gas or other products. Such shall include, but not be limited to, assignments of all agreements incidental to Agrinatural’s business operations.

c)
Upon request, Agrinatural shall assign to Heron Lake for security purposes its interest in all hedge accounts and assign any documentation reasonably required to secure Heron Lake’s interest in any and all accounts relating to hedging activities. Agrinatural hereby authorizes Heron Lake to enter into a Control Agreement with Agrinatural’s broker, as such broker my exist from time-to-time, relating to all hedge or brokerage accounts and hedging activities and Agrinatural shall join in executing all such documents and agreements reasonably required by Heron Lake.

6)     Insecurity/Other Conditions . Before making any loan disbursements or renewals, Heron Lake has the right to review the creditworthiness of Agrinatural. If at any time Heron Lake deems itself insecure, or if it would be made insecure by the requested loan disbursement or loan renewal, then, in Heron Lake’s sole discretion, Heron Lake need not make any further loan disbursements hereunder and may exercise all rights and remedies allowed by the loan documents (Note(s), Security Agreement(s), etc.).


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7)     Representations and Warranties . Agrinatural represents and warrants to Heron Lake as follows:

7.1
Limited Liability Company Existence and Power . Agrinatural is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Delaware, and is duly licensed and qualified to transact business in all jurisdictions where the character of the property owned or leased or the nature of the business transacted by it makes its licensing and qualification necessary. Agrinatural has all requisite power and authority to conduct its business, to own its properties, and to execute and deliver, and to perform all of the obligations under this Agreement, the Notes and the Security Agreements.

7.2
Limited Liability Company Authority . The execution, delivery and performance by Agrinatural of this Agreement, the Notes, Mortgages, Security Agreements and other documents required hereby and the borrowing, from time-to-time, hereunder do not: (1) require any consent or approval of the members of Agrinatural, or any authorization, consent or approval by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign; (2) violate any provision of any law, rule or regulation or of any order, writ, injunction or decree presently in effect having applicability to Agrinatural or to the Limited Liability Company Agreement of Agrinatural; (3) result in the breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which Agrinatural is a party or by which it or its properties may be bound or affected; or (4) result in or require the creation or imposition of any mortgage, deed of trust, pledge, lien, security interest or other charge or encumbrance of any nature upon or with respect to any of the properties now owned or hereafter acquired by Agrinatural.

7.3
Financial Condition . The financial statements delivered to Heron Lake are true and correct and accurately show the condition of Agrinatural. There are no undisclosed contingent liabilities of which Agrinatural is aware that would materially impact upon their financial condition. All taxes owed by Agrinatural have been paid or are fully reserved or the liabilities otherwise disclosed in prior financial statements issued to Heron Lake. In addition, there has been no material adverse change in the business, properties or condition (financial or otherwise) of Agrinatural since the date of the latest financial statement given to Heron Lake.

7.4
Litigation . There are no actions, suits or proceedings pending or, to the knowledge of Agrinatural, threatened against or affecting Agrinatural or the

3



properties of Agrinatural before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which, if determined adversely to Agrinatural, would have a material adverse effect on the financial condition, properties or operations of Agrinatural.

7.5
Titles and Liens . Agrinatural has good and marketable title to each of the properties and, as it is reflected in the latest balance sheet given to Heron Lake, free and clear of all Mortgages, security interests, liens and encumbrances, except for covenants, restrictions, rights, easements and minor irregularities of title which do not materially interfere with the business or operations of Agrinatural as presently conducted.

7.6
Project Compliance . The current assets and operations of Agrinatural do, or upon completion, shall comply with all applicable environmental, pollution control and ecological laws, ordinances, rules and regulations. All governmental authorities having jurisdiction over the Real Estate have issued all necessary permits, licenses or other authorizations for the construction, occupancy, operation and use of the Real Estate.

7.7
Utility Availability . Subject only to payment of fees to be paid upon the approved budget, all utility and municipal services required for the construction, occupancy and operation of Agrinatural’s facilities and assets, including, but not limited to, water supply, gas, electric and telephone facilities, are available for use and tap-on at the boundaries of the Sites, and shall be available in sufficient amounts for the normal and intended use of the facilities. Written permission has been or shall be obtained from the applicable utility companies or municipalities to connect the facilities into each of these services.

The above warranties and representations shall be deemed continuing, fully binding and enforceable by Heron Lake until all indebtedness owed by Agrinatural to Heron Lake is paid in full.

8. Conditions and Affirmative Covenants of Agrinatural . As long as any of the Notes or Loans made or being made under the terms of this Agreement shall remain unpaid or there are any commitments outstanding, Agrinatural shall comply with the following requirements, unless Heron Lake shall otherwise consent in writing:

8.1     Financial Statements . Agrinatural shall deliver to Heron Lake, as soon as available and in such frequencies as Heron Lake shall request from time-to-time, and in any event, within thirty (30) days after the end of the most recent month of the request, complete financial statements and profit and loss statements as of the end of the month and for the year to date, in reasonable

4



detail, and stating, in comparative form, the figures for the corresponding date or period in the previous year, all prepared in accordance with generally accepted accounting principles applied on a basis consistent with the accounting practices reflected in the annual financial statements.

Agrinatural shall deliver to Heron Lake, as soon as available and in such frequencies as Heron Lake shall request from time-to-time, and in any event, within thirty (30) days after the end of the most recent month of the request, complete budget updates regarding expected income and expected costs as of the end of the month and for the year to date, in reasonable detail, and stating, in comparative form, the figures for the corresponding date or period in the previous year, all prepared in accordance with generally accepted accounting principles applied on a basis consistent with the accounting practices reflected in the annual financial statements.

In addition, as soon as available, and, in any event, within ninety (90) days after the end of each fiscal year of Agrinatural, Agrinatural shall produce a copy of an unqualified audit prepared by a certified public accountant. The audit shall include the balance sheet of Agrinatural as of the end of such fiscal year and the related statements of income, retained earnings and changes in financial position of Agrinatural in the fiscal year then ended, all in reasonable detail and all prepared in accordance with generally accepted accounting principles applied on a consistent basis.

In addition, as soon as available, and, in any event, within ninety (90) days after filing, Agrinatural shall produce a copy of all tax returns filed by Agrinatural.
    
8.2     Books and Records; Inspection and Examination . Agrinatural shall keep accurate books of record and account for itself in which true and complete entries shall be made in accordance with generally accepted accounting principles consistently applied and, upon the request of Heron Lake, shall give any representative of Heron Lake access to and permit such representative to examine, copy or make extracts from any and all books, records and documents in their possession, to inspect any of the properties, and to discuss their affairs, finances and accounts with any of the principal officers, all at such time during normal business hours and as often as Heron Lake may reasonably request.

8.3     Production Records . Agrinatural shall maintain such records and reports of production and shall provide said reports to Heron Lake on such frequency as shall be agreed on by Heron Lake.


5





8.4     Insurance . Agrinatural shall obtain and maintain insurance with insurers believed by Agrinatural to be financially sound and reputable. The insurance coverages to be obtained by Agrinatural shall include, but not be limited to, property loss, general casualty, liability, business interruption, construction in progress and such other coverages usually carried by companies engaged in similar business and owning similar properties in the same general areas in which Agrinatural operates. All insurance coverages shall be in amounts acceptable to Heron Lake and shall list Heron Lake as loss payee.

8.5     Preservation of Limited Liability Company Existence . Agrinatural shall preserve and maintain its limited liability company existence and all of its rights, privileges and franchises; provided, however, that Agrinatural shall not be required to preserve any of its rights, privileges and franchises if its members shall determine that the preservation thereof is no longer desirable in the conduct of business of Agrinatural and that the loss thereof is not disadvantageous in any material respect to Heron Lake as a holder of Notes under the terms of this Agreement.

8.6     Costs and Expenses . Agrinatural shall pay, when due, all costs and expenses required by this Agreement, including, without limitation: (a) all taxes and assessments applied to the Real Estate; and (b) all premiums for insurance policies.

8.7     Negative Pledge . Agrinatural shall not mortgage, pledge, assign or grant security interests in any asset to any other party without the prior written consent of Heron Lake. Agrinatural shall not borrow money from any other party without the prior written consent of Heron Lake.

8.8     Dividends and Distributions to Members . Agrinatural shall not: (a) pay member dividends or distributions, and (b) make payments to members (owners) in the form of labor expense or management fees in any fiscal year without the prior written consent of Heron Lake, however, Heron Lake agrees that a capital distribution in an amount not to exceed fifty percent (50%) of prior fiscal year earnings in the aggregate may be made to members each year for payment of members’ estimated personal income tax liability resulting from Agrinatural’s earnings. Agrinatural acknowledges that said capital distribution will not materially affect the financial condition of Agrinatural, and further acknowledges that Agrinatural will remain in full compliance with all agreements made with Heron Lake after said capital distribution. Heron Lake reserves the right to terminate or suspend in any year Agrinatural’s ability

6



to make a capital distribution to its members as provided herein for payment of members’ estimated personal income tax liability.

8.9     Capital Expenditures . Agrinatural shall not, during any calendar year, beginning January 1, 2015 and thereafter, acquire or obligate themselves to acquire any facilities, cash investments in other organizations or other non-current assets of more than Five Hundred Thousand and no/100 Dollars ($500,000.00) (including the asset value of leased equipment) without the prior written consent of Heron Lake.

8.10     Accounts Receivable . Agrinatural shall take action on any aged accounts receivable more than thirty (30) days old and over One Hundred and no/100 Dollars ($100.00). Agrinatural will initiate notice and disconnection procedures on accounts receivable more than sixty (60) days old and over One Hundred and no/100 Dollars ($100.00), pursuant to State Rule or Statute, or Commission Proceedings.

8.11     Inventory Report . Agrinatural shall furnish inventory reports in such form and frequency as required by Heron Lake.

8.12     Hedge Line Monitoring . Agrinatural shall provide Heron Lake a written monthly statement and reconciliation of all transactions associated with the purchase and sale of commodities, to be received within ten (10) days after the end of each month.

8.13
Minimum Debt Service Coverage Ratio . The Company will have at the end of the fiscal year 2014 of the Company a “Debt Service Coverage Ratio” (as defined below) of not less than 2.00 to 1.00, and for each fiscal year thereafter a ratio of not less than 1.20 to 1.00. For purposes hereof, the term “Debt Service Coverage Ratio” shall mean the following (all as calculated for the most current year end in accordance with GAAP): (1) net income plus depreciation and amortization, divided by (2) $610,000.

8.14     Minimum Working Capital . The Company, beginning December 31, 2014 will have at the end of each period for which financial statements are required to be furnished an excess of current assets over current liabilities (both as determined in accordance with GAAP) of not less than $400,000.00,     provided, however, any note payable to a related party or other long-term debt classified as a current liability may be excluded from current liabilities.

8.15     Environmental Representations, Conditions and Indemnity Clause . Except
        

7




as disclosed in writing to Heron Lake, Agrinatural represents and agrees as follows:

(a)     Hazardous Material Notice . At all times during which Agrinatural is in control or possession of the facilities, whether directly or indirectly, Agrinatural agrees that it will not cause or permit any hazardous wastes to be brought upon, used, or stored upon or at the facilities which are not necessary or useful to Agrinatural’s business. For purposes of this section, “hazardous wastes” shall have the same meaning as defined at Minn. Stat. § 116.06, Subd. 11. All hazardous wastes that are necessary or useful to the facilities shall be properly handled and disposed of to comply with all federal, state, local and county laws and regulations governing such materials. Agrinatural shall immediately notify Heron Lake of any notice it receives from any federal, state or local governmental or regulatory agencies or entities of ay violations relating to hazardous wastes. Agrinatural shall comply with all rules, regulations and directives of the Minnesota Pollution Control Agency in any way relating to the handling, storage and disposal of hazardous wastes, and Agrinatural shall be solely liable under the Minnesota Environmental Response and Liability Act.

(b)     No Violation of Environmental Laws . Agrinatural has not and shall not violate any federal, state or local environmental laws relating to or affecting their owned or leased Real Estate and/or pipelines, which violation would have a material effect on Agrinatural’s business or the value of the collateral.

(c)     Licenses . Agrinatural shall, at all times, continue to exercise due diligence to obtain and maintain all licenses, permits and other approvals necessary to comply with environmental laws.

(d)     No Lawsuits . There is no pending or threatened action, suit, investigation or proceeding against Agrinatural or any of its owned or leased Real Estate and/or pieplines seeking to enforce any right or remedy under any environmental law.

(e)     No Release of Hazardous Materials . There has been no release of such nature requiring notification to proper authorities of any hazardous material onto Agrinatural’s owned or leased Real Estate and/or pipelines. Agrinatural shall not willfully cause or permit such a release of hazardous material onto, or from, its owned or leased Real Estate

8



and/or pipelines. It shall give Heron Lake written notice of the release at the same time it gives notice to the proper authorities.

(f)     Storage Tanks and Pipelines Registered No Leaks . All above ground and underground storage tanks and all pipelines have been duly registered with all applicable federal, state and local government authorities. Agrinatural has no knowledge of any leaks from any of its above ground or underground storage tanks or from any of its pipelines.

(g)     Investigation of Released Hazardous Materials . If there is a suspected release of hazardous materials, Agrinatural shall conduct all investigations, testing and other action, including an environmental audit made at Heron Lake’s request, necessary to determine the extent (if any) of the release of hazardous materials and to clean up and remove all hazardous material in accordance with environmental laws. The party performing such action shall be an environmental firm satisfactory to Heron Lake, and the action shall be done at Agrinatural’s expense.

(h)     Indemnity . Agrinatural agrees to indemnify, hold harmless and defend Heron Lake against all liens, liabilities, demands, claims, actions, suits, judgments, expenses (including attorneys’, consultants’ and experts’ fees) paid or asserted against Heron Lake (or any of Agrinatural’s Real Estate and/or pipelines Heron Lake has taken title to by foreclosure or otherwise) as a direct result of Agrinatural’s violation of any environmental law, including, but not limited to, the release of any Hazardous Material, whether or not such violation was caused or within the control of Agrinatural. This indemnity shall continue for the benefit of Heron Lake after the termination of this Agreement or other loan documents, including the release of any security interest.

(i)
Definition . Hazardous material is defined as any toxic, radioactive or hazardous substance, material, waste, pollutant, emission or contaminant, including, but not limited to: asbestos, urea formaldehyde; the group of organic compounds known as polychlorinated biphenyls (PCBs); any petroleum product and by-product, including, but not limited to, gasoline, fuel, oil, crude oil and the various constituents of such products; pesticides, fertilizers and other agricultural chemicals. It also includes any other substance or material whose generation, storage, treatment, handling, release or disposal is regulated by the provisions of any environmental law or any other waste, material, substance, pollutant or contaminant that might

9



give rise to any common law or regulatory claim, damage, penalty or liability, or that is or may be detrimental to the environment or health of any living organism.

9.
Events of Default, Rights and Remedies .

(a)    The occurrence of any of the following shall constitute a default by Agrinatural in all indebtedness outstanding to Heron Lake. A default under any Note or obligation shall constitute a default under all other Notes and obligations due and owing from Agrinatural to Heron Lake. Conditions or events of default shall mean any one of the following events (such being in addition to those conditions or events of default contained in Note(s) and other documents related to this Agreement):

(i)
If Agrinatural fails to make any payment of indebtedness when and as due under its Notes.

(ii)
Any representation or warranty made by Agrinatural in this Agreement, or made by Agrinatural in any certificate, instrument or statement contemplated by or made or delivered to Heron Lake shall prove to have been incorrect in any material respect when made.

(iii)
Default in the performance, or breach, of any covenant or agreement of Agrinatural in this Agreement and/or in Note(s) and/or other documents related to this Agreement.

(iv)
Default by Agrinatural in the performance, or breach, of any covenant or agreement with any other creditor.

(v)
Agrinatural has been adjudicated a bankrupt or insolvent or admits, in writing, its inability to pay its debts as they mature and makes an assignment for the benefit of creditors; Agrinatural shall apply for and consent to the appointment of any receiver, trustee or other similar officer for all or any substantial part of its property; or such receiver, trustee or other similar officer shall be appointed without the application or consent of Agrinatural, and such appointment shall continue undischarged for a period of thirty (30) days; Agrinatural shall institute any bankruptcy, whether voluntary or involuntary; or any judgment, writ, warrant of attachment or execution or similar process shall

10



be issued or levied against a substantial part of the property of Agrinatural, and such judgment, writ or other similar process shall not be released, vacated or fully bonded within thirty (30) days after issuance or levy.

(vi)
A mechanic’s lien is recorded in the real estate records in any of the counties where the Real Estate and/or pipelines are located, and Agrinatural fails to obtain a discharge or release of the mechanic’s lien within thirty (30) days of its recording or fails to deposit with Heron Lake, within said thirty (30) days, sufficient monies to act as a reserve to pay the mechanic’s lien in full should the lien be determined to be valid and enforceable by a court of law.

(b)    Upon the occurrence of an event of default or at any time thereafter until such event of default is cured to the written satisfaction of Heron Lake, Heron Lake may, but is not obligated to, exercise any and all of the following rights and remedies (such being in addition to those rights and remedies contained in Note(s) and other documents related to this Agreement):

(i)
Heron Lake may, by notice to Agrinatural, declare the entire unpaid principal amount of any or all Notes or obligations then outstanding, all interest accrued and unpaid thereon, and all other amounts payable under this Agreement or otherwise to be forthwith due and payable, whereupon such Notes or obligations, all such accrued interest in all such amounts shall become due and be forthwith due and payable without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by Agrinatural.

(ii)
Heron Lake may cancel all further advances or disbursements to Agrinatural or on Agrinatural’s behalf against any Notes.

(iii)
Heron Lake may, by notice to Agrinatural, declare any commitments then outstanding to be terminated, whereupon the same shall be forthwith terminated.

(iv)
Heron Lake may, without notice to Agrinatural and without further action, apply any and all money owing by Heron Lake to Agrinatural to the payment of any Notes then outstanding,

11



including interest accrued thereon, and of all sums then owing by Agrinatural hereunder.

(v)
Heron Lake may exercise and enforce its rights and remedies under any Notes, Security Agreements and Mortgages and to proceed with the enforcement of any other rights and remedies it has under law.

(vi)
Heron Lake may seek equitable relief to obtain immediate possession of the facilities (including pipelines) to continue its operation or may request the appointment of a receiver for the operation of the facilities, Real Estate and pipelines until such time as the foreclosure of Heron Lake’s Mortgage(s) and/or security interests are completed and the redemption period has expired. Agrinatural hereby consents to the appointment of a receiver in the event of default, and Agrinatural will not hinder or interfere with the receiver’s use or possession and quiet enjoyment of the premises.
10.
Miscellaneous .

10.1     Costs and Expenses . Agrinatural agrees to pay, on demand, all costs and expenses of Heron Lake in connection with the preparation and filing/recording of this Agreement, the Notes, security interests and other instruments and documents to be delivered hereunder and thereunder, including the reasonable fees and out-of-pocket expenses of counsel for Heron Lake with respect thereto, as well as all out-of-pocket expenses of legal counsel retained by Heron Lake in connection with the enforcement of this Agreement, the Notes, Security Agreements, Mortgages, and other documents and instruments to be delivered hereunder and thereunder. This includes legal fees incurred by Heron Lake in the collection of the Notes; the enforcement of its liens or security interests, taking action in any bankruptcy of Agrinatural, and consulting on matters relating to the Notes and this Agreement.

10.2     No Waiver; Cumulative Remedies . No failure or delay on the part of Heron Lake in exercising any right, power or remedy hereunder or under the Security Agreements, Mortgages or other documents taken under the terms of this Agreement shall operate as a wavier thereof; nor shall any single or partial exercise of any such right, power or

12



remedy preclude any other or further exercise thereof, or any exercise of any other right, power or remedy hereunder or under the documents provided as a part of this Agreement. The remedies herein and in the Notes, Security Agreements, Mortgages and other documents provided are cumulative and not exclusive of any remedies provided by law.

10.3     Amendments, Etc. No amendment, modification, termination or waiver of any of the provisions of this Agreement, the Security Agreements, Assignments or Notes or consent by Agrinatural to any departure therefrom shall be effective unless the same shall be in writing and signed by Heron Lake, and then such waiver and consent shall be effective only in the specific instance and for the specific purpose for which given. No notice or demand on Agrinatural in any case shall entitle Agrinatural to any other or further notice or demand in similar or other circumstances.

10.4     Addresses for Notices, Etc. Except as otherwise expressly provided herein, all notices, requests, demands and other communications provided for hereunder and under the Notes, Mortgages or Security Agreements shall be in writing and mailed or delivered to the applicable party at is address indicated below:
If to Agrinatural:
Agrinatural Gas, LLC
201 10 th Street, P. O. Box 216
Heron Lake, MN 56137
            
If to Heron Lake:
Heron Lake BioEnergy, LLC
91246 390th Avenue
Heron Lake, MN 56137
                    
or, as to each party, at such other address as shall be designated by such party in a written notice to the other party complying as to delivery with the terms of this section. All such notices, requests, demands or other communications shall, when mailed, be effective when deposited in the mail, addressed as aforesaid.

10.5     Application of Payments . All payments received shall be applied to accrued interest as of the date the payment was received and then principal thereafter.


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10.6     Entire Agreement . This Agreement constitutes the entire agreement between Agrinatural and Heron Lake. Any prior oral discussions or representations are considered merged into this Agreement. This Agreement may only be modified by a subsequent written document signed by both Heron Lake and Agrinatural.

10.7     Binding Effect, Assignment . This Agreement and the Security Agreements, Mortgages and other documents taken in connection herewith shall be binding upon and inure to the benefit of Agrinatural and Heron Lake and their respective successors and assigns, except that Agrinatural shall not have the right to assign their rights hereunder or thereunder or any interest therein or herein without the prior written consent of Heron Lake.

10.8     Governing Law . This Agreement, the Notes and Security Agreements, Real Estate Mortgages and other documents taken hereunder shall be governed by and construed in accordance with the laws of the State of Minnesota.

10.9     Survival of Representations . All representations, warranties, terms and conditions of this Agreement shall survive the closing and final disbursement on the loan(s) and shall continue to be binding and enforceable between the parties until any and all indebtedness owed Heron Lake has been paid in full.

10.10     Review . Agrinatural and Heron Lake each acknowledge that they have had the opportunity to carefully read through the terms and conditions of this Agreement, and each has had sufficient time to consult with an attorney of their choice and to make revisions, modifications or changes to the original drafts of this Agreement. Both parties acknowledge that they have had the opportunity to contribute to the terms and provisions of the final draft of this Agreement, and as a consequence, the parties agree and acknowledge that, in the event that it becomes necessary, at any time in the future, for a court of proper jurisdiction to review and interpret the terms and conditions of this Agreement, such terms and conditions will not be construed against either party as the drafter of the Agreement.

11. Payoff/Use of Funds . The loan in the amount of Three Million Fifty Thousand and no/100 Dollars ($3,050,000.00) being made in conjunction with this Agreement shall be used to pay off Profinium Financial in the approximate amount of One Million Four

14



Hundred Fourteen Thousand and no/100 Dollars ($1,414,000.00) and other debts of Agrinatural as consented to by Heron Lake.

12. Required Guaranty . Heron Lake is requiring as a term of the loan referenced in paragraph 11 that Rural Energy Solutions, LLC guarantee twenty-seven percent (27%) of any amounts owed by Agrinatural to Heron Lake.

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date first above written.

BORROWER (DEBTOR):
AGRINATURAL GAS, LLC
a Delaware Limited Liability Company


Dated: July 29, 2014            By:     /s/ Mychael L. Swan                

Its:         CEO            



By:         /a/ Ann T. Tessier            

Its:     CFO                


LENDER:
HERON LAKE BIOENERGY, LLC


Dated: July 29, 2014            By:     /s/ Steve A. Christensen        
                        
Its:         CEO            


By:     /s/ Stacie Schuler                

Its:         CFO            


15




Negotiable Promissory Note


DATED: July 29, 2014      PAYABLE: Installments
AMOUNT: $3,050,000.00


For value received, AGRINATURAL GAS, LLC, promises to pay to the order of HERON LAKE BIOENERGY, LLC, at 91246 390th Avenue, Heron Lake, MN 56137, or at any other place designated from time to time in writing by the holder hereof, in lawful money of the United States of America, the principal sum of Three Million Fifty Thousand and no/100 Dollars ($3,050,000.00), plus interest; all as provided herein.

Interest .      One month Libor rate, plus four percent (4%), with interest capped and to not exceed six percent (6%) per annum, on the unpaid balance from time-to-time.

The interest charged to Borrower shall be reset weekly on the first “U.S. Banking Day” of each week as defined herein.
            
The one month Libor rate defined as follows: a rate (rounded upward to the nearest 1/100 th and adjusted for reserves required on “Euro Currency Liabilities” (as hereinafter defined) for banks subject to “FRB Regulation D” (as hereinafter defined) or required by any other Federal Law or Regulation) per annum at the rate reported at 11:00 a.m. London time for the offering of one (1) month U.S. Dollars deposits, by Bloomberg Information Services (or any successor or substitute service providing rate quotations comparable to those currently provided by such service, from time-to-time, for the purpose of providing quotations of interest rates applicable to dollar deposits in the London Interbank Market) on the first “U.S. Banking Day” (as hereinafter defined) in each week, with such rate to change weekly on such day. The rate shall be reset automatically, without the necessity of notice being provided to the Borrower or any other party, on the first “U.S. Banking Day” of each succeeding week, and each change in the rate shall be applicable to all balances subject to this Promissory Note. Information about the then-current rate shall be made available upon request.

For purposes hereof: (1) “U.S. Banking Day” shall mean a day on which Lender is open for business and banks are open for business in New York, New York; (2) “Euro Currency Liabilities” shall have the meaning set forth in “FRB Regulation D”; and (3) “FRG Regulation D” shall mean Regulation D as promulgated by the Board of Governors of the Federal Reserve System, 12CRF Part 204, as amended.

Payment . Interest only to be paid on the 1 st day of each month, beginning August 1, 2014 through and including December 1, 2014. Beginning January 1, 2015 and on the 1 st day of each month thereafter through and including November 1, 2019, Fifty Thousand Eight Hundred Thirty-four and no/100 Dollars ($50,834.00) of principal plus interest shall be paid. On December 1, 2019 all remaining principal, plus interest, shall balloon and shall be paid in full.

Security . The amounts owed pursuant to this Negotiable Promissory Note are secured.

Guaranty . Twenty-seven percent (27%) of any and all amounts owed pursuant to this Promissory Note (principal, interest, attorneys’ fees and costs) shall be guaranteed by the execution of a separate Guaranty by Rural Energy Solutions, LLC.






Prepayment . This note may be prepaid at any time, in whole or in part, without penalty.

Default . If Borrower fails to make any payments due under this Note when due, then, the holder hereof may accelerate the entire balance of this Note and declare the same immediately due and payable without further notice or demand. Borrower shall pay all costs and expenses of collection or foreclosure, including, without limitation, reasonable attorneys' fees, except to the extent limited or prohibited by applicable law. Any written notice to Borrower hereunder shall be by certified mail, postage prepaid, and addressed to the Borrower at the property address or at such other address as Borrower designates by written notice to holder.
 
No delay or omission on the part of the holder in exercising any right hereunder shall operate as a waiver of such right or of any other remedy under this Note. A waiver on any one occasion shall not be construed as a waiver of any such right or remedy on a future occasion.


Dated: July 29, 2014

AGRINATURAL GAS, LLC

 
By:          /s/ Mychael L. Swan            
                
Its:          CEO    


By:          /a/ Ann T. Tessier            
                
Its:          CFO    




SECURITY AGREEMENT

THIS SECURITY AGREEMENT, effective July 29, 2014, is made and executed by and between Agrinatural Gas, LLC, a Delaware limited liability company, having its principal place of business at 201 - 10th Street, P.O. Box 216, Heron Lake, Minnesota 56137 ("Grantor") and Heron Lake BioEnergy, LLC, a Minnesota limited liability company, having its principal place of business at 91246 - 390 th Ave., Heron Lake, Minnesota 56137 ("Lender").
1.
Grant of Security Interest . For valuable consideration, and to secure the Indebtedness:
a.
Grantor grants to Lender a security interest in all of Grantor’s currently existing and hereafter acquired property detailed in Exhibit A annexed hereto and incorporated herein by reference (the “ Collateral ”). Grantor agrees that Lender shall have the rights stated in this Security Agreement with respect to the Collateral, in addition to all other rights which Lender may have by law.
b.
Grantor shall assign all existing easements in which Grantor is the holder, dominant tenant or has any other beneficial interest whatsoever.
2.
Cross Collateralization . In addition to the Note, this Security Agreement secures all obligations, debts and liabilities, plus interest thereon, of Grantor to Lender, or any one or more of them, as well as all claims by Lender against Grantor or any one or more of them, whether now existing or hereafter arising, whether related or unrelated to the purpose of the Note, whether voluntary or otherwise, whether due or not due, direct or indirect, determined or undetermined, absolute or contingent, liquidated or unliquidated whether Grantor may be liable individually or jointly with others, whether obligated as guarantor, surety, accommodation party or otherwise, and whether recovery upon such amounts may be or hereafter may become barred by any statute of limitations, and whether the obligation to repay such amounts may be or hereafter may become otherwise unenforceable. All rights of Lender and all obligations of Grantor hereunder shall be absolute and unconditional irrespective of (i) any lack of validity or enforceability of the Note or any Related Documents, (ii) any change in the time, manner or place of payment of, or in any other term in respect of, all or any of the obligations under the Note or any Related Documents, or any other amendment or waiver of or consent to any departure from the Note or any Related Documents, (iii) any exchange or release of (except to the extent of such release), or non-perfection of any lien on any Collateral, or any release or amendment or waiver of or consent to departure from any guaranty, for all or any of the obligations under the Note or any Related Documents, or (iv) any other circumstance that might otherwise constitute a defense available to, or a discharge of, Lender in respect of the Note or any Related Documents.
3.
Right of Setoff . To the extent permitted by applicable law, Lender reserves a right of setoff and Grantor authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the Indebtedness against any obligations that Lender may have to Grantor at any time.
4.
Grantor's Representations and Warranties with Respect to the Collateral . With respect to the Collateral, Grantor represents, promises and warrants to Lender that:
a.
Perfection of Security Interest . Grantor agrees to execute financing statements and to take whatever other actions are requested by Lender to perfect and continue Lender's security interest in the Collateral. Upon request of Lender, Grantor will deliver to Lender any and

1



all of the documents evidencing or constituting the Collateral, and Grantor will note Lender's interest upon any and all chattel paper if not delivered to Lender for possession by Lender. This is a continuing Security Agreement and will continue in effect even though all or any part of the Indebtedness is paid in full and even though for a period of time Grantor may not be indebted to Lender.
b.
Enforceability of Collateral . To the extent the Collateral consists of accounts, chattel paper, or general intangibles, as defined by the Uniform Commercial Code, the Collateral is enforceable in accordance with its terms, is genuine, and fully complies with all applicable laws and regulations concerning form, content and manner of preparation and execution, and all persons appearing to be obligated on the Collateral have authority and capacity to contract and are in fact obligated as they appear to be on the Collateral. At the time any Account becomes subject to a security interest in favor of Lender, the Account shall be a good and valid account representing an undisputed, bona fide indebtedness incurred by the account debtor, for merchandise held subject to delivery instructions or previously shipped or delivered pursuant to a contract of sale, or for services previously performed by Grantor with or for the account debtor. So long as this Security Agreement remains in effect, Grantor shall not, without Lender's prior written consent, compromise, settle, adjust, or extend payment under or with regard to any such Accounts. There shall be no setoffs or counterclaims against any of the Collateral, and no agreement shall have been made under which any deductions or discounts may be claimed concerning the Collateral except those disclosed to Lender in writing.
c.
Location of the Collateral . Except in the ordinary course of Grantor's business, Grantor agrees to keep the Collateral (or to the extent the Collateral consists of intangible property such as accounts or general intangibles, the records concerning the Collateral) at Grantor's address shown above or at such other locations as are acceptable to Lender. Upon Lender's request, Grantor will deliver to Lender in form satisfactory to Lender a schedule of real properties and Collateral locations relating to Grantor's operations, including without limitation the following: (1) all real property Grantor owns or is purchasing; (2) all real property Grantor is renting or leasing; (3) all storage facilities Grantor owns, rents, leases, or uses; and (4) all other properties where Collateral is or may be located.
d.
Removal of the Collateral . Except in the ordinary course of Grantor's business, including the sales of inventory, Grantor shall not remove the Collateral from its existing location without Lender's prior written consent. To the extent that the Collateral consists of vehicles, or other titled property, Grantor shall not take or permit any action which would require application for certificates of title for the vehicles outside the State of Minnesota, without Lender's prior written consent. Grantor shall, whenever requested, advise Lender of the exact location of the Collateral.
e.
Severance from Real Property . Grantor agrees that all Collateral shall be and remain severed from the real property wherever the same may be installed and further agrees that upon any Event of Default, that Lender may (a) take possession of and remove said fixture(s) (the Collateral) without notice to (including without notice to any other creditors of Grantor) and without liability to Grantor or any of its creditors for any diminution of value of the real estate caused by the absence of the fixture(s) (the Collateral) or by any necessity for replacing

2



the fixture(s) (the Collateral), and (b) enforce Lender’s security interest granted herein against said fixture(s) (the Collateral).
f.
Transactions Involving Collateral . Except for inventory sold or accounts collected in the ordinary course of Grantor's business, or as otherwise provided for in this Security Agreement, Grantor shall not sell, offer to sell, or otherwise transfer or dispose of the Collateral. While Grantor is not in default under this Security Agreement, Grantor may sell inventory, but only in the ordinary course of its business and only to buyers who qualify as a buyer in the ordinary course of business. A sale in the ordinary course of Grantor's business does not include a transfer in partial or total satisfaction of a debt or any bulk sale. Grantor shall not pledge, mortgage, encumber or otherwise permit the Collateral to be subject to any lien, security interest, encumbrance, or charge, other than the security interest provided for in this Security Agreement, without the prior written consent of Lender. This includes security interests even if junior in right to the security interests granted under this Security Agreement. Unless waived by Lender, all proceeds from any disposition of the Collateral (for whatever reason) shall be held in trust for Lender and shall not be commingled with any other funds; provided however, this requirement shall not constitute consent by Lender to any sale or other disposition. Upon receipt, Grantor shall immediately deliver any such proceeds to Lender.
g.
Title . Grantor represents and warrants to Lender that Grantor holds good and marketable title to the Collateral, free and clear of all liens and encumbrances except for the lien of this Security Agreement. No financing statement covering any of the Collateral is on file in any public office other than those which reflect the security interest created by this Security Agreement or to which Lender has specifically consented. Grantor shall defend Lender's rights in the Collateral against the claims and demands of all other persons.
h.
Repairs and Maintenance . Grantor agrees to keep and maintain, and to cause others to keep and maintain, the Collateral in good order, repair and condition at all times while this Security Agreement remains in effect. Grantor further agrees to pay when due all claims for work done on, or services rendered or material furnished in connection with the Collateral so that no lien or encumbrance may ever attach to or be filed against the Collateral.
i.
Inspection of Collateral . Lender and Lender's designated representatives and agents shall have the right at all reasonable times to examine and inspect the Collateral wherever located.
j.
Taxes, Assessments and Liens . Grantor will pay when due all taxes, assessments and liens upon the Collateral, its use or operation, upon this Security Agreement, upon any promissory note or notes evidencing the Indebtedness, or upon any of the other Related Documents. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender's interest in the Collateral is not jeopardized in Lender's sole opinion.
k.
Compliance with Governmental Requirements . Grantor shall comply promptly with all laws, ordinances, rules and regulations of all governmental authorities, now or hereafter in effect, applicable to the ownership, production, disposition, or use of the Collateral. Grantor may contest in good faith any such law, ordinance or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Lender's interest in the Collateral,

3



in Lender's opinion, is not jeopardized.
l.
Hazardous Substances . Grantor represents and warrants that the Collateral never has been, and never will be so long as this Security Agreement remains a lien on the Collateral, used in violation of any Environmental Laws or for the generation, manufacture, storage, transportation, treatment, disposal, release or threatened release of any Hazardous Substance. Grantor hereby (1) releases and waives any future claims against Lender for indemnity or contribution in the event Grantor becomes liable for cleanup or other costs under any Environmental Laws, and (2) agrees to indemnify and hold harmless Lender against any and all claims and losses resulting from a breach of this provision of this Security Agreement. This obligation to indemnify shall survive the payment of the Indebtedness and the satisfaction of this Security Agreement.
m.
Maintenance of Casualty Insurance . Grantor shall procure and maintain all risks insurance, including without limitation fire, theft and liability coverage together with such other insurance as Lender may require with respect to the Collateral, in form, amounts, coverages and basis reasonably acceptable to Lender and issued by a company or companies reasonably acceptable to Lender. Grantor, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days' prior written notice to Lender and not including any disclaimer of the insurer's liability for failure to give such a notice. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Grantor or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest, Grantor will provide Lender with such loss payable or other endorsements as Lender may require, if Grantor at any time fails to obtain or maintain any insurance as required under this Security Agreement, Lender may (but shall not be obligated to) obtain such insurance as Lender deems appropriate, including if Lender so chooses "single interest insurance," which will cover only Lender's interest in the Collateral.
n.
Application of Insurance Proceeds . Grantor shall promptly notify Lender of any loss or damage to the Collateral. Lender may make proof of loss if Grantor fails to do so within fifteen (15) days of the casualty. All proceeds of any insurance on the Collateral, including accrued proceeds thereon, shall be held by Lender as part of the Collateral. If Lender consents to repair or replacement of the damaged or destroyed Collateral, Lender shall, upon satisfactory proof of expenditure, pay or reimburse Grantor from the proceeds for the reasonable cost of repair or restoration. If Lender does not consent to repair or replacement of the Collateral, Lender shall retain a sufficient amount of the proceeds to pay all of the indebtedness, and shall pay the balance to Grantor. Any proceeds which have not been disbursed within six (6) months after their receipt and which Grantor has not committed to the repair or restoration of the Collateral shall be used to prepay the Indebtedness.
o.
Financing Statements . Grantor authorizes Lender to file a UCC-1 financing statement, or alternatively, a copy of this Security Agreement to perfect Lender's security interest. At Lender's request, Grantor additionally agrees to sign all other documents that are necessary to perfect, protect, and continue Lender's security interest in the Collateral. Grantor will pay

4



all filing fees, title transfer fees, and other fees and costs involved unless prohibited by law or unless Lender is required by law to pay such fees and costs. Grantor irrevocably appoints Lender to execute financing statements and documents of title in Grantor's name and to execute all documents necessary to transfer title if there is a default, Lender may file a copy of this Security Agreement as a financing statement. If Grantor changes Grantor's name or address, or the name or address of any person granting a security interest under this Security Agreement changes, Grantor will promptly notify the Lender of such change.
5.
Notices to Lender . Grantor will promptly notify Lender in writing at Lender's address shown above (or such other addresses as Lender may designate from time to time) prior to any (1) change in Grantor's name; (2) change in Grantor's assumed business name(s); (3) change in the management of the Corporation Grantor; (4) change in the authorized signer(s); (5) change in Grantor's principal office address; (6) change in Grantor's state of organization; (7) conversion of Grantor to a new or different type of business entity; or (8) change in any other aspect of Grantor that directly or indirectly relates to any agreements between Grantor and Lender. No change in Grantor's name or state of organization will take effect until after Lender has received notice.
6.
No Violation . The execution and delivery of this Security Agreement will not violate any law or agreement governing Grantor or to which Grantor is a party, and its certificate or articles of incorporation and bylaws do not prohibit any term or condition of this Security Agreement.
7.
Grantor's Right to Possession and to Collect Accounts . Until default and except as otherwise provided below with respect to accounts, Grantor may have possession of the tangible personal property and beneficial use of all the Collateral and may use it in any lawful manner not inconsistent with this Security Agreement or the Related Documents, provided that Grantor's right to possession and beneficial use shall not apply to any Collateral where possession of the Collateral by Lender is required by law to perfect Lender's security interest in such Collateral. Until otherwise notified by Lender, Grantor may collect any of the Collateral consisting of accounts. At any time, and even though no Event of Default exists, Lender may exercise its rights to collect the accounts and to notify account debtors to make payments directly to Lender for application to the Indebtedness. If Lender at any time has possession of any Collateral, whether before or after an Event of Default, Lender shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral if Lender takes such action for that purpose as Grantor shall request or as Lender, in Lender's sole discretion, shall deem appropriate under the circumstances, but failure to honor any request by Grantor shall not of itself be deemed to be a failure to exercise reasonable care. Lender shall not be required to take any steps necessary to preserve any rights in the Collateral against prior parties, nor to protect, preserve or maintain any security interest given to secure the Indebtedness.
8.
Lender's Expenditures . If any action or proceeding is commenced that would materially affect Lender's interest in the Collateral or if Grantor fails to comply with any provision of this Security Agreement or any Related Documents, including but not limited to Grantor's failure to discharge or pay when due any amounts Grantor is required to discharge or pay under this Security Agreement or any Related Documents, Lender on Grantor's behalf may (but shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharging or paying all taxes, liens, security interests, encumbrances and other claims, at any

5



time levied or placed on the Collateral and paying all costs for insuring, maintaining and preserving the Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Grantor. All such expenses will become a part of the Indebtedness and, at Lender's option, will (A) be payable on demand; (B) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (1) the term of any applicable insurance policy; or (2) the remaining term of the Note; or (C) be treated as a balloon payment which will be due and payable at the Note's maturity. This Security also will secure payment of these amounts. Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon Default.
9.
Default . Each of the following shall constitute an Event of Default under this Security Agreement:
a.
Payment Default . Grantor fails to make any payment when due under the Indebtedness.
b.
Other Defaults . Grantor fails to comply with or to perform any other term, obligation, covenant or condition contained in this Security Agreement or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Grantor.
c.
Default in Favor of Third Parties . Should Borrower or any Grantor default under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Grantor's property or Grantor's or any Grantor's ability to repay the Indebtedness or perform their respective obligations under this Security Agreement or any of the Related Documents.
d.
False Statements . Any warranty, representation or statement made or furnished to Lender by Grantor or on Grantor's behalf under this Security Agreement or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter.
e.
Defective Collateralization . This Security Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral document to create a valid and perfected security interest or lien) at any time and for any reason.
f.
Insolvency . The dissolution, termination, or suspension of Grantor's existence as an ongoing business, the Grantor admits in writing its inability to pay its debts as they mature, the insolvency of Grantor, the appointment of a receiver for any part of Grantor's property, any assignment by the Grantor for the benefit of its creditors, any type of creditor workout, or the commencement of any bankruptcy, reorganization or other insolvency proceedings by or against Grantor.
g.
Creditor or Forfeiture Proceedings . Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Grantor or by any governmental agency against any collateral securing the Indebtedness. This includes a garnishment of any of Grantor's accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Grantor as to the validity or reasonableness of the claim which is the basis of the

6



creditor or forfeiture proceeding.
h.
Events Affecting Guarantor . Any of the preceding events occurs with respect to any guarantor, endorser, surety, or accommodation party of any of the Indebtedness or guarantor, endorser, surety, or any accommodation party dies or becomes incompetent or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness.
i.
Adverse Change . A material adverse change occurs in Grantor's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired.
j.
Insecurity . Lender in good faith believes itself insecure.
10.
Rights and Remedies on Default . If an Event of Default occurs under this Security Agreement, at any time thereafter, Lender shall have all the rights of a secured party under this Security Agreement and the Minnesota Uniform Commercial Code. In addition and without limitation, Lender may exercise any one or more of the following rights and remedies:
a.
Accelerate Indebtedness . Lender may declare the entire Indebtedness, including any prepayment penalty which Grantor would be required to pay, immediately due and payable, without notice of any kind to Grantor.
b.
Assemble Collateral . Lender may require Grantor to deliver to Lender all or any portion, of the Collateral and any and all certificates of title and other documents relating to the Collateral. Lender may require Grantor to assemble the Collateral and make it available to Lender at a place to be designated by Lender. Lender also shall have full power to enter upon the property of Grantor to take possession of and remove the Collateral. If the Collateral contains other goods not covered by this Security Agreement at the time of repossession, Grantor agrees Lender may take such other goods, provided that Lender makes reasonable efforts to return them to Grantor after repossession.
c.
Sell the Collateral . Lender shall have full power to sell, lease, transfer, or otherwise deal with the Collateral or proceeds thereof in Lender's own name or that of Grantor. Lender may sell the Collateral at public auction or private sale. Unless the Collateral threatens to decline speedily in value or is of a type customarily sold on a recognized market, Lender will give Grantor, and other persons as required by law, reasonable notice of the time and place of any public sale, or the time after which any private sale or any other disposition of the Collateral is to be made. However, no notice need be provided to any person who, after Event of Default occurs, enters into and authenticates an agreement waiving that person's right to notification of sale. The requirements of reasonable notice shall be met if such notice is given at least ten (10) days before the time of the sale or disposition. All expenses relating to the disposition of the Collateral, including without limitation the expenses of retaking, holding, insuring, repairing, preparing for sale and selling the Collateral, shall become a part of the Indebtedness secured by this Security Agreement and shall be payable on demand, with interest at the Note rate from date of expenditure until repaid.
d.
Appoint Receiver . Lender shall have the right to have a receiver appointed to take possession of all or any part of the Collateral, with the power to protect and preserve the Collateral, to operate the Collateral preceding foreclosure or sale, and to collect the Rents from the Collateral and apply the proceeds, over and above the cost of the receivership, against the

7



Indebtedness. The receiver may serve without bond if permitted by law. Lender's right to the appointment of a receiver shall exist whether or not the apparent value of the Collateral exceeds the Indebtedness by a substantial amount. Employment by Lender shall not disqualify a person from serving as a receiver.
e.
Collect Revenues, Apply Accounts . Lender, either itself or through a receiver, may collect the payments, rents, income, and revenues from the Collateral. Lender may at any time in Lender's discretion transfer any Collateral into Lender's own name or that of Lender's nominee and receive the payments, rents, income, and revenues therefrom and hold the same as security for the Indebtedness or apply it to payment of the Indebtedness in such order of preference as Lender may determine. Insofar as the Collateral consists of accounts, general intangibles, insurance policies, instruments, chattel paper, choses in action, or similar property, Lender may demand, collect, receipt for, settle, compromise, adjust, sue for, foreclose, or realize on the Collateral as Lender may determine, whether or not the Indebtedness or Collateral is then due. For these purposes, Lender may, on behalf of and in the name of Grantor, receive, open and dispose of mail addressed to Grantor; change any address to which mail and payments are to be sent; and endorse notes, checks, drafts, money orders, documents of title, instruments and items pertaining to payment, shipment, or storage of any Collateral. To facilitate collection, Lender may notify account debtors and obligors on any Collateral to make payments directly to Lender.
f.
Obtain Deficiency . If Lender chooses to sell any or all of the Collateral, Lender may obtain a judgment against Grantor for any deficiency remaining on the Indebtedness due to Lender after application of all amounts received from the exercise of the rights provided in this Security Agreement. Grantor shall be liable for a deficiency even if the transaction described in this subsection is a sale of accounts or chattel paper.
g.
Other Rights and Remedies . Lender shall have all the rights and remedies of a secured creditor under the provisions of the Uniform Commercial Code, as may be amended from time to time. In addition, Lender shall have and may exercise any or all other rights and remedies it may have available under this Security Agreement, at law, in equity, or otherwise.
h.
Election of Remedies . Except as may be prohibited by applicable law, all of Lender's rights and remedies, whether evidenced by this Security Agreement, the Related Documents, or by any other writing, shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Grantor under this Security Agreement, after Grantor's failure to perform, shall not affect Lender's right to declare a default and exercise its remedies.
11.
Miscellaneous Provisions . The following miscellaneous provisions are a part of this Security Agreement:
a.
Amendments . This Security Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Security Agreement. No alteration of or amendment to this Security Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment.

8



b.
Attorneys' Fees; Expenses . Grantor agrees to pay upon demand all of Lender's costs and expenses, including Lender's reasonable attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Security Agreement. Lender may hire or pay someone else to help enforce this Security Agreement, and Grantor shall pay the costs and expenses of such enforcement. Costs and expenses include Lender's reasonable attorneys' fees and legal expenses whether or not there is a lawsuit, including reasonable attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Grantor also shall pay all court costs and such additional fees as may be directed by the court.
c.
Caption Headings . Caption headings in this Security Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Security Agreement.
d.
Governing Law . This Security Agreement will be governed by, construed and enforced in accordance with federal law and the laws of the State of Minnesota. This Security Agreement has been accepted by Lender in the State of Minnesota.
e.
No Waiver by Lender . Lender shall not be deemed to have waived any rights under this Security Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Security Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Security Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Grantor, shall constitute a waiver of any of Lender's rights or of any of Grantor's obligations as to any future transactions. Whenever the consent of Lender is required under this Security Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender.
f.
Notices . Any notice required to be given under this Security Agreement shall be given in writing, and shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Security Agreement. Any party may change its address for notices under this Security Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. For notice purposes, Grantor agrees to keep Lender informed at all times of Grantor's current address. Unless otherwise provided or required by law, if there is more than one Grantor, any notice given by Lender to any Grantor is deemed to be notice given to all Grantors.
g.
Power of Attorney . Grantor hereby appoints Lender as Grantor's irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect, amend, or to continue the security interest granted in this Security Agreement or to demand termination of filings of other secured parties. Lender may at any time, and without further authorization from

9



Grantor, file a carbon, photographic or other reproduction of any financing statement or of this Security Agreement for use as a financing statement. Grantor will reimburse Lender for all expenses for the perfection and the continuation of the perfection of Lender's security interest in the Collateral.
h.
Severability . If a court of competent jurisdiction finds any provision of this Security Agreement to be illegal, invalid, or unenforceable as to any circumstance, that finding shall not make the offending provision illegal, invalid, or unenforceable as to any other circumstance. If feasible, the offending provision shall be considered modified so that it becomes legal, valid and enforceable. If the offending provision cannot be so modified, it shall be considered deleted from this Security Agreement. Unless otherwise required by law, the illegality, invalidity, or unenforceability of any provision of this Security Agreement shall not affect the legality, validity or enforceability of any other provision of this Security Agreement.
i.
Successors and Assigns . Subject to any limitations stated in this Security Agreement on transfer of Grantor's interest, this Security Agreement shall be binding upon and inure to the benefit of the parties, their successors and assigns. If ownership of the Collateral becomes vested in a person other than Grantor, Lender, without notice to Grantor, may deal with Grantor's successors with reference to this Security Agreement and the Indebtedness by way of forbearance or extension without releasing Grantor from the obligations of this Security Agreement or liability under the Indebtedness.
j.
Survival of Representations and Warranties . All representations, warranties, and agreements made by Grantor in this Security Agreement shall survive the execution and delivery of this Security Agreement, shall be continuing in nature, and shall remain in full force and effect until such time as Grantor's Indebtedness shall be paid in full.
k.
Time is of the Essence . Time is of the essence in the performance of this Security Agreement.
12.
Definitions . The following capitalized words and terms shall have the following meanings when used in this Security Agreement. Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Security Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code:
a.
Account . The word "Account" means a trade account, account receivable, other receivable, or other right to payment for goods sold or services rendered owing to Grantor (or to a third party grantor acceptable to Lender).
b.
Borrower . The word "Borrower" means Agrinatural Gas, LLC, and includes all co-signers and co-makers signing the Note.
c.
Default . The word "Default" means the Default set forth in this Security Agreement in the section titled "Default".
d.
Environmental Laws . The words "Environmental Laws" mean any and all state, federal and local statutes, regulations and ordinances relating to the protection of human health or the environment.

10



e.
Event of Default . The words "Event of Default" mean any of the events of default set forth in this Security Agreement in the default section of this Security Agreement.
f.
Guaranty . The word "Guaranty" means the guaranty from guarantor, endorser, surety, or accommodation party to Lender, including without limitation a guaranty of all or part of the Note.
g.
Hazardous Substances . The words "Hazardous Substances" mean materials that, because of their quantity, concentration or physical, chemical or infectious characteristics, may cause or pose a present or potential hazard to human health or the environment when improperly used, treated, stored, disposed of, generated, manufactured, transported or otherwise handled.
h.
Indebtedness . The word "Indebtedness" means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other indebtedness and costs and expenses for which Grantor is responsible under this Security Agreement or under any of the Related Documents.
i.
Note . The word "Note" means that certain Negotiable Promissory Note executed Grantor on even date herewith, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for the note or credit agreement.
j.
Related Documents . The words "Related Documents" mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness.
GRANTOR HAS READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY AGREEMENT AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF THE DATE FIRST SET FORTH ABOVE.

GRANTOR:                         LENDER:
Agrinatural Gas, LLC, a Delaware            Heron Lake BioEnergy, LLC, a
limited liability company                Minnesota limited liability company    

By:       /s/ Mychael L. Swan              
Print Name:      /s/ Mychael L. Swan            
Its.:        CEO             


By:      /s/ Steve A. Christensen               
Print Name:       Steve A. Christensen           
Its.:        CEO             



By:     /s/ Ann T. Tessier                
Print Name:     Ann T. Tessier             
Its.:      CFO              

By:       /s/ Stacie Schuler             
Print Name:       Stacie Schuler           
Its.:         CFO            


11



EXHIBIT “A”
TO
SECURITY AGREEMENT

The following property constitutes the “Collateral” in which Lender is Granted a security interest pursuant to the terms of the Security Agreement dated and effective July 29, 2014:

All property, whether now owned or hereafter acquired by Grantor, Agrinatural Gas, LLC, and whether now existing or hereafter arising, and wherever located, including but not limited to all inventory, equipment, accounts (including but not limited to all health-care-insurance receivables), chattel paper, instruments (including but not limited to all promissory notes), letter-of-credit rights, letters of credit, documents, deposit accounts, investment property, money, other rights to payment and performance, and general intangibles (including but not limited to all software and all payment intangibles); all oil, gas and other minerals before extraction; all oil gas, other minerals and accounts constituting as-extracted collateral; all fixtures; all timber to be cut; all attachments, accessions, accessories, fittings, increases, tools, parts, repairs, supplies, and commingled goods relating to the foregoing property; all insurance refunds relating to the foregoing property; all good will relating to the foregoing property; all records and data and embedded software relating to the foregoing property, and all equipment, inventory, and software to utilize, create, maintain and process any such records and data on electronic media; all easements and easement rights whatsoever and wherever located; and all supporting obligations relating to the foregoing property.
The above describe property also includes all the following, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located:
1)
All accessions, attachments, accessories, tools, parts, supplies, replacements, expansions, or substitutions of and additions to any of the property described herein, whether added now or later;
2)
All products and produce of any of the property described in this Collateral section;
3)
All accounts, general intangibles, instruments, rents, monies, payments, and all other rights, arising out of a sale, lease, consignment or other disposition of any of the property described in this Collateral section;
4)
All proceeds (including insurance proceeds) from the sale, destruction, loss, or other disposition of any of the property described in this Collateral section, and sums due from a third party who has damaged or destroyed the Collateral or from that party's insurer, whether due to judgment, settlement or other process; and
5)
All records and data relating to any of the property described in this Collateral section, whether in the form of a writing, photograph, microfilm, microfiche, or electronic media, together with all of Grantor's right, title, and interest in and to all computer software required to utilize, create, maintain, and process any such records or data on electronic media.
[ Remainder intentionally blank. ]

A – 1



GUARANTY

In order to induce Heron Lake BioEnergy, LLC, (hereinafter called "Lender") to make a loan or loans, or renewal or extension thereof, to Agrinatural Gas, LLC (hereinafter called "Debtor"), the Undersigned hereby unconditionally guarantees to Lender, its successors and assigns, the due and punctual payment when due, whether by acceleration or otherwise, in accordance with the terms thereof, twenty-seven percent (27%) of the principal of and interest on and all other sums payable, or stated to be payable, with respect to the note of the Debtor, made by the Debtor to Lender, dated July 29, 2014 in the principal amount of Three Million Fifty Thousand and no/100 Dollars ($3,050,000.00), with interest at the rate as indicated in said Negotiable Promissory Note. Such note, and the interest thereon and all other sums payable with respect thereto are hereinafter collectively called "Liabilities." As security for the performance of this guaranty the Undersigned hereby mortgages, pledges, assigns, transfers and delivers to Lender certain collateral (if any), listed in the attached schedule. The term "collateral" as used herein shall mean any funds, guaranties, agreements or other property or rights or interests of any nature whatsoever, or the proceeds thereof, which may have been, are, or hereafter may be, mortgaged, pledged, assigned, transferred or delivered directly or indirectly by or on behalf of the Debtor or the Undersigned or any other party to Lender or to the holder of the aforesaid note of the Debtor, or which may have been, are, or hereafter may be held by any party as trustee or otherwise, as security, whether immediate or underlying, for the performance of this guaranty or the payment of the Liabilities or any of them or any security therefore. (The providing of “collateral” shall occur as described in the Loan Agreement of identical date hereof.)

The Undersigned waives any notice of the incurring by the Debtor at any time of any of the Liabilities, and waives any and all presentment, demand, protest or notice of dishonor, nonpayment, or other default with respect to any of the Liabilities and any obligation of any party at any time comprised in the collateral. The Undersigned hereby grants to Lender full power, in its uncontrolled discretion and without notice to the undersigned, but subject to the provisions of any agreement between the Debtor or any other party and Lender at the time in force, to deal in any manner with the Liabilities and the collateral, including, but without limiting the generality of the foregoing, the following powers:

(a)    To modify or otherwise change any terms of all or any part of the Liabilities or the rate of interest thereon (but not to increase the principal amount of the note of the Debtor to Lender), to grant any extension or renewal thereof and any other indulgence with respect thereto, and to effect any release, compromise or settlement with respect thereto;
(b)    To enter into any agreement of forbearance with respect to all or any part of the Liabilities, or with respect to all or any part of the collateral, and to change the terms of any such agreement;
(c)    To forbear from calling for additional collateral to secure any of the Liabilities or to secure any obligation comprised in the collateral;

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(d)    To consent to the substitution, exchange, or release of all or any part of the collateral, whether or not the collateral, if any, received by Lender upon any such substitution, exchange, or release shall be of the same or of a different character or value than the collateral surrendered by Lender;
(e)    In the event of the nonpayment when due, whether by acceleration or otherwise, of any of the Liabilities, or in the event of default in the performance of any obligation comprised in the collateral, to realize on the collateral or any part thereof, as a whole or in such parcels or subdivided interests as Lender may elect, at any public or private sale or sales, for cash or on credit or for future delivery, without demand, advertisement or notice of the time or place of sale or any adjournment thereof (the Undersigned hereby waiving any such demand, advertisement and notice to the extent permitted by law), or by foreclosure or otherwise, or to forbear from realizing thereon, all as Lender in its uncontrolled discretion may deem proper, and to purchase all or any part of the collateral for its own account at any such sale or foreclosure, such powers to be exercised only to the extent permitted by law.

The obligations of the Undersigned hereunder shall not be released, discharged or in any way affected, nor shall the Undersigned have any rights or recourse against Lender, by reason of any action Lender may take or omit to take under the foregoing powers.

In case the Debtor shall fail to pay all or any part of the Liabilities when due, whether by acceleration or otherwise, according to the terms of said note, the Undersigned, immediately upon the written demand of Lender, will pay to Lender the amount due and unpaid by the Debtor as aforesaid, in like manner as if such amount constituted the direct and primary obligation of the Undersigned. Lender shall not be required, prior to any such demand on, or payment by, the Undersigned, to make any demand upon or pursue or exhaust any of its rights or remedies against the Debtor or others with respect to the payment of any of the Liabilities, or to pursue or exhaust any of its rights or remedies with respect to any part of the collateral. Until all indebtedness of Debtor to Lender shall have been paid in full, the Undersigned shall have no right of subrogation, and waives any right to enforce any remedy which Lender now has or may hereafter have against Debtor, and waives any benefit of, and any right to participate in any security now or hereafter held by Lender.

The obligations of the Undersigned hereunder, and the rights of Lender in the collateral, shall not be released, discharged or in any way affected, nor shall the Undersigned have any rights against Lender: by reason of the fact that any of the collateral may be in default at the time of acceptance thereof by Lender or later; nor by reason of the fact that a valid lien in any of the collateral may not be conveyed to, or created in favor of, Lender; nor by reason of the fact that any of the collateral may be subject to equities or defenses or claims in favor of others or may be invalid or defective in any way; nor by reason of the fact that any of the Liabilities may be invalid for any reason whatsoever; nor by reason of the fact that the value of any of the collateral, or the financial condition of the Debtor or of any obligor under or guarantor of any of the collateral, may not have been correctly estimated or may have changed or may hereafter change; nor by reason of any deterioration, waste, or loss by fire, theft, or otherwise of any of the collateral, unless such deterioration, waste, or loss be caused by the willful act or willful failure to act of Lender.

2




The Undersigned agrees to furnish lender, or the holder of the aforesaid note of the Debtor, upon demand, but not more often than semiannually, so long as any part of the indebtedness under such note remains unpaid, a financial statement setting forth, in reasonable detail, the assets, liabilities, and net worth of the Undersigned.

The term "Undersigned" as used in this agreement shall mean the signer or signers of this agreement, and such signers, if more than one, shall be jointly and severally liable hereunder. The Undersigned further agrees that all liability hereunder shall continue notwithstanding the incapacity, lack of authority, death, or disability of any one or more of the Undersigned, and that any failure by Lender or its assigns to file or enforce a claim against the estate of any of the Undersigned shall not operate to release any other of the Undersigned from liability hereunder. The failure of any other person to sign this guaranty shall not release or affect the liability of any signer hereof.


    Dated: July 29, 2014

RURAL ENERGY SOLUTIONS, LLC


By: ____/s/ Mychael L. Swan_________________
        
Its: CEO        


By: _____/s/ Ann T. Tessier__________________
        
Its: CFO        


3


MLA No. RI1304


MASTER LOAN AGREEMENT


THIS MASTER LOAN AGREEMENT is entered into as of         July 29             , 2014, between AGSTAR FINANCIAL SERVICES, FLCA (the “Lead Lender”) and HERON LAKE BIOENERGY, LLC, Heron Lake, Minnesota (the “Company”).

BACKGROUND

From time to time Lead Lender may make loans to the Company. In order to reduce the amount of paperwork associated therewith, Lead Lender and the Company would like to enter into a master loan agreement. For that reason, and in consideration of Lead Lender making one or more loans to the Company, Lead Lender and the Company agrees as follows:

SECTION 1.      Supplements. In the event the Company desires to borrow from Lead Lender and Lead Lender is willing to lend to the Company, or in the event Lead Lender and the Company desire to consolidate any existing loans hereunder, the parties will enter into a Supplement to this agreement (a “Supplement”). Each Supplement will set forth the amount of the loan, the purpose of the loan, the interest rate or rate options applicable to that loan, the repayment terms of the loan, and any other terms and conditions applicable to that particular loan. Each loan will be governed by the terms and conditions contained in this agreement and in the Supplement relating to the loan.[MAP_MRESTATE02]

SECTION 2.      Sale of Participation Interests and Appointment of Administrative Agent. The Company acknowledges that concurrent with the execution of this Master Loan Agreement and related Supplements, Lead Lender is selling a participation interest in this Master Loan Agreement and Supplements to CoBank, FCB, an affiliate of CoBank, ACB. Pursuant to an Administrative Agency Agreement and Intercreditor Agreement dated of even date herewith (“Agency Agreement”), Lead Lender has appointed CoBank, ACB (“CoBank”) to act as Administrative Agent (“Agent”) to act in place of Lead Lender hereunder and under the Supplements and any security documents to be executed thereunder. All funds to be advanced hereunder shall be made by Agent, all repayments by the Company hereunder shall be made to Agent, and all notices to be made to Lead Lender hereunder shall be made to Agent. Agent shall be solely responsible for the administration of this agreement, the Supplements and the security documents to be executed by the Company thereunder and the enforcement of all rights and remedies of Lead Lender hereunder and thereunder. The Company acknowledges the appointment of Agent and consents to such appointment.

SECTION 3.      Availability. Loans will be made available on any day on which Agent and the Federal Reserve Banks are open for business upon the telephonic or written request of the Company. Requests for loans must be received no later than 12:00 Noon Company’s local time on the date the loan is desired. Loans will be made available by wire transfer of immediately available funds to such account or accounts as may be authorized by the Company. The Company shall furnish to Agent a duly completed and executed copy of any wire and telephone transfer forms, and Agent shall be entitled to rely on (and shall incur no liability to the Company in acting on) any request or direction furnished in accordance with the terms thereof.     



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HERON LAKE BIOENERGY, LLC
Heron Lake, Minnesota



SECTION 4.      Repayment. The Company's obligation to repay each loan shall be evidenced by the promissory note set forth in the Supplement relating to that loan or by such replacement note as Agent shall require. Agent shall maintain a record of all loans, the interest accrued thereon, and all payments made with respect thereto, and such record shall, absent proof of manifest error, be conclusive evidence of the outstanding principal and interest on the loans. All payments shall be made by wire transfer of immediately available funds, by check, or by automated clearing house or other similar cash handling processes as specified by separate agreement between the Company and Agent. Wire transfers shall be made to ABA No. 307088754 for advice to and credit of CoBank (or to such other account as Agent may direct by notice). The Company shall give Agent telephonic notice no later than 12:00 Noon Company’s local time of its intent to pay by wire and funds received after 3:00 p.m. Company’s local time shall be credited on the next business day. Checks shall be mailed to CoBank, Department 167, Denver, Colorado 80291‑0167 (or to such other place as Agent may direct by notice). Credit for payment by check will not be given until the later of: (A) the day on which Agent receives immediately available funds; or (B) the next business day after receipt of the check.

SECTION 5.      Capitalization.

(A) CoBank Equity. The Company agrees to acquire equity in CoBank in such amounts and at such times as CoBank may from time to time require in accordance with its Bylaws and Capital Plan (as each may be amended from time to time), except that the maximum amount of equity that the Company may be required to purchase in connection with a loan may not exceed the maximum amount permitted by the Bylaws at the time the Supplement relating to such loan is entered into or such loan is renewed or refinanced by CoBank. The rights and obligations of the parties with respect to such equity and any patronage or other distributions made by CoBank shall be governed by CoBank’s Bylaws and Capital Plan (as each may be amended from time to time).

(B) Lead Lender Equity.

(1)      Association Membership: The Company agrees to purchase and maintain stock or participation certificates in Lead Lender or Lead Lender’s parent association, as applicable, in amounts as may be required from time to time under the Capital Plan adopted by the Board of Directors of Lead Lender or Lead Lender's parent association, pursuant to applicable Bylaws.

(2) Voting Stockholder: Steve Christensen, CEO is authorized by the Company to exercise any voting rights in Lead Lender or Lead Lender's parent association, subject to applicable Bylaws, and to receive effective interest rate disclosures, unless otherwise agreed in writing between the parties.

SECTION 6.      Security. The Company’s obligations under this agreement, all Supplements (whenever executed), and all instruments and documents relating to any Hedging Transaction (as defined below), and all instruments and documents contemplated hereby or thereby, shall be secured by a statutory first lien on all equity which the Company may now own or hereafter acquire in CoBank and/or Lead Lender (including Lead Lender’s parent company, as applicable). In addition, the Company's obligations under each Supplement (whenever executed), this agreement and all agreements or



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HERON LAKE BIOENERGY, LLC
Heron Lake, Minnesota



documents relating to any Hedging Transaction (as defined below) shall be secured by a first lien (subject only to exceptions approved in writing by Agent) pursuant to all security agreements, mortgages, and deeds of trust executed by the Company in favor of Agent, on behalf of Lead Lender and CoBank, whether now existing or hereafter entered into. As additional security for those obligations, the Company agrees to grant to Agent, on behalf of Lead Lender and CoBank, by means of such instruments and documents as Agent shall require, a first priority lien on: (A) such of its other assets, whether now existing or hereafter acquired, as Agent may from time to time require; and (B) all realty which the Company may from time to time acquire after the date hereof. Lead Lender may at its discretion assign collateral to the Agent under the Agency Agreement.

“Hedging Transaction” shall mean any interest rate swap, hedge, cap, collar or similar agreement or arrangement entered into between the Company and CoBank, designed to protect the Company against fluctuations in interest rates.

SECTION 7.      Conditions Precedent.

(A)      Conditions to Initial Supplement. Lead Lender’s obligation to extend credit under the initial Supplement hereto is subject to the conditions precedent that Agent receive, in form and content satisfactory to Agent, each of the following:

(1)      This Agreement, Etc. A duly executed copy of this agreement and all instruments and documents contemplated hereby.

(2)      Guaranty and Related Documents. (a) Guarantee of payment from HLBE Pipeline Company, LLC (the "Guarantor");[MAP_AND8] (b) such certified board resolutions, evidence of incumbency, and other evidence as Agent may require that the guarantee and all instruments and documents executed in connection therewith have been duly authorized and executed; and (c) Security Agreements granting to Lead Lender a first lien on all personal property of the Guarantor, whether now existing or hereafter acquired.

(3)      Proof of Insurance. A certificate of insurance listing CoBank, as Agent for the Lead Lender and CoBank, as mortgagee and lender loss payee under the insurance policies required to be maintained by the Company pursuant hereto.

(4)      Security Agreement. A security agreement granting to Agent, on behalf of Lead Lender and CoBank, a first lien (subject only to exceptions approved in writing by Agent) on all personal property of the Company[MAP_EXCEPT3], whether now owned or hereafter acquired.

(5)      Mortgage. An executed mortgage to Agent, on behalf of Lead Lender and CoBank in the face amount of $28,000,000.00 ("Mortgage") on the Company's property located in Jackson County, Minnesota (the "Company Property").

(6)      Title Commitment. A commitment from a title insurance company acceptable to Agent to issue an ALTA lender’s policy of title insurance in the face amount of $28,000,000.00 insuring



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HERON LAKE BIOENERGY, LLC
Heron Lake, Minnesota



the Mortgage to Lead Lender as a first priority lien on the Company Property (the "Title Policy"), subject only to exceptions approved in writing by Agent. The Company agrees to pay the cost of such commitment.

(7)      Appraisal. An appraisal of the Company Property by a licensed, independent appraiser that reflects a minimum asset valuation of $48,000,000.00.

An appraisal on the Company’s real property, plant and equipment, in form and content acceptable to Lead Lender and Agent. Provided further, the aggregate of all term loan commitments provided by Agent secured by the appraised real property, plant and equipment and, in the case of term loan supplements with expired commitments, the outstanding balances thereunder, will not exceed 65% of the appraised value (as adjusted by Agent in its sole discretion following review of the appraisal and consultation with the Company) of the Company’s real property, plant and equipment.
(8)      Flood Insurance. Receipt of flood zone determinations on all real property security and evidence of flood insurance if required by a Standard Flood Hazard Determination.

(9)      Risk Management Policy. A duly executed copy of the Risk Management Policy.

(10)      Payoff Letter . Evidence of payment by letter or other evidence satisfactory to Agent that the Company’s existing obligations to AgStar Financial Services, PCA have been or will be paid in full and that all collateral securing said obligations has been released.

(11)      Environmental Checklist . An environmental audit or report as Agent may require.

(B)      Conditions to Each Supplement. Lead Lender’s obligation to extend credit under each Supplement, including the initial Supplement, is subject to the conditions precedent that Agent receive, in form and content satisfactory to Agent, each of the following:

(1)      Supplement. A duly executed copy of the Supplement and all instruments and documents contemplated thereby.

(2)      Evidence of Authority. Such certified board resolutions, certificates of incumbency, and other evidence that Agent may require that the Supplement, all instruments and documents executed in connection therewith, and, in the case of initial Supplement hereto, this agreement and all instruments and documents executed in connection herewith, have been duly authorized and executed.

(3)      Fees and Other Charges. All fees and other charges provided for herein or in the Supplement.

(4)      Evidence of Perfection, Etc. Such evidence as Agent may require that Agent, on behalf of Lead Lender and CoBank, has a duly perfected first priority lien on all security for the Company’s obligations, and that the Company is in compliance with Section 9(D) hereof.




Master Loan Agreement RI1304                                     - 5 -
HERON LAKE BIOENERGY, LLC
Heron Lake, Minnesota



(C)      Conditions to Each Loan. Lead Lender’s obligation under each Supplement to make any loan to the Company thereunder is subject to the condition that no “Event of Default” (as defined in Section 12 hereof) or event which with the giving of notice and/or the passage of time would become an Event of Default hereunder (a “Potential Default”), shall have occurred and be continuing.

SECTION 8.      Representations and Warranties.

(A)      This Agreement. The Company represents and warrants to Lead Lender and Agent that as of the date of this agreement:

(1)      Compliance. The Company and, to the extent contemplated hereunder, each “Subsidiary” (as defined below), is in compliance with all of the terms of this agreement, and no Event of Default or Potential Default exists hereunder.

(2)      Subsidiaries. The Company has the following “Subsidiary(ies)” (as defined below): Lakefield Farmers Elevator, LLC and HLBE Pipeline Company, LLC. For purposes hereof, a “Subsidiary” shall mean a corporation of which shares of stock having ordinary voting power to elect a majority of the board of directors or other managers of such corporation are owned, directly or indirectly, by the Company.

(B)      Each Supplement. The execution by the Company of each Supplement hereto shall constitute a representation and warranty to Lead Lender and Agent that:

(1)      Applications. Each representation and warranty and all information set forth in any application or other documents submitted in connection with, or to induce Lead Lender to enter into, such Supplement, is correct in all material respects as of the date of the Supplement.

(2)      Conflicting Agreements, Etc. This agreement, the Supplements, all security and other instruments and documents relating hereto and thereto, and any Interest Rate Agreements (as defined below) (collectively, at any time, the “Loan Documents”), do not conflict with, or require the consent of any party to, any other agreement to which the Company is a party or by which it or its property may be bound or affected, and do not conflict with any provision of the Company’s bylaws, articles of incorporation, or other organizational documents. As used in this agreement, “Interest Rate Agreement” means any interest rate swap, hedge, cap, collar or similar agreement, including any master agreement published by the International Swap and Derivatives Association, Inc., between the Company and CoBank, designed to protect the Company from fluctuations in interest rates.

(3)      Compliance. The Company and, to the extent contemplated hereunder, each Subsidiary, is in compliance with all of the terms of the Loan Documents (including, without limitation, Section 9(A) of this agreement on eligibility to borrow from Lead Lender).

(4)      Binding Agreement. The Loan Documents create legal, valid, and binding obligations of the Company which are enforceable in accordance with their terms, except to the extent that



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HERON LAKE BIOENERGY, LLC
Heron Lake, Minnesota



enforcement may be limited by applicable bankruptcy, insolvency, or similar laws affecting creditors’ rights generally.

SECTION 9.      Affirmative Covenants. Unless otherwise agreed to in writing by Agent, while this agreement is in effect, the Company agrees to and with respect to Subsections 9(B) through 9(G), and Subsection 9(H)(6) hereof, agrees to cause each Subsidiary to:

(A)      Eligibility. Maintain its status as an entity eligible to borrow from Lead Lender.

(B)      Corporate Existence, Licenses, Etc. (1) Preserve and keep in full force and effect its existence and good standing in the jurisdiction of its incorporation or formation; (2) qualify and remain qualified to transact business in all jurisdictions where such qualification is required; and (3) obtain and maintain all licenses, certificates, permits, authorizations, approvals, and the like which are material to the conduct of its business or required by law, rule, regulation, ordinance, code, order, and the like (collectively, “Laws”).

(C)      Compliance with Laws. Comply in all material respects with all applicable Laws, including, without limitation, all Laws relating to environmental protection and any patron or member investment program that it may have. In addition, the Company agrees to cause all persons occupying or present on any of its properties, and to cause each Subsidiary to cause all persons occupying or present on any of its properties, to comply in all material respects with all environmental protection Laws.

(D)      Insurance. Maintain insurance with insurance companies or associations acceptable to Agent in such amounts and covering such risks as are usually carried by companies engaged in the same or similar business and similarly situated, and make such increases in the type or amount of coverage as Agent may request. All such policies insuring any collateral for the Company’s obligations to Lead Lender shall have mortgagee or lender loss payable clauses or endorsements in form and content acceptable to Agent. At Agent’s request, all policies (or such other proof of compliance with this Subsection as may be satisfactory to Agent) shall be delivered to Agent.

(E)      Property Maintenance. Maintain all of its property that is necessary to or useful in the proper conduct of its business in good working condition, ordinary wear and tear excepted.

(F)      Books and Records. Keep adequate records and books of account in which complete entries will be made in accordance with generally accepted accounting principles (“GAAP”) consistently applied.

(G)      Inspection. Permit Agent or its agents, upon reasonable notice and during normal business hours or at such other times as the parties may agree, to examine its properties, books, and records, and to discuss its affairs, finances, and accounts, with its respective officers, directors, employees, and independent certified public accountants.

(H)      Reports and Notices. Furnish to Agent:



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HERON LAKE BIOENERGY, LLC
Heron Lake, Minnesota



(1)      Annual Financial Statements. As soon as available, but in no event more than 90 days after the end of each fiscal year of the Company occurring during the term hereof, annual consolidated and consolidating financial statements of the Company and its consolidated Subsidiaries, prepared in accordance with GAAP consistently applied. Such financial statements shall: (a) be audited by independent certified public accountants selected by the Company and acceptable to Agent; (b) be accompanied by a report of such accountants containing an opinion thereon acceptable to Agent; (c) be prepared in reasonable detail and in comparative form; (d) include a balance sheet, a statement of income, a statement of retained earnings, a statement of cash flows, and all notes and schedules relating thereto; and (e) include unconsolidated schedules of the Company and its consolidated Subsidiaries.

(2)      Interim Financial Statements. As soon as available, but in no event more than 30 days after the end of each month, an unconsolidated balance sheet of the Company as of the end of such month, an unconsolidated statement of income for the Company, for such period and for the period year to date, and such other interim statements as Agent may specifically request, all prepared in reasonable detail and in comparative form in accordance with GAAP consistently applied and, if required by written notice from Agent, certified by an authorized officer or employee of the Company acceptable to Agent.

(3)      Notice of Default. Promptly after becoming aware thereof, notice of the occurrence of an Event of Default or a Potential Default.

(4)      Notice of Non-Environmental Litigation. Promptly after the commencement thereof, notice of the commencement of all actions, suits, or proceedings before any court, arbitrator, or governmental department, commission, board, bureau, agency, or instrumentality affecting the Company or any Subsidiary which, if determined adversely to the Company or any such Subsidiary, could have a material adverse effect on the financial condition, properties, profits, or operations of the Company or any such Subsidiary.

(5)      Notice of Environmental Litigation, Etc. Promptly after receipt thereof, notice of the receipt of all pleadings, orders, complaints, indictments, or any other communication alleging a condition that may require the Company or any Subsidiary to undertake or to contribute to a cleanup or other response under environmental Laws, or which seek penalties, damages, injunctive relief, or criminal sanctions related to alleged violations of such Laws, or which claim personal injury or property damage to any person as a result of environmental factors or conditions.

(6)      Operating Agreement and Articles. Notification of any change in the Company’s operating agreements or articles of organization, or Risk Management Policy, or membership and marketing agreements (or like documents), and promptly after any change, copies of all such changes, certified by the Company’s Secretary.

(7)      Compliance Certificates. Together with each set of financial statements furnished to Agent pursuant to Subsection (1) hereof and, if applicable, Subsection (2) hereof, a certificate of an officer or employee of the Company acceptable to Agent, in the form attached as Exhibit “A” hereto:



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HERON LAKE BIOENERGY, LLC
Heron Lake, Minnesota



(a) certifying that no Event of Default or Potential Default occurred during the period covered by such statement(s) or, if an Event of Default or Potential Default occurred, a description thereof and of all actions taken or to be taken to remedy same; and (b) setting forth calculations showing compliance with the financial covenants set forth in Section 10 hereof.

(8)      Other Information. Such other information regarding the condition or operations, financial or otherwise, of the Company or any Subsidiary as Agent may from time to time reasonably request, including but not limited to copies of all pleadings, notices, and communications referred to in Subsections 9(H)(4) and (5) above.

(I)      Company Post-Closing Mortgage and Title Policy.

(1)      On or before December 1, 2014, provide Agent with:

(a)      the recorded Mortgage granting to Agent, on behalf of Lead Lender and CoBank, a first lien (subject only to exceptions approved in writing by Agent) on the Company Property; and

(b)      the Title Policy, which is subject only to exceptions approved in writing by Agent, together with such endorsements as may be reasonably requested by Agent. The Company agrees to fully cooperate with Agent and to provide any information and/or documentation required by Agent and/or the Title Company to allow the Title Company to issue the Title Policy in form and substance satisfactory to Agent.

(2)      The Company agrees to pay 100% of the cost of Title Policy and recording the Mortgage, including any mortgage registration tax, and also agrees that if, for any reason, the Title Policy is not issued to Agent, on behalf of Lead Lender and CoBank, by December 1, 2014, or such later date as may be agreeable to Agent, then an “Event of Default” shall be deemed to have occurred under this agreement.

(J)      Assignment of Contracts . As requested, provide Agent with an assignment of contracts pertinent to the on-going operation of the Company's facilities within 30 days of such request from Agent.

SECTION 10.      Negative Covenants. Unless otherwise agreed to in writing by Agent, while this agreement is in effect the Company will not:

(A)      Borrowings. Create, incur, assume, or allow to exist, directly or indirectly, any indebtedness or liability for borrowed money (including trade or bankers’ acceptances), letters of credit, or the deferred purchase price of property or services (including capitalized leases), except for: (1) debt to Lead Lender and/or Agent; (2) accounts payable to trade creditors incurred in the ordinary course of business; (3) current operating liabilities (other than for borrowed money) incurred in the ordinary course of business; and (4) debt of the Company to other lenders or finance companies in an aggregate amount not to exceed $3,300,000.00.



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HERON LAKE BIOENERGY, LLC
Heron Lake, Minnesota



(B)      Liens. Create, incur, assume, or allow to exist any mortgage, deed of trust, pledge, lien (including the lien of an attachment, judgment, or execution), security interest, or other encumbrance of any kind upon any of its property, real or personal (collectively, “Liens”). The forgoing restrictions shall not apply to: (1) Liens in favor of Lead Lender and/or Agent; (2) Liens for taxes, assessments, or governmental charges that are not past due; (3) Liens and deposits under workers’ compensation, unemployment insurance, and social security Laws; (4) Liens and deposits to secure the performance of bids, tenders, contracts (other than contracts for the payment of money), and like obligations arising in the ordinary course of business as conducted on the date hereof; (5) Liens imposed by Law in favor of mechanics, materialmen, warehousemen, and like persons that secure obligations that are not past due; (6) easements, rights-of-way, restrictions, and other similar encumbrances which, in the aggregate, do not materially interfere with the occupation, use, and enjoyment of the property or assets encumbered thereby in the normal course of its business or materially impair the value of the property subject thereto; and (7) Liens in favor of other lenders or finance companies to secure indebtedness permitted hereunder.

(C)      Mergers, Acquisitions, Etc. Merge or consolidate with any other entity or acquire all or a material part of the assets of any person or entity, or form or create any new Subsidiary or affiliate, or commence operations under any other name, organization, or entity, including any joint venture.

(D)      Transfer of Assets. Sell, transfer, lease, or otherwise dispose of any of its assets, except in the ordinary course of business.

(E)      Loans and Investments. Make any loan or advance to any person or entity (including the Company’s consolidated Subsidiaries), or purchase any capital stock, obligations or other securities of, make any capital contribution to, or otherwise invest in any person or entity, or form or create any partnerships or joint ventures except: (1) trade credit extended in the ordinary course of business; and (2) loans or advances by the Company to Agrinatural Gas, LLC in an aggregate principal amount not to exceed $3,050,000.00 at any one time outstanding.

(F)      Contingent Liabilities. Assume, guarantee, become liable as a surety, endorse, contingently agree to purchase, or otherwise be or become liable, directly or indirectly (including, but not limited to, by means of a maintenance agreement, an asset or stock purchase agreement, or any other agreement designed to ensure any creditor against loss), for or on account of the obligation of any person or entity, except by the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of the Company’s business.

(G)      Change in Business. Engage in any business activities or operations substantially different from or unrelated to the Company’s present business activities or operations.

(H)      Dividends, Etc. Declare or pay any dividends, or make any distribution of assets to the members/owners, or purchase, redeem, retire or otherwise acquire for value any equity, or allocate or otherwise set apart any sum for any of the foregoing, except that for each fiscal year of the Company, one or more distributions may be made to the Company's members/owners of up to an aggregate of 65% of the net profit (according to GAAP) for such fiscal year after Agent's receipt of of the audited



Master Loan Agreement RI1304                                     - 10 -
HERON LAKE BIOENERGY, LLC
Heron Lake, Minnesota



financial statements for the pertinent fiscal year, provided that the Company has been and will remain in compliance with all of the covenants, terms and conditions of this Master Loan Agreement.

(I) Leases. Create, incur, assume, or permit to exist any obligation as lessee under operating leases or leases which should be capitalized in accordance with GAAP for the rental or hire of any real or personal property, except for: (1) railcar leases not to exceed an initial or extended term of sixty (60) months; (2) railcar leases with an initial or extended term in excess of sixty (60) months, but for 175 cars or less; and (3) operating leases, excluding railcar leases, which do not in the aggregate require the Company to make scheduled payments to the lessors in any fiscal year of the Company in excess of $100,000.00.

SECTION 11.      Financial Covenants. Unless otherwise agreed to in writing, while this agreement is in effect:

(A)      Working Capital. The Company will have at the end of each period for which financial statements are required to be furnished pursuant to Section 9(H) hereof an excess of unconsolidated current assets over unconsolidated current liabilities (both as determined in accordance with GAAP consistently applied) of not less than $8,000,000.00, except that in determining unconsolidated current assets, any amount available under the Revolving Term Loan Supplement (less the amount that would be considered a current liability under GAAP if fully advanced) hereto may be included.

(B)      Net Worth. The Company will have at the end of each period for which financial statements are required to be furnished pursuant to Section 9(H) hereof an excess of unconsolidated total assets over unconsolidated total liabilities (both as determined in accordance with GAAP consistently applied) of not less than $32,000,000.00, plus any amount of the subordinated convertible debt converted to capital units per the notice of redemption dated May 2, 2014.

(C)      Debt Service Coverage Ratio. The Company will have at the end of each fiscal year of the Company a “Debt Service Coverage Ratio” (as defined below) of not less than 1.15 to 1.00. For purposes hereof, the term “Debt Service Coverage Ratio” shall mean the following (all as calculated on an unconsolidated basis for the most current year end in accordance with GAAP consistently applied): (1) net income (after taxes), plus depreciation and amortization, minus non-cash dividends/income received, minus extraordinary gains (+ losses), minus gain (+ loss) on asset sale; divided by $4,000,000.00.

SECTION 12.      Events of Default. Each of the following shall constitute an “Event of Default” under this agreement:

(A)      Payment Default. The Company should fail to make any payment required under this agreement or any other Loan Document when due, or should fail to purchase any equity in CoBank and/or Lead Lender or Lead Lender’s parent Association as and when required by the Capital Plan and/or Bylaws of CoBank and/or Lead Lender or its parent Association.




Master Loan Agreement RI1304                                     - 11 -
HERON LAKE BIOENERGY, LLC
Heron Lake, Minnesota



(B)      Representations and Warranties. Any representation or warranty made or deemed made by the Company herein or in any Supplement, application, agreement, certificate, or other document related to or furnished in connection with this agreement or any Supplement, shall prove to have been false or misleading in any material respect on or as of the date made or deemed made.

(C)      Certain Affirmative Covenants. The Company or, to the extent required hereunder, any Subsidiary should fail to perform or comply with Sections 9(A) through 9(H)(2), 9(H)(6) , 9(H)(7), 9(I) or any reporting covenant set forth in any Supplement hereto, and such failure continues for 15 days after written notice thereof shall have been delivered by Agent to the Company.

(D)      Other Covenants and Agreements. The Company or, to the extent required hereunder, any Subsidiary should fail to perform or comply with any other covenant or agreement contained herein or in any other Loan Document or shall use the proceeds of any loan for an unauthorized purpose.

(E)      Cross-Default. The Company should, after any applicable grace period, breach or be in default under the terms of any other agreement between the Company and Lead Lender or Agent, or between the Company and any affiliate of Lead Lender or Agent, including without limitation Farm Credit Leasing Services Corporation.

(F)      Other Indebtedness. The Company or any Subsidiary should fail to pay when due any indebtedness to any other person or entity for borrowed money or any long-term obligation for the deferred purchase price of property (including any capitalized lease), or any other event occurs which, under any agreement or instrument relating to such indebtedness or obligation, has the effect of accelerating or permitting the acceleration of such indebtedness or obligation, whether or not such indebtedness or obligation is actually accelerated or the right to accelerate is conditioned on the giving of notice, the passage of time, or otherwise.

(G)      Judgments. A judgment, decree, or order for the payment of money shall be rendered against the Company or any Subsidiary and either: (1) enforcement proceedings shall have been commenced; (2) a Lien prohibited under Section 10(B) hereof shall have been obtained; or (3) such judgment, decree, or order shall continue unsatisfied and in effect for a period of 20 consecutive days without being vacated, discharged, satisfied, or stayed pending appeal.

(H)      Insolvency, Etc. The Company or any Subsidiary shall: (1) become insolvent or shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they come due; or (2) suspend its business operations or a material part thereof or make an assignment for the benefit of creditors; or (3) apply for, consent to, or acquiesce in the appointment of a trustee, receiver, or other custodian for it or any of its property or, in the absence of such application, consent, or acquiescence, a trustee, receiver, or other custodian is so appointed; or (4) commence or have commenced against it any proceeding under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution, or liquidation Law of any jurisdiction.




Master Loan Agreement RI1304                                     - 12 -
HERON LAKE BIOENERGY, LLC
Heron Lake, Minnesota



(I)      Material Adverse Change. Any material adverse change occurs, as reasonably determined by Agent, in the Company’s financial condition, results of operation, or ability to perform its obligations hereunder or under any instrument or document contemplated hereby.

(J)      Revocation of Guaranty. Any guaranty, suretyship, subordination agreement, maintenance agreement, or other agreement furnished in connection with the Company’s obligations hereunder and under any Supplement shall, at any time, cease to be in full force and effect, or shall be revoked or declared null and void, or the validity or enforceability thereof shall be contested by the guarantor, surety or other maker thereof (the “Guarantor”), or the Guarantor shall deny any further liability or obligation thereunder, or shall fail to perform its obligations thereunder, or any representation or warranty set forth therein shall be breached, or the Guarantor shall breach or be in default under the terms of any other agreement with Lead Lender and/or Agent (including any loan agreement or security agreement), or a default set forth in Subsections (F) through (H) hereof shall occur with respect to the Guarantor.

SECTION 13.      Remedies. Upon the occurrence and during the continuance of an Event of Default or any Potential Default, Lead Lender shall have no obligation to continue to extend credit to the Company and may discontinue doing so at any time without prior notice. For all purposes hereof, the term “Potential Default” means the occurrence of any event which, with the passage of time or the giving of notice or both would become an Event of Default. In addition, upon the occurrence and during the continuance of any Event of Default, Lead Lender or Agent may, upon notice to the Company, terminate any commitment and declare the entire unpaid principal balance of the loans, all accrued interest thereon, and all other amounts payable under this agreement, all Supplements, and the other Loan Documents to be immediately due and payable. Upon such a declaration, the unpaid principal balance of the loans and all such other amounts shall become immediately due and payable, without protest, presentment, demand, or further notice of any kind, all of which are hereby expressly waived by the Company. In addition, upon such an acceleration:

(A)      Enforcement. Lead Lender or Agent may proceed to protect, exercise, and enforce such rights and remedies as may be provided by this agreement, any other Loan Document or under Law. Each and every one of such rights and remedies shall be cumulative and may be exercised from time to time, and no failure on the part of Lead Lender or Agent to exercise, and no delay in exercising, any right or remedy shall operate as a waiver thereof, and no single or partial exercise of any right or remedy shall preclude any other or future exercise thereof, or the exercise of any other right. Without limiting the foregoing, Agent may hold and/or set off and apply against the Company’s obligations to Lead Lender the proceeds of any equity in CoBank, ACB, Lead Lender or Lead Lender’s parent Association, any cash collateral held by Lead Lender or Agent, or any balances held by Lead Lender or Agent for the Company’s account (whether or not such balances are then due).

(B)      Application of Funds. Agent may apply all payments received by it to the Company’s obligations to Lead Lender in such order and manner as Agent may elect in its sole discretion.

In addition to the rights and remedies set forth above: (1) upon the occurrence and during the continuance of an Event of Default, then at Agent’s option in each instance, the entire indebtedness outstanding



Master Loan Agreement RI1304                                     - 13 -
HERON LAKE BIOENERGY, LLC
Heron Lake, Minnesota



hereunder and under all Supplements shall bear interest from the date of such Event of Default until such Event of Default shall have been waived or cured in a manner satisfactory to Agent at 4.00% per annum in excess of the rate(s) of interest that would otherwise be in effect on that loan; and (2) after the maturity of any loan (whether as a result of acceleration or otherwise), the unpaid principal balance of such loan (including without limitation, principal, interest, fees and expenses) shall automatically bear interest at 4.00% per annum in excess of the rate(s) of interest that would otherwise be in effect on that loan. All interest provided for herein shall be payable on demand and shall be calculated on the basis of a year consisting of 360 days.

SECTION 14.      Broken Funding Surcharge. Notwithstanding any provision contained in any Supplement giving the Company the right to repay any loan prior to the date it would otherwise be due and payable, the Company agrees to provide three Business Days’ prior written notice for any prepayment of a fixed rate balance and that in the event it repays any fixed rate balance prior to its scheduled due date or prior to the last day of the fixed rate period applicable thereto (whether such payment is made voluntarily, as a result of an acceleration, or otherwise), the Company will pay to Agent a surcharge in an amount equal to the greater of: (A) an amount which would result in Lead Lender being made whole (on a present value basis) for the actual or imputed funding losses incurred by Lead Lender as a result thereof; or (B) $300.00. Notwithstanding the foregoing, in the event any fixed rate balance is repaid as a result of the Company refinancing the loan with another lender or by other means, then in lieu of the foregoing, the Company shall pay Agent a surcharge in an amount sufficient (on a present value basis) to enable Lead Lender to maintain the yield it would have earned during the fixed rate period on the amount repaid. Such surcharges will be calculated in accordance with methodology established by Lead Lender and Agent (copies of which will be made available to the Company upon request).

SECTION 15.      Complete Agreement, Amendments. This agreement, all Supplements, and all other instruments and documents contemplated hereby and thereby, are intended by the parties to be a complete and final expression of their agreement. No amendment, modification, or waiver of any provision hereof or thereof, and no consent to any departure by the Company herefrom or therefrom, shall be effective unless approved by Agent and contained in a writing signed by or on behalf of Agent, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. In the event this agreement is amended or restated, each such amendment or restatement shall be applicable to all Supplements hereto.

SECTION 16.      Other Types of Credit. From time to time, Agent, on behalf of Lead Lender for the account of the Company, may issue letters of credit or extend other types of credit to back obligations owing by Company to third parties. In the event the parties desire to do so under the terms of this agreement, such extensions of credit may be set forth in any Supplement hereto and this agreement shall be applicable thereto.

SECTION 17.      Applicable Law. Without giving effect to the principles of conflict of laws and except to the extent governed by federal law, the Laws of the State of Colorado, without reference to choice of law doctrine, shall govern this agreement, each Supplement and any other Loan Documents for which Colorado is specified as the applicable law, and all disputes and matters between the parties



Master Loan Agreement RI1304                                     - 14 -
HERON LAKE BIOENERGY, LLC
Heron Lake, Minnesota



to this agreement, including all disputes and matters whatsoever arising under, in connection with or incident to the lending and/or leasing or other business relationship between the parties, and the rights and obligations of the parties to this agreement or any other Loan Documents by and between the parties for which Colorado is specified as the applicable law.

SECTION 18.      Notices. All notices hereunder shall be in writing and shall be deemed to be duly given upon delivery if personally delivered or sent by telegram or facsimile transmission, or three days after mailing if sent by express, certified or registered mail, to the parties at the following addresses (or such other address for a party as shall be specified by like notice):

If to Lead Lender, as follows:

AgStar Financial Services, FLCA
14800 Galaxie Avenue, Suite 205
Apple Valley, Minnesota 55124
Attention: Mr. Jason Johnson

Telephone: (952) 997-4060
Facsimile: (952) 997-4077

If to Agent, as follows:

For general correspondence purposes:
CoBank, ACB
P.O. Box 5110
Denver, Colorado 80217-5110

For direct delivery purposes, when desired:
5500 South Quebec Street
Greenwood Village, Colorado 80111-1914

Attention: Credit Information Services
Fax No.: (303) 224-6101
If to the Company, as follows:

Heron Lake BioEnergy, LLC
91246 390 th  Avenue
Heron Lake, Minnesota 56137-0077

Attention: Chief Financial Officer
Fax No.: (507) 793-0078

SECTION 19.      Taxes and Expenses. To the extent allowed by law, the Company agrees to pay all reasonable out-of-pocket costs and expenses (including the fees and expenses of counsel retained or employed by Lead Lender and/or Agent, and including any expenses of in-house counsel of Lead Lender and/or Agent) incurred by Lead Lender and/or Agent and any participants of Lead Lender in connection with the origination, administration, collection, and enforcement of this agreement and the other Loan Documents, including, without limitation, all costs and expenses incurred in perfecting, maintaining, determining the priority of, and releasing any security for the Company’s obligations to Lead Lender, and any stamp, intangible, transfer, or like tax payable in connection with this agreement or any other Loan Document.

SECTION 20.      Effectiveness and Severability. This agreement shall continue in effect until: (A) all indebtedness and obligations of the Company under this agreement, all Supplements, and all other Loan Documents shall have been paid or satisfied; (B) Lead Lender has no commitment to extend



Master Loan Agreement RI1304                                     - 15 -
HERON LAKE BIOENERGY, LLC
Heron Lake, Minnesota



credit to or for the account of the Company under any Supplement; and (C) either party sends written notice to the other terminating this agreement. Any provision of this agreement or any other Loan Document which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or thereof.

SECTION 21.      Successors and Assigns. This agreement, each Supplement, and the other Loan Documents shall be binding upon and inure to the benefit of the Company and Lead Lender and their respective successors and assigns, except that the Company may not assign or transfer its rights or obligations under this agreement, any Supplement or any other Loan Document without the prior written consent of Agent.

SECTION 22.      Participations, Etc. From time to time, Lead Lender may sell to one or more banks, financial institutions, or other lenders a participation in one or more of the loans or other extensions of credit made pursuant to this agreement. However, no such participation shall relieve Lead Lender of any commitment made to the Company hereunder. In connection with the foregoing, Lead Lender may disclose information concerning the Company and its Subsidiaries, if any, to any participant or prospective participant, provided that such participant or prospective participant agrees to keep such information confidential. Patronage distributions in the event of a sale of a participation interest shall be governed by the Bylaws and Capital Plan of CoBank and/or Lead Lender or Lead Lender’s parent Association (as each may be amended from time to time). A sale of a participation interest may include certain voting rights of the participants regarding the loans hereunder (including without limitation the administration, servicing, and enforcement thereof). Lead Lender agrees to give written notification to the Company of any sale of a participation interest, which notification may be given by Agent.

SECTION 23.      Counterpart Signatures. This agreement, each Supplement and any other Loan Document may be executed in any number of counterparts and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original and shall be binding upon all parties and their respective permitted successors and assigns, and all of which taken together shall constitute one and the same agreement.

IN WITNESS WHEREOF, the parties have caused this agreement to be executed by their duly authorized officers as of the date shown above.
AGSTAR FINANCIAL SERVICES, FLCA
HERON LAKE BIOENERGY, LLC
/a/ Robert Atwood
/s/ Steve A. Christensen
By:
Bob Atwood
By:
Steve A. Christensen
 
 
Title:
Mgr. Agency Desk and Team Leader
Title:
CEO




EXHIBIT A

Heron Lake BioEnergy, LLC
Compliance Certificate

As of Month Ended                         

This Certificate is delivered pursuant to the Master Loan Agreement dated ______________ (hereinafter referred to as the "Agreement") between Heron Lake BioEnergy, LLC (hereinafter referred to as "Company"), AgStar Financial Services and CoBank, ACB. Pursuant to Section 11 of the Agreement, all calculations hereunder shall be calculated on an unconsolidated basis. Terms used herein and defined in the Master Loan Agreement shall have their defined meanings when used herein .
Working Capital
Required not less than $8,000,000 at all time.
     GAAP Current Assets
 
$0
 
 
(-) GAAP Current Liabilities
 
$0
 
 
 
 
GAAP Working Capital
 
$0
 
 
 
 
 
plus: Unadvanced Portion of Revolving Term Facility ( less the amount that would be considered a current liability under GAAP if fully advanced )
 
 
$0
 
 
 
 
 
 
 
Adjusted Working Capital
 
$0
Compliance (Yes/No)
 
 
 
 
Net Worth
Required at all times not less than $32,000,000 plus any amount of the subordinated convertible debt converted to
capital units per the notice of redemption dated May 2, 2014
 
 
 
 
 
     Total Assets
 
 
$0
 
(-) Total Liabilities
 
 
$0
 
 
 
 
 
 
 
 
 
Net Worth
$0
 
 
 
 
 
Compliance (Yes/No)
 
 
 
 
Debt Service Coverage Ratio (Fiscal Year End)
Required to be not less than 1.15:1.00
 
 
 
 
 
 
 
 
Net Income
 
$0
 
 
    plus: Depreciation & Amortization
$0
 
 
    less: Non-Cash Dividends/Income received
$0
 
 
    less: Extraordinary Gain (plus losses)
$0
 
 
    less: Gain (plus losses) on Asset Sale
$0
 
 
Available Cash
 
 
$0
 
 
 
 
 
 
    divided by $4,000,000
 
 
$4,000,000
 
 
 
DSC Ratio
0.00
Compliance (Yes/No)
 
 
 
PRINCIPAL FINANCIAL OFFICER'S CERTIFICATION

The undersigned hereby certifies he is a principal financial officer of the Company, that the foregoing is a correct statement of financial condition and compliance as of the month end stated above, and that, during such month, there existed at no time any condition or event which constituted an event or which, after notice or lapse of time or both, would constitute an event of default in the performance of any covenants contained in the Master Loan Agreement.

By:                          Title:                      Date:             







Loan No. RI1304T01


REVOLVING TERM LOAN SUPPLEMENT


THIS SUPPLEMENT to the Master Loan Agreement dated _____July 29_______________ , 2014 (the “MLA”), is entered into as of _________July 29_____________ , 2014 between AGSTAR FINANCIAL SERVICES, FLCA (“Lead Lender”) and HERON LAKE BIOENERGY, LLC, Heron Lake, Minnesota (the “Company”).

SECTION 1. The Revolving Term Loan Commitment. On the terms and conditions set forth in the MLA and this Supplement, Lead Lender agrees to make loans to the Company from the date hereof, up to and including March 1, 2022, in an aggregate principal amount not to exceed, at any one time outstanding, $28,000,000.00 less the amounts scheduled to be repaid during the period set forth below in Section 5 (the “Commitment”). Within the limits of the Commitment, the Company may borrow, repay, and reborrow.

The Company may, in its sole discretion, elect to permanently reduce the amount of the Commitment by giving Agent ten (10) days prior written notice. Said election shall be made only if the Company is not in default at the time of the election and will remain in compliance with all financial covenants after such reduction. Any such reduction shall be treated as an early, voluntary reduction of the Commitment amount and shall not delay or reduce the amount of any scheduled Commitment reduction under Section 5 hereof, but rather shall result in an earlier expiration of the Commitment and final maturity of the loans.

SECTION 2.      Purpose. The purpose of the Commitment is to provide working capital to the Company and refinance the existing indebtedness with AgStar Financial Services, FLCA.

SECTION 3.      Term. Intentionally Omitted.

SECTION 4.      Interest. The Company agrees to pay interest on the unpaid balance of the loan(s) in accordance with one or more of the following interest rate options, as selected by the Company:

(A)      One-Month LIBOR Index Rate. At a rate (rounded upward to the nearest 1/100th and adjusted for reserves required on “Eurocurrency Liabilities” [as hereinafter defined] for banks subject to “FRB Regulation D” [as hereinafter defined] or required by any other federal law or regulation) per annum equal at all times to 3.25% above the rate reported at 11:00 a.m. London time for the offering of one (1)‑month U.S. dollars deposits, by Bloomberg Information Services (or any successor or substitute service providing rate quotations comparable to those currently provided by such service, as determined by Agent (as defined in the MLA) from time to time, for the purpose of providing quotations of interest rates applicable to dollar deposits in the London interbank market) on the first “U.S. Banking Day” (as hereinafter defined) in each week, with such rate to change weekly on such day[MAP_PPREFERENCE4]. The rate shall be reset automatically, without the necessity of notice being provided to the Company or any other party, on the first “U.S. Banking Day” of each succeeding week, and each change in the rate shall be applicable to all balances



Revolving Term Loan Supplement RI1304T01                                  - 2 -
Heron Lake BioEnergy, LLC
Heron Lake, Minnesota






subject to this option. Information about the then-current rate shall be made available upon telephonic request. For purposes hereof: (1) “U.S. Banking Day” shall mean a day on which Agent is open for business and banks are open for business in New York, New York; (2) “Eurocurrency Liabilities” shall have the meaning as set forth in “FRB Regulation D”; and (3) “FRB Regulation D” shall mean Regulation D as promulgated by the Board of Governors of the Federal Reserve System, 12 CFR Part 204, as amended.

(B)      LIBOR. At a fixed rate per annum equal to “LIBOR” (as hereinafter defined) plus 3.25%. Under this option: (1) rates may be fixed for "Interest Periods" (as hereinafter defined) of 1, 2, 3, 6, or 12 months, as selected by the Company; (2) amounts may be fixed in increments of $100,000.00 or multiples thereof; (3) the maximum number of fixes in place at any one time shall be five; and (4) rates may only be fixed on a "Banking Day" (as hereinafter defined) on three Banking Days’ prior written notice. For purposes hereof: (a) "LIBOR" shall mean the rate (rounded upward to the nearest sixteenth and adjusted for reserves required on “Eurocurrency Liabilities” [as hereinafter defined] for banks subject to “FRB Regulation D” [as herein defined] or required by any other federal law or regulation) reported at 11:00 a.m. London time two Banking Days before the commencement of the Interest Period for the offering of U.S. dollar deposits in the London interbank market for the Interest Period designated by the Company, by Bloomberg Information Services (or any successor or substitute service providing rate quotations comparable to those currently provided by such service, as determined by Agent from time to time, for the purpose of providing quotations of interest rates applicable to dollar deposits in the London interbank market); (b) "Banking Day" shall mean a day on which Agent is open for business, dealings in U.S. dollar deposits are being carried out in the London interbank market, and banks are open for business in New York City and London, England; (c) "Interest Period" shall mean a period commencing on the date this option is to take effect and ending on the numerically corresponding day in the next calendar month or the month that is 2, 3, 6, or 12 months thereafter, as the case may be; provided, however, that: (i) in the event such ending day is not a Banking Day, such period shall be extended to the next Banking Day unless such next Banking Day falls in the next calendar month, in which case it shall end on the preceding Banking Day; and (ii) if there is no numerically corresponding day in the month, then such period shall end on the last Banking Day in the relevant month; (d) “Eurocurrency Liabilities” shall have meaning as set forth in “FRB Regulation D”; and (e) “FRB Regulation D” shall mean Regulation D as promulgated by the Board of Governors of the Federal Reserve System, 12 CFR Part 204, as amended.

The Company shall select the applicable rate option at the time it requests a loan hereunder and may, subject to the limitations set forth above, elect to convert balances bearing interest at the variable rate option to one of the fixed rate options. Upon the expiration of any fixed rate period, interest shall automatically accrue at the variable rate option unless the amount fixed is repaid or fixed for an additional period in accordance with the terms hereof. Notwithstanding the foregoing, rates may not be fixed for periods expiring after the maturity date of the loans and rates may not be fixed in such a manner as to cause the Company to have to break any fixed rate balance in order to pay any installment of principal. All elections provided for herein shall be made electronically (if applicable), telephonically or in writing and must be received by Agent not later than 12:00 Noon Company's local time in order to be considered to have been received on that day; provided, however, that in the case of LIBOR rate loans, all such elections must be confirmed in writing upon Agent's request. Interest shall be calculated on the actual number of days each loan is outstanding on the basis of a year consisting of 360 days and shall be payable monthly in arrears by the 20th day of the following month or on such other day in such month as Agent shall require in a written notice to the Company; provided, however, in the event the Company elects to fix all or a portion of the indebtedness outstanding under the LIBOR interest rate option above, at Agent's option upon written notice to the Company, interest shall be



Revolving Term Loan Supplement RI1304T01                                  - 3 -
Heron Lake BioEnergy, LLC
Heron Lake, Minnesota






payable at the maturity of the Interest Period and if the LIBOR interest rate fix is for a period longer than three months, interest on that portion of the indebtedness outstanding shall be payable quarterly in arrears on each three-month anniversary of the commencement date of such Interest Period, and at maturity.

SECTION 5.      Promissory Note. The Company promises to repay on the date of each reduction in the Commitment, the outstanding principal, if any, that is in excess of the available balance. The available balance shall be decreased by $3,500,000.00 on March 1st of each year beginning March 1, 2015, and continuing through and including March 1, 2021, followed by a final reduction at the expiration of the Commitment on March 1, 2022, at which time any outstanding balance shall be due and payable in full. If any installment due date is not a day on which Agent is open for business, then such payment shall be made on the next day on which Agent is open for business. In addition to the above, the Company promises to pay interest on the unpaid principal balance hereof at the times and in accordance with the provisions set forth in Section 4 hereof.

SECTION 6.      Prepayment. Subject to the broken funding surcharge provision of the MLA, the Company may on one Business Day’s prior written notice prepay all or any portion of the loan(s). During the term of the Commitment, prepayments shall be applied to such balances, fixed or variable, as the Company shall specify. After the expiration of the term of the Commitment, prepayments shall, unless Agent otherwise agrees, be applied to principal installments in the inverse order of their maturity and to such balances, fixed or variable, as Agent shall specify.

In addition to the foregoing, prepayment of any loan balance due to refinancing, or refinancing of any unadvanced Commitment, up to and including July 1, 2016, will result in a 2% prepayment charge in addition to any broken funding surcharges which may be applicable, based on the total amount of the Commitments in effect at such time.

SECTION 7.      Security. The Company’s obligations hereunder and, to the extent related hereto, under the MLA, including without limitation any future advances under any existing mortgage or deed of trust, shall be secured as provided in the Security Section of the MLA.

SECTION 8.      Commitment Fee. In consideration of the Commitment, the Company agrees to pay to Agent a commitment fee on the average daily unused portion of the Commitment at the rate of 0.50% per annum (calculated on a 360-day basis), payable monthly in arrears by the 20th day following each month. Such fee shall be payable for each month (or portion thereof) occurring during the original or any extended term of the Commitment.

SECTION 9.      Administrative Fee. The Company agrees to pay to Agent on execution hereof and on each July 1 thereafter, for as long as the Company has commitments from Lead Lender or Agent, an administrative fee in the amount of $2,500.00.




Revolving Term Loan Supplement RI1304T01                                  - 4 -
Heron Lake BioEnergy, LLC
Heron Lake, Minnesota






SECTION 10.      Loan Origination Fee. In consideration of the Commitment, the Company agrees to pay to Agent on the execution hereof a loan origination fee in the amount of $28,000.00.

IN WITNESS WHEREOF, the parties have caused this Supplement to be executed by their duly authorized officers as of the date shown above.

AGSTAR FINANCIAL SERVICES, FLCA
 
 
 
HERON LAKE BIOENERGY, LLC
 
/s/ Robert Atwood
 
 
 
/s/ Steve A. Christensen
By:
Bob Atwood
 
By:
By: Steve A. Christensen
 
Title:
Mgr. Agency Desk and Team Leader
 
Title:
CEO






CoBANK, ACB
AND
AGSTAR FINANCIAL SERVICES, FLCA

SECURITY AGREEMENT

THIS SECURITY AGREEMENT (the “Security Agreement”) is executed and delivered by Heron Lake BioEnergy, LLC (the “Debtor”), a Minnesota limited liability company, having its place of business (or chief executive office if more than one place of business) located at 91246 390th Avenue, Heron Lake, Minnesota 56137-0077, to CoBANK, ACB, in its capacity as Administrative Agent on behalf of AGSTAR FINANCIAL SERVICES, FLCA and CoBANK, ACB (the “Secured Party”), a federally chartered instrumentality of the United States, whose mailing address is P.O. Box 5110, Denver, Colorado 80217.

SECTION 1.      GRANT OF SECURITY INTEREST. For valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Debtor hereby grants to the Secured Party a security interest in all of the personal property of the Debtor, wherever located and whether now existing or hereafter acquired, together with all accessions and additions thereto, and all products and proceeds thereof, including:

accounts; inventory (including without limitation, returned or repossessed goods); goods; as-extracted collateral; chattel paper; electronic chattel paper; instruments; investment property (including, without limitation, certificated and uncertificated securities, security entitlements, securities accounts, commodity contracts, and commodity accounts); letters of credit; letter-of-credit rights; documents; equipment; farm products; fixtures; general intangibles (including, without limitation, payment intangibles, choses or things in action, litigation rights and resulting judgments, goodwill, patents, trademarks and other intellectual property, tax refunds, miscellaneous rights to payment, investments and other interests in entities not included in the definition of investment property (including, without limitation, all equities and patronage rights in all cooperatives and all interests in partnerships and joint ventures), margin accounts, computer programs, software, invoices, books, records and other information relating to or arising out of the Debtor's business); and, to the extent not covered by the above, all other personal property of the Debtor of every type and description, including without limitation, supporting obligations, interests or claims in or under any policy of insurance, commercial tort claims, deposit accounts, money, and judgments (the "Collateral").

Where applicable, all terms used herein shall have the same meaning as presently and as hereafter defined in the Uniform Commercial Code (the “UCC”).

SECTION 2.      THE OBLIGATIONS . The security interest granted hereunder shall secure the payment of all indebtedness and the performance of all obligations of the Debtor to the Secured Party of every type and description, whether now existing or hereafter arising, fixed or contingent, as primary obligor or as guarantor or surety, acquired directly or by assignment or otherwise, liquidated or unliquidated, regardless of how they arise or by what agreement or instrument they may be evidenced, including without limitation all loans, advances and other extensions of credit and all covenants, agreements, and provisions contained in all loan and other agreements between the parties (the “Obligations”).





SECTION 3.      REPRESENTATIONS, WARRANTIES AND COVENANTS. The Debtor represents, warrants and covenants as follows:

A.      Title to Collateral. Except as permitted by any other written agreement between the parties, and except for any security interest in favor of the Secured Party, the Debtor has clear title to all Collateral free of all adverse claims, interests, liens, or encumbrances. Without the prior written consent of the Secured Party, the Debtor shall not create or permit the existence of any adverse claims, interests, liens, or other encumbrances against any of the Collateral. The Debtor shall provide prompt written notice to the Secured Party of any future adverse claims, interests, liens, or encumbrances against all Collateral, and shall defend diligently the Debtor's and the Secured Party's interests in all Collateral.

B.      Validity of Security Agreement; Corporate Authority. This Security Agreement is the valid and binding obligation of the Debtor, enforceable in accordance with its terms. The Debtor is duly formed, validly existing and in good standing under the laws of its jurisdiction of formation. The Debtor has the full corporate power to execute, deliver and carry out the terms and provisions of this Security Agreement and all related documents and to grant to the Secured Party a security interest in, and a lien on, the Collateral, has taken all necessary action to authorize the execution, delivery and performance of this Security Agreement and all related documents, and such execution, delivery and performance do not and will not (i) violate any of the terms or provisions of the organizational documents of the Debtor or any provision of any law, order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to the Debtor, (ii) result in a breach of, or constitute a default under, any indenture or loan or credit agreement or any other agreement, document or instrument to which the Debtor is a party or by which the Debtor or any of the Debtor’s property may be bound or affected or (iii) result in or require the creation or imposition of any lien or other encumbrance of any nature upon or with respect to any of the property of the Debtor (except for any security interest in favor of the Secured Party).

C.      Location of the Debtor. The Debtor’s place of business (or chief executive office if more than one place of business) is located at the address shown above. The Debtor’s state of incorporation or formation is as shown above.

D.      Location of Fixtures. All fixtures are now at the location or locations specified on Schedule A attached hereto and made a part hereof.

E.      Name, Identity, and Corporate Structure. The Debtor’s exact legal name is as set forth above. Except as set forth on Schedule B , the Debtor has not within the past ten years changed its name, identity or corporate structure through incorporation, merger, consolidation, joint venture or otherwise.

F.      Change in Name, State of Debtor’s Location, Location of Collateral, Etc. Without giving at least thirty days' prior written notice to the Secured Party, the Debtor shall not change its name, identity or corporate structure, the location of its place of business (or chief executive office if more than one place of business), its state of incorporation or formation, or the location of the Collateral.

G.      Further Assurances. Upon the request of the Secured Party, the Debtor shall do all acts and things as the Secured Party may from time to time deem necessary or advisable to enable it to perfect, maintain, and continue the perfection and priority of the security interest of the Secured Party in the Collateral, or to facilitate the exercise by the Secured Party of any rights or remedies granted to the Secured Party hereunder or provided by law. Without limiting the foregoing, the Debtor agrees to execute, in form and substance satisfactory to the Secured Party, such financing statements, amendments thereto, supplemental agreements, assignments, notices of assignments, and other instruments and documents as the Secured Party may from time to time request. In addition, in the event the Collateral or any part thereof consists of


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instruments, documents, chattel paper, or money (whether or not proceeds of the Collateral), the Debtor shall, upon the request of the Secured Party, deliver possession thereof to the Secured Party (or to an agent of the Secured Party retained for that purpose), together with any appropriate endorsements and/or assignments. Where Collateral is in the possession of a third party, the Debtor will join with the Secured Party in notifying the third party of the Secured Party’s security interest and obtaining an acknowledgment from the third party that it is holding the Collateral for the benefit of the Secured Party. The Debtor will cooperate with the Secured Party in obtaining control with respect to Collateral consisting of deposit accounts (that are not held by the Secured Party as depositary institution), investment property, letter-of-credit rights and electronic chattel paper. The Secured Party shall use reasonable care in the custody and preservation of such Collateral in its possession, but shall not be required to take any steps necessary to preserve rights against prior parties. All costs and expenses incurred by the Secured Party to establish, perfect, maintain, determine the priority of, or release the security interest granted hereunder (including the cost of all filings, recordings, and taxes thereon and the fees and expenses of any agent retained by Secured Party) shall become part of the Obligations secured hereby and be paid by the Debtor on demand.

H.      Insurance. The Debtor shall maintain such property and casualty insurance with such insurance companies, in such amounts, and covering such risks, as are at all times satisfactory to the Secured Party. All such policies shall provide for loss payable clauses or endorsements and other terms and conditions in form and content acceptable to the Secured Party. Upon the request of the Secured Party, all policies (or such other proof of compliance with this Section as may be satisfactory to the Secured Party) shall be delivered to the Secured Party. The Debtor shall pay all insurance premiums when due. In the event of loss, damage, or injury to any insured Collateral, the Secured Party shall have full power to collect any and all insurance proceeds due under any of such policies (and the Debtor hereby agrees, upon request by the Secured Party, to promptly forward to the Secured Party all such insurance proceeds received directly by the Debtor), and may, at its option, apply such proceeds to the payment of any of the Obligations secured hereby, or may apply such proceeds to the repair or replacement of such Collateral.

I.      Taxes, Levies, Etc. The Debtor has paid and shall continue to pay when due all taxes, levies, assessments, or other charges which may become an enforceable lien against the Collateral.

J.      Disposition and Use of Collateral by the Debtor. Without the prior written consent of the Secured Party, the Debtor shall not at any time sell, transfer, lease, abandon, or otherwise dispose of any Collateral, except that, so long as the Debtor is not in default hereunder, the Debtor may sell, transfer, lease, abandon, or otherwise dispose of equipment and inventory in the ordinary course of Debtor’s business. The Debtor shall not use any of the Collateral in any manner which violates any statute, regulation, ordinance, rule, decree, order, or insurance policy.

K.      Receivables. The Debtor shall preserve, enforce, and collect all accounts, chattel paper, electronic chattel paper, instruments, documents and general intangibles, whether now owned or hereafter acquired or arising (the “Receivables”), in a diligent fashion and, upon the request of the Secured Party, the Debtor shall execute an agreement in form and substance satisfactory to the Secured Party by which the Debtor shall direct all account debtors and obligors on Receivables to make payment to a lock box deposit account under the exclusive control of the Secured Party.

L.      Condition of Collateral. All tangible Collateral is now in good repair and condition and the Debtor shall at all times hereafter, at its own expense, maintain all such Collateral in good repair and condition.



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M.      Condition of Books and Records. The Debtor has maintained and shall maintain complete, accurate and up‑to‑date books, records, accounts, and other information relating to all Collateral in such form and in such detail as may be satisfactory to the Secured Party, and shall allow the Secured Party or its representatives at any reasonable time to examine and copy such books, records, accounts, and other information.

N.      Right of Inspection. At all reasonable times upon the request of the Secured Party, the Debtor shall allow the Secured Party or its representatives to visit any of the Debtor’s properties or locations so that the Secured Party or its representatives may confirm, inspect and appraise any of the Collateral.

SECTION 4.      DEFAULT. The breach of any of the Obligations secured hereby, and/or the breach of any representation, warranty, covenant, or agreement contained in this Security Agreement, shall constitute default hereunder.

SECTION 5.      RIGHTS AND REMEDIES. Upon the Debtor's default and at any time thereafter, the Secured Party may declare all Obligations to be immediately due and payable and may exercise any and all rights and remedies of the Secured Party in the enforcement of its security interest under the UCC, this Security Agreement, or any other applicable law. Without limiting the foregoing:

A.      Disposition of Collateral. The Secured Party may sell, lease, or otherwise dispose of all or any part of the Collateral, in its then present condition or following any commercially reasonable preparation or processing thereof, whether by public or private sale or at any brokers' board, in lots or in bulk, for cash, on credit or otherwise, with or without representations or warranties, and upon such other terms as may be acceptable to the Secured Party, and the Secured Party may purchase at any public sale. At any time when advance notice of sale is required, the Debtor agrees that ten days' prior written notice shall be reasonable. In connection with the foregoing, the Secured Party may:

1.      require the Debtor to assemble the Collateral and all records pertaining thereto and make such Collateral and records available to the Secured Party at a place to be designated by the Secured Party which is reasonably convenient to both parties;

2.      enter the premises of the Debtor or premises under the Debtor's control and take possession of the Collateral;

3.      without charge, use or occupy the premises of the Debtor or premises under the Debtor's control, including without limitation, warehouse and other storage facilities;

4.      without charge, use any patent, trademark, tradename, or other intellectual property or technical process used by the Debtor in connection with any of the Collateral; and

5.      rely conclusively upon the advice or instructions of any one or more brokers or other experts selected by the Secured Party to determine the method or manner of disposition of any of the Collateral and, in such event, any disposition of the Collateral by the Secured Party in accordance with such advice or instructions shall be deemed to be commercially reasonable.

B.      Collection of Receivables. The Secured Party may, but shall not be obligated to, take all actions reasonable or necessary to preserve, enforce or collect the Receivables, including without limitation, the right to notify account debtors and obligors on Receivables to make direct payment to the


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Secured Party, to permit any extension, compromise, or settlement of any of the Receivables for less than face value, or to sue on any Receivable, all without prior notice to the Debtor.

C.      Proceeds. The Secured Party may collect and apply all proceeds of the Collateral, and may endorse the name of the Debtor in favor of the Secured Party on any and all checks, drafts, money orders, notes, acceptances, or other instruments of the same or a different nature, constituting, evidencing, or relating to the Collateral. The Secured Party may receive and open all mail addressed to the Debtor and remove therefrom any cash or non‑cash items of payment constituting proceeds of the Collateral.

D.      Insurance Adjustments. The Secured Party may adjust, settle, and cancel any and all insurance covering any Collateral, endorse the name of the Debtor on any and all checks or drafts drawn by any insurer, whether representing payment for a loss or a return of unearned premium, and execute any and all proofs of claim and other documents or instruments of every kind required by any insurer in connection with any payment by such insurer.

The net proceeds of any disposition of the Collateral may be applied by the Secured Party, after deducting its reasonable expenses incurred in such disposition, to the payment in whole or in part of the Obligations in such order as the Secured Party may elect. The enumeration of the foregoing rights and remedies is not intended to be exhaustive, and the exercise of any right and/or remedy shall not preclude the exercise of any other rights or remedies, all of which are cumulative and non‑exclusive.

SECTION 6.      OTHER PROVISIONS.

A.      Amendment, Modification, and Waiver. Without the prior written consent of the Secured Party, no amendment, modification, or waiver of, or consent to any departure by the Debtor from, any provision hereunder shall be effective. Any such amendment, modification, waiver, or consent shall be effective only in the specific instance and for the specific purpose for which given. No delay or failure by the Secured Party to exercise any remedy hereunder shall be deemed a waiver thereof or of any other remedy hereunder. A waiver on any one occasion shall not be construed as a bar to or waiver of any remedy on any subsequent occasion.

B.      Costs and Attorneys’ Fees. Except as prohibited by law, if at any time the Secured Party employs counsel in connection with the creation, perfection, preservation, or release of the Secured Party's security interest in the Collateral or the enforcement of any of the Secured Party's rights or remedies hereunder, all of the Secured Party's reasonable attorneys’ fees arising from such services and all expenses, costs, or charges relating thereto shall become part of the Obligations secured hereby and be paid by the Debtor on demand.

C.      No Obligation to Make Loans. Nothing contained herein or in any financing statement or other document executed or filed in connection herewith shall be construed to obligate the Secured Party to make any loans or advances to the Debtor, whether pursuant to a commitment or otherwise.

D.      Revival of Obligations. To the extent the Debtor or any third party makes a payment or payments to the Secured Party or the Secured Party enforces its security interest or exercises any right of setoff, and such payment or payments or the proceeds thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, and/or required to be repaid to a trustee, receiver, or any other party under any bankruptcy, insolvency or other law or in equity, then, to the extent of such recovery, the Obligations or any part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment or payments had not been made, or such enforcement or setoff had not occurred.



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E.      Performance by the Secured Party. In the event the Debtor shall at any time fail to pay or perform punctually any of its duties hereunder, the Secured Party may, at its option and without notice to or demand upon the Debtor, without obligation and without waiving or diminishing any of its other rights or remedies hereunder, fully perform or discharge any of such duties. All costs and expenses incurred by the Secured Party in connection therewith, together with interest thereon at the Secured Party's CoBank Base Rate plus four percent per annum, shall become part of the Obligations secured hereby and be paid by the Debtor upon demand.

F.      Indemnification, Etc. The Debtor hereby expressly indemnifies and holds the Secured Party harmless from any and all claims, causes of action, or other proceedings, and from any and all liability, loss, damage, and expense of every nature, arising by reason of the Secured Party's enforcement of its rights and remedies hereunder, or by reason of the Debtor's failure to comply with any environmental or other law or regulation. As to any action taken by the Secured Party hereunder, the Secured Party shall not be liable for any error of judgment or mistake of fact or law, absent gross negligence or willful misconduct on its part.

G.      Power of Attorney. The Debtor hereby appoints the Secured Party or the Secured Party's designee as its attorney‑in‑fact, which appointment is irrevocable, durable, and coupled with an interest, with full power of substitution, in the name of the Debtor or in the name of the Secured Party, to take any action which the Debtor is obligated to perform hereunder or which the Secured Party may deem necessary or advisable to accomplish the purposes of this Security Agreement. In taking any action in accordance with this Section, the Secured Party shall not be deemed to be the agent of the Debtor. The powers conferred upon the Secured Party in this Section are solely to protect its interest in the Collateral and shall not impose any duty upon the Secured Party to exercise any such powers.

H.      Continuing Effect. This Security Agreement, the Secured Party's security interest in the Collateral, and all other documents or instruments contemplated hereby shall continue in full force and effect until all of the Obligations have been satisfied in full, the Secured Party has no commitment to make any further advances to the Debtor, and the Debtor has sent a valid written demand to the Secured Party for termination of this Security Agreement.

I.      Binding Effect. This Security Agreement shall be binding upon and inure to the benefit of the Debtor and the Secured Party and their respective successors and assigns.

J.      Security Agreement as Financing Statement and Authorization to File. A photographic copy or other reproduction of this Security Agreement may be used as a financing statement. In addition, the Debtor authorizes the Secured Party to prepare and file financing statements describing the Collateral, amendments thereto, and continuation statements and file any financing statement, amendment thereto or continuation statement electronically. In addition, the Debtor authorizes the Secured Party to file financing statements describing any agricultural liens or other statutory liens held by the Secured Party.

K.      Governing Law. Subject to any applicable federal law, this Security Agreement shall be construed in accordance with and governed by the laws of the State of Colorado, except to the extent that the UCC provides for the application of the law of another state.

L.      Notices. All notices, requests, demands, or other communications required or permitted hereunder shall be in writing and shall be deemed to have been given when sent by registered or certified mail, return receipt requested, addressed to the other party at the respective addresses given above, or to such other person or address as either party designates to the other in the manner herein prescribed.



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M.      Severability. The determination that any term or provision of this Security Agreement is unenforceable or invalid shall not affect the enforceability or validity of any other term or provision hereof.
[MAP_TELESEC7]
IN WITNESS WHEREOF, the Debtor has executed this [MAP_AMENDRESTATE2] Security Agreement by its duly authorized officer as of the day and year shown below.

Date:
July 29, 2014
 
Debtor:
Heron Lake BioEnergy, LLC,
a Minnesota limited liability company
 
 
By:
/s/ Steve A. Christensen
 
 
Title:
CEO



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SCHEDULE A

To Security Agreement Dated July 29, 2014

Executed By: Heron Lake BioEnergy, LLC

Set forth below are the present locations (by county and state) of the Debtor’s fixtures.



County:
 
State:
 
County:
 
County:
 
County:
 
County:
 



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SCHEDULE B

To Security Agreement Dated July 29, 2014

Executed by: Heron Lake BioEnergy, LLC

Set forth below is an explanation of any changes within the past ten (10) years to the Debtor’s name, identity or corporate structure through incorporation, merger, consolidation, joint venture or otherwise.




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============================================
REAL ESTATE MORTGAGE,
ASSIGNMENT OF RENTS AND PROFITS AND
FIXTURE FINANCING STATEMENT
Made By

HERON LAKE BIOENERGY, LLC
as Mortgagor

in favor of
CoBANK, ACB, in its capacity as Administrative Agent (“Agent”)
on behalf of AGSTAR FINANCIAL SERVICES, FLCA
as Mortgagee

Dated as of July 29, 2014

THIS INSTRUMENT CONSTITUTES A LIEN ON ALL AFTER ACQUIRED PROPERTY OF THE MORTGAGOR.

THIS INSTRUMENT CONTAINS FUTURE ADVANCE PROVISIONS AND SECURES A REVOLVING LINE OF CREDIT.
NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN, ENFORCEMENT OF THIS MORTGAGE IS LIMITED TO A DEBT AMOUNT OF $28,000,000.00 UNDER CHAPTER 287 OF MINNESOTA STATUTES, PLUS PROTECTIVE ADVANCES.
============================================

This instrument was drafted by:
Melanie N. Ferguson
CoBank, ACB
P.O. Box 5110
Denver, CO 80217

Attention: Collateral Department
Phone No: 800-542-8072
Tax statements for the real property described in this instrument should be sent to:
              Heron Lake BioEnergy, LLC
              91246 390 th  Avenue
              Heron Lake, MN 56137



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THIS REAL ESTATE MORTGAGE, ASSIGNMENT OF RENTS AND PROFITS AND FIXTURE FINANCING STATEMENT, dated as of July 29, 2014 is made by HERON LAKE BIOENERGY, LLC (hereinafter called the "Mortgagor"), a limited liability company existing under the laws of the State of Minnesota, in favor of CoBANK, ACB, in its capacity as Administrative Agent on behalf of AGSTAR FINANCIAL SERVICES, FLCA (hereinafter called the "Mortgagee"), a federally chartered instrumentality of the United States.


ARTICLE I.

DEFINITIONS

Section 1.01.      Definitions. In addition to the terms defined elsewhere in this Mortgage, the following terms shall have the meanings specified in this Section 1.01, unless the context clearly requires otherwise. The terms defined herein include the plural as well as the singular. Accounting terms used in this Mortgage but not otherwise defined herein shall have the meanings they have under GAAP.

Credit Agreements shall mean all agreements, instruments and documents between the Mortgagor and the Mortgagee or executed by the Mortgagor in favor of the Mortgagee which evidence or relate to the Obligations, whether now existing or hereafter entered into, and all amendments, supplements and restatements thereof.

Environmental Law shall have the meaning specified in Section 3.13.

Event of Default shall have the meaning specified in Section 4.01.

GAAP shall mean generally accepted accounting principles as established by the American Institute of Certified Public Accountants.

Hazardous Materials shall have the meaning specified in Section 3.13.

Lien shall mean any statutory or common law consensual or non-consensual mortgage, pledge, grant, security title or interest, lien, encumbrance or charge of any kind against property, including, without limitation, any conditional sale or other title retention transaction, and any lease transaction in the nature of a security interest.

Maximum Debt Limit shall mean $28,000,000.00 at any one time outstanding, and shall include advances and re-advances made from time to time pursuant to a revolving line of credit.

Mortgage shall mean this Real Estate Mortgage, Assignment of Rents and Profits and Fixture Financing Statement, as it may be amended or supplemented from time to time.

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Mortgaged Property shall have the meaning specified in Section 2.01.

Mortgagee shall mean CoBANK, ACB, in its capacity as Administrative Agent on behalf of AGSTAR FINANCIAL SERVICES, FLCA.

Obligations shall mean all indebtedness and other obligations of the Mortgagor to the Mortgagee of every type and description, whether now existing or hereafter arising, fixed or contingent, as primary obligor or as guarantor or surety, acquired directly or by assignment or otherwise, liquidated or unliquidated, regardless of how they arise or by what agreement or instrument they may be evidenced, including, without limitation, indebtedness under all loans, advances and other extensions of credit made to or for the account of the Mortgagor including without limitation the promissory note(s) that are more particularly identified on Exhibit B hereto, and all covenants, agreements and provisions contained in this Mortgage and in any of the Credit Agreements.

Permitted Encumbrances shall mean:

(i)      as to the property specifically described in Exhibit “A” hereto, the restrictions, exceptions, reservations, conditions, limitations, interests and other matters which are set forth or referred to in such descriptions; and

(ii)      as to all Mortgaged Property, any Lien permitted under the Credit Agreements.

Potential Default shall mean the occurrence of any event which with the giving of notice and/or the passage of time and/or the occurrence of any other condition would ripen into an Event of Default.

Uniform Commercial Code shall mean the Uniform Commercial Code of the state of the Mortgagor’s Location and any state in which any of the Mortgaged Property is located.

ARTICLE II.

GRANTING CLAUSES

Section 2.01.      Granting Clauses. In order to secure the repayment of the Obligations, whether such Obligations are made pursuant to a commitment, made at the option of the Mortgagee, made after a reduction to zero or other balance, or made otherwise, up to the Maximum Debt Limit, and to declare the terms and conditions upon which the Obligations are to be secured, the Mortgagor, in consideration of the premises, does hereby grant, bargain, sell, alienate, convey, assign, transfer, mortgage, hypothecate, pledge, set over and confirm unto the Mortgagee, and its respective assigns the following (all of which are hereinafter collectively called the "Mortgaged Property"):

All right, title and interest of the Mortgagor in and to those fee and leasehold estates in real property described in Exhibit "A" hereto, subject in each case to those matters set forth in such Exhibit, together with all buildings, improvements, fixed assets, personalty and fixtures now or in the future annexed, affixed or attached to said real property or said buildings, improvements or structures located thereon; and

All right, title and interest of the Mortgagor in, to and under any and all grants, privileges, rights of way, easements and other similar interest now owned, held, leased, enjoyed or exercised, or which may hereafter be owned, held, leased, acquired, enjoyed or exercised, by the Mortgagor for the purposes of, or in connection with the real property described in Exhibit “A” hereto or, the construction,

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acquisition, ownership, use or operation by or on behalf of the Mortgagor of all buildings and improvements located on the property encumbered hereby, wherever located; and

Also, all right, title and interest of the Mortgagor in and to all rents, income (both from services and occupation), royalties, revenues and payments, including prepayments and security deposits (collectively the “Rents”), which are now or hereafter due or to be paid in connection with the Mortgaged Property.

TOGETHER WITH all tenements, hereditaments and appurtenances belonging or otherwise pertaining to the aforesaid property or any part thereof, with all reversions, remainders, rents, income, revenues, profits, cash, proceeds, products and benefits at any time derived, received or had from any or all of the above-described property of the Mortgagor and all deposits or other accounts into which the same may be deposited.

TO HAVE AND TO HOLD the Mortgaged Property unto the Mortgagee and its respective assigns forever, to secure the payment and performance of the Obligations, including, without limitation, the due performance of the covenants, agreements and provisions herein contained, and for the uses and purposes and upon the terms, conditions, provisos and agreements hereinafter expressed and declared.

PROVIDED NEVERTHELESS, should the Mortgagor pay and perform all of the Obligations, then this instrument will be of no further force and effect, and this Mortgage shall be satisfied by the Mortgagee, at the expense of the Mortgagor.


ARTICLE III.

PARTICULAR REPRESENTATIONS, WARRANTIES AND
COVENANTS OF THE MORTGAGOR

The Mortgagor represents, warrants and, except as otherwise permitted by the Mortgagee, covenants with the Mortgagee as follows:


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Section 3.01.      Authority to Execute and Deliver this Mortgage; All Action Taken; Enforceable Obligations. The Mortgagor is authorized under its articles of incorporation and bylaws or other applicable organizational documents and all applicable laws and by corporate or organizational action to execute and deliver this Mortgage; and this Mortgage is, and any amendment, supplement or restatement of this Mortgage, when executed and delivered will be, the legal, valid and binding obligations of the Mortgagor which are enforceable in accordance with their respective terms.

Section 3.02.      Authority to Mortgage Property; No Liens; Exception for Permitted Encumbrances; Mortgagor to Defend Title and Remove Liens. The Mortgagor has good and marketable title to all fee and leasehold estates in real property and good, right and lawful authority to mortgage the Mortgaged Property for the purposes herein expressed. The Mortgaged Property is free and clear of any Lien affecting the title thereto, except Permitted Encumbrances. The Mortgagor will, so long as any of the Obligations shall remain unpaid, maintain and preserve the Lien of this Mortgage superior to all other Liens, other than Permitted Encumbrances, and will forever warrant and defend the title to the Mortgaged Property against any and all claims and demands.

Section 3.03.      No Encumbrances on Mortgaged Property. The Mortgagor will not create, incur, suffer or permit to exist any Lien on any of the Mortgaged Property, except for Permitted Encumbrances. Except for claims giving rise to Permitted Encumbrances, the Mortgagor will promptly pay or discharge any and all obligations for or on account of which any such Lien might exist.

Section 3.04. Sale or Transfer of Mortgaged Property. The Mortgagor shall not sell, lease or transfer any of the Mortgaged Property to any person or entity except as permitted in the Credit Agreements.

Section 3.05.      Payment of Obligations. The Mortgagor will duly and punctually pay all amounts due under the Obligations, at the dates and places and in the manner provided in all Credit Agreements, and all other sums becoming due hereunder.

Section 3.06.      Preservation of Franchises and Compliance with Laws. The Mortgagor will take or cause to be taken all such action as may from time to time be necessary to obtain, preserve and renew all franchises, rights of way, easements, permits, and licenses now or hereafter granted or upon it conferred necessary to the operations of the Mortgagor, and will comply in all material respects with all laws, ordinances, regulations, and requirements applicable to it or the Mortgaged Property.

Section 3.07.      Maintenance of Mortgaged Property. The Mortgagor will at all times maintain and preserve the Mortgaged Property and each and every material part and parcel thereof in good repair, working order and condition, ordinary wear and tear excepted, and in material compliance with all applicable laws, ordinances, regulations, and requirements, and will from time to time make all needed and proper repairs, renewals, and replacements, and useful and proper alterations, additions, betterments and improvements, and will, subject to contingencies beyond its reasonable control, at all times keep its plant and properties in continuous operating condition and use all reasonable diligence to furnish the consumers served by it through the Mortgaged Property, or any part thereof, with adequate services furnished by the Mortgagor.

Section 3.08.      Insurance; Restoration of Damaged Mortgaged Property. The Mortgagor will maintain insurance as required by the Credit Agreements. In the event of damage to or the destruction or loss of any portion of the Mortgaged Property, unless the Mortgagee shall otherwise agree, the Mortgagor shall replace or restore such damaged, destroyed or lost portion so that the Mortgaged Property shall be in substantially the same condition as it was in prior to such damage,

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destruction or loss. Provided no Potential Default or Event of Default then exists, the Mortgagee shall provide to the Mortgagor any insurance proceeds received by the Mortgagee upon such reasonable terms and conditions as the Mortgagee may require to ensure that such proceeds are used for the foregoing purpose and that such required replacement or restoration will be completed. The Mortgagor shall replace the lost portion of the Mortgaged Property or shall commence such restoration promptly after such damage, destruction or loss shall have occurred and shall complete such replacement or restoration as expeditiously as practicable, and shall pay or cause to be paid, out of the proceeds of such insurance or otherwise, all costs and expenses in connection therewith so that such replacement or restoration shall be so completed that the portion of the Mortgaged Property so replaced or restored shall be free and clear of all Liens, except for Permitted Encumbrances. At the request of the Mortgagee, the Mortgagor shall exercise such rights and remedies which it may have under any insurance policy or fidelity bond and which may be designated by the Mortgagee, and the Mortgagor hereby irrevocably appoints the Mortgagee as its agent to exercise such rights and remedies under any insurance policy or bond as the Mortgagee may choose, and the Mortgagor shall pay all reasonable costs and expenses incurred by the Mortgagee in connection with such exercise.

Section 3.09.      Mortgagee Right to Expend Money to Protect Mortgaged Property. From time to time, the Mortgagee may, in its sole discretion, but shall not be obligated to, advance funds on behalf of the Mortgagor, in order to ensure compliance with any covenant or agreement of the Mortgagor made in or pursuant to this Mortgage or any of the Credit Agreements, to preserve or protect any right or interest of the Mortgagee in the Mortgaged Property or under or pursuant to this Mortgage or any of the Credit Agreements, including, without limitation, the payment of any insurance premiums or taxes and the satisfaction or discharge of any judgment or any Lien upon the Mortgaged Property or other property or assets of the Mortgagor (other than Permitted Encumbrances); provided, however, that the making of any such advance by the Mortgagee shall not constitute a waiver by the Mortgagee of any Event of Default with respect to which such advance is made nor excuse the Mortgagor from any performance required hereunder. The Mortgagor shall pay to the Mortgagee upon demand all such advances made by the Mortgagee with interest thereon at a rate equal at all times to 4% per annum above the Mortgagee's “CoBank Base Rate.” For purposes hereof, the CoBank Base Rate shall mean the rate of interest established by the Mortgagee from time to time as its CoBank Base Rate, which rate is intended by the Mortgagee to be a reference rate and not its lowest rate. All such advances and accrued interest shall be secured by this Mortgage.

Section 3.10.      Further Assurances. Upon the request of the Mortgagee, the Mortgagor shall promptly do all acts and things, including the execution, acknowledgment and delivery of such amendments thereto and other instruments and documents as the Mortgagee may request, to enable the Mortgagee to perfect and maintain the Lien of this Mortgage and/or the Mortgagee’s rights and remedies hereunder. The Mortgagor shall notify the Mortgagee promptly upon the acquisition of any fee or leasehold estate in real property and, to the extent required under the Credit Agreement, shall execute and record such amendments or supplements to this Mortgage or other documents or instruments as are necessary or appropriate to subject such real property to the Lien of this Mortgage and shall deliver such executed and recorded amendments or supplements or other documents or instruments to the Mortgagee. In the event the Mortgagor fails to take any action required under this Section 3.10, the Mortgagee may take any such action and make, execute and record any such instruments and documents for and in the name of the Mortgagor, and the Mortgagor hereby irrevocably appoints the Mortgagee as its attorney-in-fact to take such actions, which appointment is coupled with an interest and irrevocable.

Section 3.11.      Condemnation, Etc. In the event that the Mortgaged Property or any part

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thereof shall be taken under the power of eminent domain or like power, then, unless the Mortgagee otherwise consents, all proceeds and avails thereof shall be applied by the Mortgagor to the prepayment of the Obligations (such prepayments to be applied in such order and manner as the Mortgagee may, in its sole discretion, elect).

Section 3.12.      Conflict with Mortgage Terms. The provisions of this Mortgage and the Credit Agreements shall be cumulative and not mutually exclusive, notwithstanding any inconsistencies.

Section 3.13.      Environmental Representations, Warranties and Covenants. The Mortgagor makes the following representations, warranties and covenants, all of which are subject to any exceptions that the Mortgagor may have previously disclosed in writing to the Mortgagee, and which, to the extent that they deal with representations of fact, are based on the Mortgagor’s present knowledge, arrived at after reasonable inquiry.

(A)      Use of the Mortgaged Property.

(1)      The Mortgagor shall: (a) use, handle, transport or store Hazardous Materials as defined under any Environmental Law (both as hereinafter defined); and (b) store or treat non-hazardous wastes: (i) in a good and prudent manner in the ordinary course of business; and (ii) in compliance with all applicable Environmental Laws.

(2)      The Mortgagor shall not conduct or allow to be conducted, in violation of any Environmental Law, any business, operations or activity on the Mortgaged Property, or, except in strict compliance with applicable law, employ or use the Mortgaged Property to generate, use, handle, manufacture, treat, store, process, transport or dispose of any Hazardous Materials, or any other substance which is prohibited, controlled or regulated under applicable law. The Mortgagor shall not use the Mortgaged Property in a way that poses a threat or nuisance to public safety, health or the environment, or cause or allow to be caused a known or suspected release of Hazardous Materials, on, under, or from the Mortgaged Property.

(3)      The Mortgagor shall not do or permit any act or thing, business or operation that poses an unreasonable risk of harm, or impairs or may impair the value of the Mortgaged Property or any part thereof.

(B)      Condition of the Mortgaged Property.

(1)      The Mortgagor shall take all appropriate response actions, including any removal and remedial actions, in the event of a release, emission, discharge or disposal of Hazardous Materials in, on, under, or about the Mortgaged Property, so as to remain in compliance with all Environmental Laws.

(2)      All underground tanks, wells, septic tanks, ponds, pits, or any other storage tanks (whether currently in use or abandoned) on the Mortgaged Property, if any, are, as of the date hereof, maintained in compliance with all applicable Environmental Laws.

(C)      Notice of Environmental Problems or Litigation. Neither the Mortgagor nor any of its tenants have given, nor were they required to give, nor have they received, any notice, letter, citation, order, warning, complaint, inquiry, claim or demand that: (1) the Mortgagor and/or any tenants have violated, or are about to violate, any Environmental Law, judgment or order; (2) there has been a release, or there is a threat of release, of Hazardous Materials from the Mortgaged Property; (3) the Mortgagor and/or its tenants may be or are liable, in whole or in part, for the costs of cleaning up,

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remediating, removing or responding to a release or a threatened release of Hazardous Materials; or (4) the Mortgaged Property is subject to a Lien in favor of any governmental entity for any liability, costs or damages, under any Environmental Law arising from, or costs incurred by such governmental entity in response to, a release or a threatened release of a Hazardous Material. The Mortgagor further represents and warrants that no conditions currently exist or are currently reasonably foreseeable that would subject the Mortgagor to any such investigation, litigation, administrative enforcement or to any damages, penalties, injunctive relief, or cleanup costs under any Environmental Law. Upon receipt of any such notice, the Mortgagor and its tenants shall immediately provide a copy to the Mortgagee.

(D)      Right of Inspection. The Mortgagor hereby grants, and will cause any tenants to grant, to the Mortgagee, its agents, attorneys, employees, consultants, contractors, successors and assigns, an irrevocable license and authorization, upon reasonable notice, to enter upon and inspect the Mortgaged Property and facilities thereon, and perform such tests, including without limitation, subsurface testing, soils and groundwater testing, and other tests which may physically invade the Mortgaged Property, as the Mortgagee, in its sole discretion, determines are necessary to protect its security interest; provided, however, that under no circumstances shall the Mortgagee be obligated to perform such inspections or tests.

(E)      Indemnity. The Mortgagor agrees to indemnify and hold the Mortgagee, its directors, employees, agents, and its successors and assigns, harmless from and against any and all claims, losses, damages, liabilities, fines, penalties, charges, judgments, administrative orders, remedial action requirements, enforcement actions of any kind, and all costs and expenses incurred in connection therewith (including without limitation attorney’s fees and expenses) arising directly or indirectly, in whole or in part, out of any failure of the Mortgagor to comply with the environmental representations, warranties, and covenants contained herein.

(F)      Continuation of Representations, Warranties, Covenants and Indemnities. The Mortgagor’s representations, warranties, covenants, and indemnities contained herein shall survive the occurrence of any event whatsoever, including, without limitation, the satisfaction of the Obligations secured hereby, the reconveyance or foreclosure of this Mortgage, the acceptance by the Mortgagee of a deed in lieu of foreclosure, or any transfer or abandonment of the Mortgaged Property.

(G)      Corrective Action. In the event the Mortgagor is in breach of any of its representations, warranties or agreements as set forth above, then, without limiting the Mortgagee’s other rights hereunder, the Mortgagor, at its sole expense, shall take all actions required, including, without limitation, environmental cleanup of the Mortgaged Property, to comply with the representations, warranties, and covenants contained herein and with all applicable legal requirements and, in any event, shall take all actions deemed necessary under all applicable Environmental Laws.

(H)      Hazardous Materials Defined. The term “Hazardous Materials” shall mean dangerous, toxic, or hazardous pollutants, contaminants, chemicals, wastes, materials or substances, as defined in or governed by the provisions of any Environmental Law.

(I)      Environmental Law Defined. The term “Environmental Law” shall mean any federal, state or local laws, statute, ordinance, rule, regulation, administration order, or permit now in effect or hereinafter enacted, pertaining to the public health, safety, industrial hygiene, or the environmental conditions on, under or about the Mortgaged Property.

Section 3.14.      Non-Homestead Property. The Mortgaged Property is not homestead property.

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ARTICLE IV.

EVENTS OF DEFAULT AND
REMEDIES OF THE MORTGAGEE

Section 4.01.      Events of Default. Each of the following shall be an "Event of Default":

(A)      default shall be made in the payment of any amount due under any Obligation;

(B)      default shall be made in the due observance or performance of any of the covenants, co-nditions or agreements on the part of the Mortgagor, and, if such default shall be under Sections 3.06, 3.07, or 3.08 hereof, such default shall continue for a period of thirty (30) days after written notice specifying such default and requiring the same to be remedied shall have been given to the Mortgagor by the Mortgagee;

(C)      any representation or warranty made by the Mortgagor herein, or in any certificate, instrument or document delivered hereunder, shall prove to be false or misleading in any material respect on or as of the date made;

(D)      an “Event of Default” shall have occurred under any Credit Agreement or, in the event any Credit Agreement does not contain specified “Events of Default,” the Mortgagor shall breach or be in default of any Credit Agreement; and

(E)      an event of damage, destruction or loss or a taking under the power of eminent domain or like power (or transfer in lieu of such taking) shall have had, in the judgment of the Mortgagee, a material adverse effect on the ability of the Mortgagor to pay or perform the Obligations.

Section 4.02.      Acceleration of Maturity. If an Event of Default shall have occurred and be continuing, the Mortgagee may declare the Obligations to be due and payable immediately by a notice in writing to the Mortgagor, and upon such declaration, all Obligations shall become due and payable immediately, anything contained herein or in the Credit Agreements to the contrary notwithstanding.

Section 4.03.      Remedies of the Mortgagee. If one or more Events of Default shall occur, the Obligations shall be due and payable without presentment, demand or further notice of any kind. The Mortgagee shall have the right to proceed to protect and enforce its right by one or more of the following remedies:

(A)      THE MORTGAGEE SHALL HAVE THE RIGHT TO BRING SUIT either for damages, for specific performance of any agreement contained in this Mortgage or any Loan Document (as defined in the Credit Agreement), for the foreclosure of this Mortgage, or for the enforcement of any other appropriate legal or equitable remedy;

(B)      THE MORTGAGEE SHALL HAVE THE RIGHT TO SELL THE MORTGAGED PROPERTY AT PUBLIC AUCTION AND CONVEY THE SAME TO THE PURCHASER IN FEE SIMPLE, as provided by law, the provisions of Minnesota Statutes Chapter 582.30 being hereby waived, the Mortgagor, and Guarantor, if any, to remain liable for any deficiency. Said sale may be as one tract or otherwise, at the sole option of the Mortgagee. In the event of any sale of the Mortgaged Property pursuant to any judgment or decree of any court or at public auction or otherwise in connection with the enforcement of any of the terms of this Mortgage, the Mortgagee, its successors or assigns, may become the purchaser, and for the purpose of making settlement for or

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payment of the purchase price, shall be entitled to deliver over and use any Note (as defined in the Credit Agreement) and any claims for interest accrued and unpaid thereon, together with all other sums, with interest, advanced or secured hereby and unpaid hereunder, in order that there may be credited as paid on the purchase price the total amount of the Obligations then due, including principal and interest on the Obligations and all other sums, with interest, advanced or secured hereby and unpaid hereunder or under any of the other Loan Documents;

(C)      THE MORTGAGEE SHALL HAVE THE RIGHT TO OBTAIN THE APPOINTMENT OF A RECEIVER at any time after the occurrence of an Event of Default. The Mortgagee may apply for the appointment of a receiver to the district court for the county where the Mortgaged Property or any part thereof is located, by an action separate from any foreclosure of this Mortgage pursuant to Minnesota Statutes Chapter 580 or pursuant to Minnesota Statutes Chapter 581, or as a part of the foreclosure action under said Chapter 581 (it being agreed that the existence of a foreclosure pursuant to said Chapter 580 or a foreclosure action pursuant to said Chapter 581 is not a prerequisite to any action for a receiver hereunder). The Mortgagee shall be entitled to the appointment of a receiver without regard to waste, adequacy of the security or solvency of the Mortgagor. The receiver, who shall be an experienced property manager, shall collect (until the Obligations are fully paid and satisfied and, in the case of a foreclosure sale, during the entire redemption period) the Rents, and shall manage the Mortgaged Property, execute leases within or beyond the period of the receivership if approved by the court and apply all rents, profits and other income collected by him in the following order:

(i)      to the payment of all reasonable fees of the receiver, if any, approved by the court;

(ii)      to the repayment of tenant security deposits, with interest thereon, as required by Minnesota Statutes, § 504B.178;

(iii)      to the payment when due of delinquent or current real estate taxes or special assessments with respect to the Mortgaged Property, or the periodic escrow for the payment of the same;

(iv)      to the payment when due of premiums for insurance of the type required by this Mortgage, or the periodic escrow for the payment of the same;

(v)      to the payment for the keeping of the covenants required of a lessor or licensor pursuant to Minnesota Statutes, § 504B.161, subdivision 1;

(vi)      to the payment of all expenses for normal maintenance of the Mortgaged Property; and

(vii)      the balance to the Mortgagee (a) if received prior to the commencement of a foreclosure, to be applied to the Obligations, in such order as the Mortgagee may elect and (b) if received after the commencement of a foreclosure, to be applied to the amount required to be paid to effect a reinstatement prior to foreclosure sale, or, after a foreclosure sale to any deficiency and thereafter to the amount required to be paid to effect a redemption, all pursuant to Minnesota Statutes, §§ 580.30, 580.23 and 581.10, with any excess to be paid to the Mortgagor. Provided, that if this Mortgage is not reinstated nor the Mortgaged Property redeemed as provided by said §§ 580.30, 580.23 or 581.10, the entire amount paid to the Mortgagee pursuant hereto shall be the property of the Mortgagee together with all or any part of the Mortgaged Property acquired through foreclosure.

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The Mortgagee shall have the right, at any time and without limitation, as provided in Minnesota Statutes, § 582.03, to advance money to the receiver to pay any part or all of the items which the receiver should otherwise pay if cash were available from the Mortgaged Property and sums so advanced, with interest at the rate set forth in Section 3.09 hereof, shall be secured hereby, or if advanced during the period of redemption shall be part of the sum required to be paid to redeem from the sale;

(D)      THE MORTGAGEE SHALL HAVE THE RIGHT TO COLLECT THE RENTS from the Mortgaged Property and apply the same in the manner hereinbefore provided with respect to a receiver. For that purpose, the Mortgagee may enter and take possession of the Mortgaged Property and manage and operate the same and take any action which, in the Mortgagee’s judgment, is necessary or proper to collect the Rents and to conserve the value of the Mortgaged Property. The Mortgagee may also take possession of, and for these purposes use, any and all of the personal property. The expense (including any receiver’s fees, attorneys’ fees, costs and agent’s compensation) incurred pursuant to the powers herein contained shall be secured by this Mortgage. The Mortgagee shall not be liable to account to the Mortgagor for any action taken pursuant hereto other than to account for any Rents actually received by the Mortgagee. Enforcement hereof shall not cause the Mortgagee to be deemed a mortgagee in possession unless the Mortgagee elects in writing to be a mortgagee in possession;

(E)      THE MORTGAGEE SHALL HAVE THE RIGHT TO ENTER AND TAKE POSSESSION of the Mortgaged Property and manage and operate the same in conformity with all applicable laws and take any action which, in the Mortgagee’s judgment, is necessary or proper to conserve the value of the Mortgaged Property;

(F)      THE MORTGAGEE SHALL HAVE ALL OF THE RIGHTS AND REMEDIES PROVIDED IN THE UNIFORM COMMERCIAL CODE including the right to proceed under the Uniform Commercial Code provisions governing default as to any personal property separately from the real estate included within the Mortgaged Property, or to proceed as to all of the Mortgaged Property in accordance with its rights and remedies in respect of said real estate. If the Mortgagee should elect to proceed separately as to the personal property, the Mortgagor agrees to make such personal property available to the Mortgagee at a place or places acceptable to the Mortgagee, and if any notification of intended disposition of any of such personal property is required by law, such notification shall be deemed reasonably and properly given if given at least ten (10) days before such disposition in the manner hereinafter provided; and

(G)      THE MORTGAGEE SHALL HAVE THE RIGHT TO FILE PROOF OF CLAIM and other documents as may be necessary or advisable in order to have its claims allowed in any receivership, insolvency, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceedings affecting the Mortgagor, its creditors or its property, for the entire amount due and payable by the Mortgagor in respect of the Obligations at the date of the institution of such proceedings, and for any additional amounts which may become due and payable by the Mortgagor after such date.

Each remedy herein specifically given shall be in addition to every other right now or hereafter given or existing at law or in equity, and each and every right may be exercised from time to time and as often and in such order as may be deemed expedient by the Mortgagee and the exercise or the beginning of the exercise of one right shall not be deemed a waiver of the right to exercise at the same time or thereafter any other right. The Mortgagee shall have all rights and remedies available under

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the law in effect now and/or at the time such rights and remedies are sought to be enforced, whether or not they are available under the law in effect on the date hereof.

Section 4.04.      Expenses of Exercising Rights, Powers and Remedies. The reasonable expenses (including any receiver’s fees, attorneys’ fees, appraisers’ fees, environmental engineers’ and/or consultants’ fees, costs incurred for documentary and expert evidence, stenographers’ charges, publication costs, costs (which may be estimated as to items to be expended after entry of the decree of foreclosure) of procuring all abstracts of title, continuations of abstracts of title, title searches and examinations, title insurance policies and commitments and extensions therefor, Torrens duplicate certificates of title, Uniform Commercial Code and chattel lien searches, and similar data and assurances with respect to title as the Mortgagee may deem reasonably necessary either to prosecute any foreclosure action or to evidence to bidders at any sale which may be had pursuant to any foreclosure decree the true condition of the title to or the value of the Mortgaged Property, and agent’s compensation) incurred by the Mortgagee after the occurrence of any Event of Default and/or in pursuing the rights, powers and remedies contained in this Mortgage shall be immediately due and payable by the Mortgagor, with interest thereon from the date incurred at the rate set forth in Section 3.09 hereof, and shall be added to the indebtedness secured by this Mortgage.

Section 4.05.      Restoration of Position. In case the Mortgagee shall have proceeded to enforce any right under this Mortgage by foreclosure, sale, entry or otherwise, and such proceedings shall have been discontinued or abandoned for any reason or shall have been determined adversely, then, and in every such case, the Mortgagor and the Mortgagee shall be restored to their former positions and rights hereunder with respect to the Mortgaged Property subject to the lien hereof.

Section 4.06.      Marshalling. The Mortgagor, for itself and on behalf of all persons, parties and entities which may claim under the Mortgagor, hereby waives all requirements of law relating to the marshalling of assets, if any, which would be applicable in connection with the enforcement by the Mortgagee of its remedies for an Event of Default hereunder, absent this waiver. The Mortgagee shall not be required to sell or realize upon any portion of the Mortgaged Property before selling or realizing upon any other portion thereof.

Section 4.07. Remedies Cumulative; No Election. Every right or remedy herein conferred upon or reserved to the Mortgagee shall be cumulative and shall be in addition to every other right and remedy given hereunder or under any Credit Agreement or now or hereafter existing at law, or in equity, or by statute. The pursuit of any right or remedy shall not be construed as an election.

Section 4.08. Waiver of Appraisement Rights. The Mortgagor, for itself and all who may claim through or under it, covenants that it will not at any time insist upon or plead, or in any manner whatever claim, or take the benefit or advantage of, any appraisement, valuation, stay, extension or redemption laws now or hereafter in force in any locality where any of the Mortgaged Property may be situated, in order to prevent, delay or hinder the enforcement or foreclosure of this Mortgage, or the absolute sale of the Mortgaged Property, or any part thereof, or the final and absolute putting into possession thereof, immediately after such sale, of the purchaser or purchasers thereat, and the Mortgagor, for itself and all who may claim through or under it, hereby waives the benefit of all such laws unless such waiver shall be forbidden by law.

ARTICLE V.

POSSESSION UNTIL DEFAULT; SATISFACTION


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Section 5.01.      Possession Until Default. Until one or more Events of Default shall have occurred, the Mortgagor shall be permitted to retain actual possession of the Mortgaged Property, and to manage, operate and use the same and any part thereof, with the rights and franchises appertaining thereto, including, without limitation, to collect, receive, take, use and enjoy the rents, revenues, issues, earnings, income, products, profits and proceeds thereof or therefrom, subject to the provisions of this Mortgage.

Section 5.02.      Satisfaction. If the Mortgagor shall well and truly pay or cause to be paid the Obligations at the times and in the manner provided in the Credit Agreements, and shall also pay or cause to be paid all other sums payable by the Mortgagor hereunder, and shall keep and perform all covenants herein and in all Credit Agreements required to be kept and performed by it, and there are no further obligations to make advances to the Mortgagor under any of the Credit Agreements, then and in that case, all property, rights and interest hereby conveyed or assigned or pledged shall, upon the written request of the Mortgagor, revert to the Mortgagor and the estate, right, title and interest of the Mortgagee shall thereupon cease, determine and become void, and the Mortgagee, in such case, at the Mortgagee’s cost and expense, shall enter satisfaction of this Mortgage upon the record.

ARTICLE VI.

MISCELLANEOUS

Section 6.01.      Property Deemed Real Property. It is hereby declared to be the intention of the Mortgagor that all the Mortgaged Property, including, without limitation, all rights of way and easements granted or given to the Mortgagor or obtained by it to use real property in connection with the construction, acquisition, ownership, use or operation of the buildings or improvements located on the real property encumbered hereby, and all other property physically attached to any of the foregoing, including fixtures now or in the future attached to any of the foregoing, shall be deemed to be real property.

Section 6.02.      Mortgage to Bind and Benefit Successors and Assigns. All of the covenants, stipulations, promises, undertakings and agreements herein contained by or on behalf of the Mortgagor shall bind its successors and assigns, whether so specified or not, and all titles, rights and remedies hereby granted to or conferred upon the Mortgagee shall pass to and inure to the benefit of the successors and assigns of the Mortgagee. The Mortgagor hereby agrees to execute such consents, acknowledgments and other instruments as may be requested by the Mortgagee in connection with the assignment, transfer, mortgage, hypothecation or pledge of the rights or interests of the Mortgagee hereunder or under the Credit Agreements or in and to any of the Mortgaged Property.

Section 6.03.      Headings. The descriptive headings of the various articles and sections of this Mortgage were formulated and inserted for convenience only and shall not be deemed to affect the meaning or construction of any of the provisions hereof.

Section 6.04.      Notices. All demands, notices, reports, approvals, designations or directions required or permitted to be given hereunder shall be in writing and shall be deemed to be properly given if sent by registered or certified mail, postage prepaid, or delivered by hand, or sent by facsimile transmission, receipt confirmed, addressed to the proper party or parties at the following address:


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As to the Mortgagor:
Heron Lake BioEnergy, LLC
 
91246 390 th  Avenue
 
Heron Lake, MN 56137
 
Attention: CFO
 
Telephone No: 320-564-3100
 
Fax No:

As to the Mortgagee:
AgStar Financial Services, FLCA
 
14800 Galaxie Avenue
 
Suite 205
 
Apple Valley, MN 55124
 
Attention: Jason Johnson
 
Telephone No: 866-577-1831

As Agent to the Mortgagee:
CoBank, ACB
 
5500 S. Quebec Street
 
Greenwood Village, CO 80111
 
Attention: Regional Agribusiness Banking Group
 
Fax No: 303-740-4002

Either such party may from time to time designate to each other a new address to which demands, notices, reports, approvals, designations or directions may be addressed, and from and after any such designation, the address designated shall be deemed to be the address of such party in lieu of the address given above.

Section 6.05.      Severability. The invalidity of any one or more phrases, clauses, sentences, paragraphs or provisions of this Mortgage shall not affect the remaining portions hereof.

Section 6.06.      Governing Law. The effect and meaning of this Mortgage, and the rights of all parties hereunder, shall be governed by, and construed according to, the laws of the State of Minnesota, except to the extent governed by federal law.

Section 6.07.      Indemnification by the Mortgagor of the Mortgagee. The Mortgagor agrees to indemnify and save harmless the Mortgagee against any liability or damages which the Mortgagee may incur or sustain in the exercise and performance of its rightful powers and duties hereunder, including any liability or damages arising from the Mortgagor's failure to comply with any Environmental Law or the like applicable to the Mortgaged Property. For such indemnity, the Mortgagee shall be secured under this Mortgage in the same manner as the Obligations and all amounts payable under this Section shall be paid to the Mortgagee with interest at the rate specified in Section 3.09. The Mortgagor’s obligations under this Section shall survive the exercise by the Mortgagee of its rights and remedies hereunder, any foreclosure on all or any part of the Mortgaged Property and the cancellation or satisfaction of this Mortgage.

Section 6.08.      Assignment of Rents and Profits. This Mortgage constitutes an assignment of rents and profits within the meaning of Minnesota Statutes, §§ 559.17 and 576.01, and is intended to comply fully with the provisions thereof, and to afford the Mortgagee, to the fullest extent allowed by law, the rights and remedies of a mortgage lender or secured lender pursuant thereto.


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Section 6.09.      Fixture Filing. This instrument shall be deemed to be a Fixture Filing within the meaning of the Minnesota Uniform Commercial Code, and for such purpose, the following information is given:

(a)      Name and address of Debtor:          Heron Lake BioEnergy, LLC
91246 390 th Avenue
Heron Lake, MN 56137
(b)      Name and address of
Secured Party:
CoBank, ACB, in its capacity as Administrative Agent on behalf of AGSTAR FINANCIAL SERVICES, FLCA
5500 South Quebec Street
Greenwood Village, Colorado 80111
Attention: Regional Agribusiness Banking Group
Fax No.: (303) 740-4002

(c)      Description of the types (or
items) of property covered
by this Fixture Filing:              See granting clauses.

(d)      Description of real estate
to which the collateral is
attached or upon which it
is or will be located:              See Exhibit “A” hereto.

Some of the above-described collateral is or is to become fixtures upon the above described real estate, and this Fixture Filing is to be filed for record in the public real estate records.

Section 6.10.      Payment of Mortgage Registry Tax. The Mortgagee is aware of the provisions of Minn. Statutes §287.05, Subd. 5, and shall comply with the requirements contained therein with respect to future advances under this Mortgage, if any.

Section 6.11. Revolving Credit. This Mortgage secures indebtedness to be advanced from time to time and outstanding under the revolving credit line established by the Credit Agreements. Pursuant to the Credit Agreements, advances, payments and re-advances may be made from time to time. The maximum principal amount of the line of credit which may be secured by this Mortgage at any one time is the Maximum Debt Limit set forth in Section 1.01 hereof. The parties agree, and mutually intend, that a reduction of the outstanding revolving credit line to zero shall not constitute an extinguishment of the debt secured hereby, unless and until a satisfaction of this Mortgage is executed by the Mortgagee and delivered to the Mortgagor. If, after such reduction to zero, subsequent re-advances are made from said revolving credit line, the subsequent re-advances so made shall not constitute a new debt, and shall constitute a continuation of the original debt evidenced by the Credit Agreements and secured hereby.



[Signatures follow on next page.]


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IN WITNESS WHEREOF , Heron Lake BioEnergy, LLC, as Mortgagor, has caused this Mortgage to be signed in its name by its officers thereunto duly authorized, all as of the day and year first above written.

Heron Lake BioEnergy, LLC , Mortgagor


 
 
By: /s/ Steve A. Christensen
 
 
Printed Name: Steve A. Christensen
 
 
Title: CEO


STATE OF MINNESOTA      )
)
COUNTY OF CHIPPEWA      )

The foregoing instrument was acknowledged before me this 29th day of July, 2014, by Steve A. Christensen, the CEO of Heron Lake BioEnergy, LLC, a Minnesota limited liability company, on behalf of said company.


(SEAL)                  __________/s/ Stacie Schuler_____________________ _
Notary Public
                
My commission expires: _____Jan 31, 2016___________

NOTARY PUBLIC SEAL
Notary Public - Minnesota
My Commission Expires January 31, 2016


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EXHIBIT A -- REAL PROPERTY
Heron Lake BioEnergy, LLC

1.
Legal descriptions of real property in which the Mortgagor has a fee estate:

Jackson County, Minnesota

PARCEL A
Part of the SW1/4 of Sec. 16, T104N, R37W, Jackson County, Minnesota, lying Southerly of the Southerly right of way line of the Union Pacific Railroad, described as follows:

Beginning at an existing iron monument at the SE corner of the SW1/4 of said Sec. 16; thence South 89°57'49" West, along the South line of said SW1/4, a distance of 1031.09 feet; thence North 00°37'05" East, parallel with the West line of said SW1/4, a distance of 275.02 feet; thence South 89°57'49" West, parallel with the South line of said SW1/4, a distance of 1600.10 feet, to a point on the West line of said SW1/4; thence North 00°37'05" East, along the West line of said SW1/4, a distance of 593.98 feet; thence South 89°22'55" East a distance of 412.00 feet; thence North 00°37'05" East, parallel with the West line of said SW1/4, a distance of 400.00 feet; thence North 89°22'55" West a distance of 412.00 feet, to a point on the West line of said SW1/4; thence North 00°37'05" East, along the West line of said SW1/4, a distance of 103.50 feet, to a point on the Southerly right of way line of the Union Pacific Railroad; thence North 76°38'53" East, along the Southerly right of way line of said Union Pacific Railroad, a distance of 2706.70 feet, to a point on the East line of said SW1/4; thence South 00°29'31" West, along the East line of said SW1/4, a distance of 1995.89 feet, to the point of beginning.

AND ALSO:

That part of the S1/2 of the SW1/4 of Sec. 16, T104N, R37W of the Fifth Principal Meridian, Jackson County, Minnesota, described as follows: Commencing at an existing iron monument at the Southeast corner of the SW1/4 of said Section 16; thence South 89 degrees 57 minutes 49 seconds West, bearing based on Jackson County Coordinate System, along the South line of the SW 1 / 4 a distance of 1031.09 feet to the POINT OF BEGINNING; thence North 00 degrees 37 minutes 05 seconds East, parallel with the West line of said SW1/4, a distance of 275.02 feet; thence South 89 degrees 57 minutes 49 seconds West, parallel with the South line of said SW 1 / 4 , a distance of 1600.10 feet to a point on the West line of said SW1/4; thence South 00 degrees 37 minutes 05 seconds West, along the West line of said SW1/4, a distance of 275.02 feet to the Southwest corner of said SW 1 / 4 ; thence North 89 degrees 57 minutes 49 seconds East, along the South line of said SW 1 / 4 , to the point of beginning.

EXCEPTING a part of the S1/2 SW1/4 of Sec. 16, T104N, R37W, Jackson County, Minnesota, described as follows: Commencing at an existing iron monument at the SE corner of the SW1/4 of said Sec. 16; thence South 89°57'49" West, bearing based on Jackson County Coordinate System, along the South line of said SW1/4 of said Sec. 16, a distance of 1048.26 feet, to the point of beginning; thence continuing South 89°57'49" West, along said South line, a distance of 503.33 feet; thence North 00°02'11" West a distance of 275.00 feet; thence North 89°57'49" East, parallel with the South line of said SW1/4, a distance of 246.59 feet; thence North 00°02'11" West a distance of 74.71 feet; thence North 89°57'49" East, parallel with the South line of said SW/4, a distance of 256.74 feet; thence South 00°02'11" East a distance of 349.71 feet, to the point of beginning.


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PARCEL B
Part of the SE1/4 of Sec. 16, T104N, R37W, Jackson County, Minnesota, described as follows:

Beginning at an existing iron monument at the SW corner of the SE1/4 of said Sec. 16; thence North 00°29'31" East, bearing based on Jackson County Coordinate System, along the West line of the SE1/4 of said Sec. 16, a distance of 1995.89 feet, to a point on the Southerly right of way line of the Union Pacific Railroad; thence North 76°38'53" East, along the Southerly right of way line of said Union Pacific Railroad, a distance of 2701.22 feet, to a point on the East line of the SE1/4; thence South 00°18'29" West, along the East line of said SE1/4 a distance of 1950.98 feet; thence South 89°57'40" West, parallel with the South line of said SE1/4, a distance of 1005.15 feet; thence South 61°35'10" West a distance of 172.03 feet; thence South 00°18'29" West, parallel with the East line of said SE1/4, a distance of 585.18 feet, to a point on the South line of said SE1/4; thence South 89°57'40" West, along the South line of said SE1/4, a distance of 1475.25 feet, to the point of beginning.



2.
Legal descriptions of real property in which the Mortgagor has a leasehold estate:

None.

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EXHIBIT B - OBLIGATIONS

The “Obligations” as described in the Definitions section above include without limitation the following promissory note(s):


Promissory Note No.
Date
Principal Amount
RI1304T01
July 29, 2014
$28,000,000.00



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CONTINUING GUARANTEE


1.      Absolute Guarantee. For valuable consideration and to induce AGSTAR FINANCIAL SERVICES, FLCA ("AgStar") to extend a loan or loans to Heron Lake BioEnergy, LLC , Heron Lake, Minnesota ("Company"), of which HLBE PIPELINE COMPANY, LLC (“Guarantor”) is a wholly owned subsidiary, Guarantor unconditionally and absolutely guarantees and promises to pay to AgStar, or order, on demand, in lawful money of the United States, any and all Indebtedness of Company to AgStar (as defined below); provided that the liability of the Guarantor hereunder shall be limited to the maximum amount of the Indebtedness which Guarantor may guarantee without rendering this Guarantee void or voidable under any applicable fraudulent conveyance or fraudulent transfer law.

The word "Indebtedness" is used herein in its more comprehensive sense, and includes any and all advances, debts, obligations and liabilities of Company, including but not limited to all principal, interest, fees, expenses and stock subscription charges, heretofore, now or hereafter made, incurred or created, whether voluntary or involuntary and however arising, whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, and whether Company may be liable individually or jointly with others, or whether recovery upon such Indebtedness may be or hereafter become barred by any statute of limitation, or whether such Indebtedness may be or hereafter become otherwise unenforceable.

2.      Continuing Guarantee. No termination by Guarantor shall be effective except by notice sent to AgStar by registered mail naming a termination date effective not less than ninety (90) days after the receipt of such notice by AgStar. No such termination shall affect (i) any Indebtedness of Company incurred prior to the effective date of termination or (ii) any Indebtedness for interest, fees, expenses and/or stock subscription charges incurred after termination related to any Indebtedness outstanding on the effective date of termination.

3.      Guarantee of Payment. This continuing guarantee is a guarantee of payment and not of collection. The obligations hereunder are joint and several, and independent upon the Indebtedness of Company, and a separate action or actions may be brought and prosecuted against Guarantor whether action is brought against Company or whether Company be joined in any such action or actions; and Guarantor waives the benefit of any statutes of limitations affecting its liability hereunder or the enforcement thereof.

4.      Authorities of AgStar. Guarantor authorizes AgStar, without notice or demand and without affecting liability hereunder, from time to time, to (a) grant additional credit to Company, and renew, compromise, extend, accelerate or otherwise change the time for payment of, or otherwise change the terms of, the Indebtedness or any part thereof, including increase or decrease of the rate of interest thereon; (b) take and hold security for the payment of this Guarantee or the Indebtedness guaranteed, and exchange, enforce, waive and release any such security; (c) apply such security and direct the order or manner of sale thereof as AgStar in its discretion may determine; and (d) release or substitute any one or more endorsers or guarantors of the Indebtedness.

5.      Waivers. Guarantor hereby expressly waives to the extent permitted by applicable law:

(a)      Any right to require AgStar, as a condition to proceeding against Guarantor, to (i) proceed against Company or any other person; (ii) proceed against or exhaust any security held from Company or Guarantor; or (iii) pursue any other remedy in AgStar’s power whatsoever.






(b)      Any defense arising by reason of any disability or other defense or counter-claim that the Company may assert on the underlying debt, including but not limited to failure of consideration, breach of warranty, fraud, statute of frauds, bankruptcy, statute of limitations, lender liability, accord and satisfaction, and usury or by reason of the cessation from any cause whatsoever of the liability of Company.

(c)      The pleading or assertion of any defense based on the failure of AgStar to keep Guarantor informed of the financial and business status of Company, it being expressly acknowledged by Guarantor that it is Guarantor's responsibility to keep so informed.

(d)      All setoffs and counterclaims, and all presentments, demands for performance, notices of nonperformance, protests, notices of dishonor, notices of sale of foreclosure of any security for the payment of the Indebtedness, and notices of acceptance of this Guarantee and of the existence, creation, or incurring or new or additional Indebtedness.
        
(e)      Guarantor waives Minnesota Statutes Chapter 582.30 and acknowledges that the Guarantor remains liable for any deficiency.

(f)      Additional Waivers:

(i)      Guarantor expressly waives any and all rights of subrogation, reimbursement, indemnity, exoneration, contribution or any other claim which it may now or hereafter have against Company or any other person directly or contingently liable for the Indebtedness guaranteed hereunder, or against or with respect to Company's property, including without limitation, any property securing its Indebtedness to AgStar, arising from the existence or performance of this Guarantee. In furtherance, and not in limitation, of the preceding waiver, Guarantor agrees that any payment to AgStar by Guarantor pursuant to this Guarantee shall be deemed to be a contribution to the capital of Company or other obligated party and such payment shall not cause Guarantor to be a creditor of Company or any other obligated party. In addition to, and not in substitution for, any other rights granted to AgStar by this Guarantee, including but not limited to any rights set forth in Paragraph 11 below, in the event that a bankruptcy court determines that any monies paid by Company to AgStar are avoidable preferences because they were made for the benefit of Guarantor, then Guarantor shall indemnify and hold AgStar harmless from any losses, including, but not limited to all costs and expenses, including reasonable attorneys' fees, which AgStar may incur as a result of such determination.

(ii)      The Guarantor specifically waives any defenses the Guarantor may have to the guaranty obligations by reason of election of remedies by AgStar.

GUARANTOR WARRANTS AND AGREES THAT EACH OF THE WAIVERS SET FORTH IN THIS AGREEMENT IS MADE WITH GUARANTOR’S FULL KNOWLEDGE OF ITS SIGNIFICANCE AND CONSEQUENCES AND THAT, UNDER THE CIRCUMSTANCES, THE WAIVERS ARE REASONABLE AND NOT CONTRARY TO PUBLIC POLICY OR LAW. IF ANY SUCH WAIVER IS DETERMINED TO BE CONTRARY TO ANY APPLICABLE LAW OR PUBLIC POLICY, SUCH WAIVER SHALL BE EFFECTIVE ONLY TO THE EXTENT PERMITTED BY LAW OR PUBLIC POLICY.

6.      Lien; Right of Setoff. In addition to all liens upon, and all rights of setoff against the monies, securities or other property of Guarantor given to AgStar by law or by contract, AgStar shall have a lien upon and a right to setoff against all monies securities and other property of Guarantor now or hereafter in the possession of or on deposit with AgStar, whether held in a general or special account of deposit, or for safekeeping or otherwise; and every such lien and right of setoff may be exercised without demand upon





or notice to Guarantor. No lien or right of setoff shall be deemed to have been waived by any act or conduct on the part of AgStar, or by any neglect to exercise such right of setoff or to enforce such lien, or by any delay in so doing, and every right of setoff and lien shall continue in full force and effect until such right of setoff or lien is specifically waived or released by an instrument in writing executed by AgStar.

7.      No Waiver. No exercise or nonexercise of any right hereby given AgStar, no dealing by AgStar with Company or any other guarantor, no change, impairment, or suspension of any of AgStar's rights or remedies, shall in any way affect any of the obligations of Guarantor hereunder or any security furnished by Guarantor or give Guarantor any recourse against AgStar. The Guarantor represents to AgStar that Guarantor is now and will be completely familiar with the business, operation, and condition of Company, and Guarantor waives any right to require AgStar to notify Guarantor of any facts concerning Company, unknown to Guarantor, material or otherwise, which might affect the relationship of AgStar, Guarantor, and Company, or which might cause Guarantor to give AgStar notice of termination of this Guarantee as herein provided.

8.      Subordination. Any Indebtedness of Company to Guarantor now or hereafter held by Guarantor is hereby subordinated to the Indebtedness of Company to AgStar; and such Indebtedness of Company to Guarantor, if AgStar so requests, shall be collected, enforced and received by Guarantor as trustee for AgStar and be paid over to AgStar on account of the Indebtedness of Company to AgStar but without reducing or affecting in any manner the liability of Guarantor under the other provisions of this Guarantee.

9.      Authority. Although Company is a legal entity, it is not necessary for AgStar to inquire into the powers of Company, or the officers, directors, or agents acting or purporting to act on its behalf, and any Indebtedness made or created in reliance upon the professed exercise of such powers shall be guaranteed hereunder.

10.      Costs of Enforcement. Guarantor agrees to pay the attorneys' fees of AgStar and all other costs and expenses which may be incurred by AgStar in the enforcement of this Guarantee. This Guarantee shall be interpreted and enforced in accordance with the laws of the State of Minnesota.

11.      Remedies Cumulative. AgStar's rights under this Guarantee are cumulative and not alternative, and shall not be exhausted by AgStar's exercise of any one or more rights hereunder, or otherwise, or by any number of successive actions, unless and until all obligations of Company and Guarantor have been paid or performed. The liability under this Guarantee shall continue notwithstanding the incapacity or disability of Guarantor, and its benefits shall inure to AgStar's successors and assigns. AgStar may assign this Guarantee, in whole or in part, without notice to Guarantor. Guarantor waives all exemptions and all setoffs and counterclaims. Only to the extent that this Guarantee is inconsistent with any prior guarantee given by Guarantor to AgStar, or contains additional provisions, does this Guarantee supersede such prior guarantees; otherwise, such prior guarantees remain in full force and effect.

12.      Reinstatement of Payment. If any payment received by AgStar and applied to the Indebtedness is subsequently set aside, recovered, rescinded, or required to be returned for any reason (including, without limitation, the bankruptcy, insolvency or reorganization of Company), the Indebtedness to which such payment was applied shall for the purposes of this continuing guarantee be deemed to have continued in existence, and this continuing guarantee shall be enforceable as to such Indebtedness as fully as if such applications had never been made.

13.      Right of Foreclosure. The Guarantor agrees that if all or a portion of the Indebtedness is, at any time, secured by a deed of trust or mortgage covering interests in real property, AgStar, in its sole





discretion, without notice or demand, and without affecting the liability of the Guarantor, may foreclose the deed of trust or mortgage, and the interest in real property, secured thereby by nonjudicial sale; and the Guarantor hereby waives any defense to the recovery by AgStar against the Guarantor of any deficiency after a nonjudicial sale.

14.      Amendment. Neither this Agreement, nor any provision hereof, may be amended, modified, waived, or discharged except by an instrument in writing duly signed by, or on behalf of, AgStar.

15.      Severability. In case any right of AgStar herein shall be held to be invalid, illegal, or unenforceable, such invalidity, illegality and/or unenforceability shall not affect any other right granted hereby.

16.      Guarantor’s Representations. Guarantor represents and warrants that: (a) no representations or agreements of any kind have been made to the Guarantor which would limit or qualify in any way the terms of this Guarantee; (b) the Guarantor has not and will not, without AgStar’s prior written consent, sell, lease, assign, encumber, hypothecate, transfer or otherwise dispose of any of the Guarantor’s assets, or any interest therein, other than in the ordinary course of business; (c) AgStar has made no representation to the Guarantor as to the creditworthiness of the Company; (d) the Guarantor will provide to AgStar financial and credit information in form acceptable to AgStar, including balance sheets and income statements no less frequently than annually, as soon as they become available, not later than 120 days after each fiscal year end or at such other times as AgStar may request.

1. Security for Guarantee. This Guarantee is secured by any and all security agreement(s), pledges, assignments, mortgage(s), deed(s) of trust, or other security documents executed by Guarantor in favor of AgStar, including any replacements, modifications or amendments thereto. In addition, at AgStar’s request, the Guarantor agrees to grant to AgStar, by means of such instruments and documents as AgStar shall require, a first lien on such of the Guarantor’s other assets, whether now existing or hereafter acquired, as AgStar may from time to time require.

IN WITNESS WHEREOF, the undersigned Guarantor has executed this Continuing Guarantee as of July 29, 2014.

HLBE PIPELINE COMPANY, LLC ,
Heron Lake, Minnesota

By: __Steve A. Christensen______________________ _

Title: _________CEO____________________________








CoBANK, ACB
AND
AGSTAR FINANCIAL SERVICES, FLCA

SECURITY AGREEMENT

THIS SECURITY AGREEMENT (the “Security Agreement”) is executed and delivered by HLBE PIPELINE COMPANY, LLC (the “Debtor”), a Minnesota limited liability company, having its place of business (or chief executive office if more than one place of business) located at 91246 390th Avenue, Heron Lake, Minnesota 56137-0077, to CoBANK, ACB, in its capacity as Administrative Agent on behalf of AGSTAR FINANCIAL SERVICES, FLCA and CoBANK, ACB (the “Secured Party”), a federally chartered instrumentality of the United States, whose mailing address is P.O. Box 5110, Denver, Colorado 80217.

SECTION 1.      GRANT OF SECURITY INTEREST. For valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Debtor hereby grants to the Secured Party a security interest in all of the personal property of the Debtor, wherever located and whether now existing or hereafter acquired, together with all accessions and additions thereto, and all products and proceeds thereof, including:

accounts; inventory (including without limitation, returned or repossessed goods); goods; as-extracted collateral; chattel paper; electronic chattel paper; instruments; investment property (including, without limitation, certificated and uncertificated securities, security entitlements, securities accounts, commodity contracts, and commodity accounts); letters of credit; letter-of-credit rights; documents; equipment; farm products; fixtures; general intangibles (including, without limitation, payment intangibles, choses or things in action, litigation rights and resulting judgments, goodwill, patents, trademarks and other intellectual property, tax refunds, miscellaneous rights to payment, investments and other interests in entities not included in the definition of investment property (including, without limitation, all equities and patronage rights in all cooperatives and all interests in partnerships and joint ventures), margin accounts, computer programs, software, invoices, books, records and other information relating to or arising out of the Debtor's business); and, to the extent not covered by the above, all other personal property of the Debtor of every type and description, including without limitation, supporting obligations, interests or claims in or under any policy of insurance, commercial tort claims, deposit accounts, money, and judgments (the "Collateral").

Where applicable, all terms used herein shall have the same meaning as presently and as hereafter defined in the Uniform Commercial Code (the “UCC”).

SECTION 2.      THE OBLIGATIONS . The security interest granted hereunder shall secure the payment of all indebtedness and the performance of all obligations of the Debtor to the Secured Party of every type and description, whether now existing or hereafter arising, fixed or contingent, as primary obligor or as guarantor or surety, acquired directly or by assignment or otherwise, liquidated or unliquidated, regardless of how they arise or by what agreement or instrument they may be evidenced, including without limitation all loans, advances and other extensions of credit and all covenants, agreements, and provisions contained in all loan and other agreements between the parties (the “Obligations”).

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SECTION 3.      REPRESENTATIONS, WARRANTIES AND COVENANTS. The Debtor represents, warrants and covenants as follows:

A.      Title to Collateral. Except as permitted by any other written agreement between the parties, and except for any security interest in favor of the Secured Party, the Debtor has clear title to all Collateral free of all adverse claims, interests, liens, or encumbrances. Without the prior written consent of the Secured Party, the Debtor shall not create or permit the existence of any adverse claims, interests, liens, or other encumbrances against any of the Collateral. The Debtor shall provide prompt written notice to the Secured Party of any future adverse claims, interests, liens, or encumbrances against all Collateral, and shall defend diligently the Debtor's and the Secured Party's interests in all Collateral.

B.      Validity of Security Agreement; Corporate Authority. This Security Agreement is the valid and binding obligation of the Debtor, enforceable in accordance with its terms. The Debtor is duly formed, validly existing and in good standing under the laws of its jurisdiction of formation. The Debtor has the full corporate power to execute, deliver and carry out the terms and provisions of this Security Agreement and all related documents and to grant to the Secured Party a security interest in, and a lien on, the Collateral, has taken all necessary action to authorize the execution, delivery and performance of this Security Agreement and all related documents, and such execution, delivery and performance do not and will not (i) violate any of the terms or provisions of the organizational documents of the Debtor or any provision of any law, order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to the Debtor, (ii) result in a breach of, or constitute a default under, any indenture or loan or credit agreement or any other agreement, document or instrument to which the Debtor is a party or by which the Debtor or any of the Debtor’s property may be bound or affected or (iii) result in or require the creation or imposition of any lien or other encumbrance of any nature upon or with respect to any of the property of the Debtor (except for any security interest in favor of the Secured Party).

C.      Location of the Debtor. The Debtor’s place of business (or chief executive office if more than one place of business) is located at the address shown above. The Debtor’s state of incorporation or formation is as shown above.

D.      Location of Fixtures. All fixtures are now at the location or locations specified on Schedule A attached hereto and made a part hereof.

E.      Name, Identity, and Corporate Structure. The Debtor’s exact legal name is as set forth above. Except as set forth on Schedule B , the Debtor has not within the past ten years changed its name, identity or corporate structure through incorporation, merger, consolidation, joint venture or otherwise.

F.      Change in Name, State of Debtor’s Location, Location of Collateral, Etc. Without giving at least thirty days' prior written notice to the Secured Party, the Debtor shall not change its name, identity or corporate structure, the location of its place of business (or chief executive office if more than one place of business), its state of incorporation or formation, or the location of the Collateral.

G.      Further Assurances. Upon the request of the Secured Party, the Debtor shall do all acts and things as the Secured Party may from time to time deem necessary or advisable to enable it to perfect, maintain, and continue the perfection and priority of the security interest of the Secured Party in the Collateral, or to facilitate the exercise by the Secured Party of any rights or remedies granted to the Secured Party hereunder or provided by law. Without limiting the foregoing, the Debtor agrees to execute, in form and substance satisfactory to the Secured Party, such financing statements, amendments thereto, supplemental agreements, assignments, notices of assignments, and other instruments and documents as the Secured Party

2



may from time to time request. In addition, in the event the Collateral or any part thereof consists of instruments, documents, chattel paper, or money (whether or not proceeds of the Collateral), the Debtor shall, upon the request of the Secured Party, deliver possession thereof to the Secured Party (or to an agent of the Secured Party retained for that purpose), together with any appropriate endorsements and/or assignments. Where Collateral is in the possession of a third party, the Debtor will join with the Secured Party in notifying the third party of the Secured Party’s security interest and obtaining an acknowledgment from the third party that it is holding the Collateral for the benefit of the Secured Party. The Debtor will cooperate with the Secured Party in obtaining control with respect to Collateral consisting of deposit accounts (that are not held by the Secured Party as depositary institution), investment property, letter-of-credit rights and electronic chattel paper. The Secured Party shall use reasonable care in the custody and preservation of such Collateral in its possession, but shall not be required to take any steps necessary to preserve rights against prior parties. All costs and expenses incurred by the Secured Party to establish, perfect, maintain, determine the priority of, or release the security interest granted hereunder (including the cost of all filings, recordings, and taxes thereon and the fees and expenses of any agent retained by Secured Party) shall become part of the Obligations secured hereby and be paid by the Debtor on demand.

H.      Insurance. The Debtor shall maintain such property and casualty insurance with such insurance companies, in such amounts, and covering such risks, as are at all times satisfactory to the Secured Party. All such policies shall provide for loss payable clauses or endorsements and other terms and conditions in form and content acceptable to the Secured Party. Upon the request of the Secured Party, all policies (or such other proof of compliance with this Section as may be satisfactory to the Secured Party) shall be delivered to the Secured Party. The Debtor shall pay all insurance premiums when due. In the event of loss, damage, or injury to any insured Collateral, the Secured Party shall have full power to collect any and all insurance proceeds due under any of such policies (and the Debtor hereby agrees, upon request by the Secured Party, to promptly forward to the Secured Party all such insurance proceeds received directly by the Debtor), and may, at its option, apply such proceeds to the payment of any of the Obligations secured hereby, or may apply such proceeds to the repair or replacement of such Collateral.

I.      Taxes, Levies, Etc. The Debtor has paid and shall continue to pay when due all taxes, levies, assessments, or other charges which may become an enforceable lien against the Collateral.

J.      Disposition and Use of Collateral by the Debtor. Without the prior written consent of the Secured Party, the Debtor shall not at any time sell, transfer, lease, abandon, or otherwise dispose of any Collateral, except that, so long as the Debtor is not in default hereunder, the Debtor may sell, transfer, lease, abandon, or otherwise dispose of equipment and inventory in the ordinary course of Debtor’s business. The Debtor shall not use any of the Collateral in any manner which violates any statute, regulation, ordinance, rule, decree, order, or insurance policy.

K.      Receivables. The Debtor shall preserve, enforce, and collect all accounts, chattel paper, electronic chattel paper, instruments, documents and general intangibles, whether now owned or hereafter acquired or arising (the “Receivables”), in a diligent fashion and, upon the request of the Secured Party, the Debtor shall execute an agreement in form and substance satisfactory to the Secured Party by which the Debtor shall direct all account debtors and obligors on Receivables to make payment to a lock box deposit account under the exclusive control of the Secured Party.

L.      Condition of Collateral. All tangible Collateral is now in good repair and condition and the Debtor shall at all times hereafter, at its own expense, maintain all such Collateral in good repair and condition.


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M.      Condition of Books and Records. The Debtor has maintained and shall maintain complete, accurate and up‑to‑date books, records, accounts, and other information relating to all Collateral in such form and in such detail as may be satisfactory to the Secured Party, and shall allow the Secured Party or its representatives at any reasonable time to examine and copy such books, records, accounts, and other information.

N.      Right of Inspection. At all reasonable times upon the request of the Secured Party, the Debtor shall allow the Secured Party or its representatives to visit any of the Debtor’s properties or locations so that the Secured Party or its representatives may confirm, inspect and appraise any of the Collateral.

SECTION 4.      DEFAULT. The breach of any of the Obligations secured hereby, and/or the breach of any representation, warranty, covenant, or agreement contained in this Security Agreement, shall constitute default hereunder.

SECTION 5.      RIGHTS AND REMEDIES. Upon the Debtor's default and at any time thereafter, the Secured Party may declare all Obligations to be immediately due and payable and may exercise any and all rights and remedies of the Secured Party in the enforcement of its security interest under the UCC, this Security Agreement, or any other applicable law. Without limiting the foregoing:

A.      Disposition of Collateral. The Secured Party may sell, lease, or otherwise dispose of all or any part of the Collateral, in its then present condition or following any commercially reasonable preparation or processing thereof, whether by public or private sale or at any brokers' board, in lots or in bulk, for cash, on credit or otherwise, with or without representations or warranties, and upon such other terms as may be acceptable to the Secured Party, and the Secured Party may purchase at any public sale. At any time when advance notice of sale is required, the Debtor agrees that ten days' prior written notice shall be reasonable. In connection with the foregoing, the Secured Party may:

1.      require the Debtor to assemble the Collateral and all records pertaining thereto and make such Collateral and records available to the Secured Party at a place to be designated by the Secured Party which is reasonably convenient to both parties;

2.      enter the premises of the Debtor or premises under the Debtor's control and take possession of the Collateral;

3.      without charge, use or occupy the premises of the Debtor or premises under the Debtor's control, including without limitation, warehouse and other storage facilities;

4.      without charge, use any patent, trademark, tradename, or other intellectual property or technical process used by the Debtor in connection with any of the Collateral; and

5.      rely conclusively upon the advice or instructions of any one or more brokers or other experts selected by the Secured Party to determine the method or manner of disposition of any of the Collateral and, in such event, any disposition of the Collateral by the Secured Party in accordance with such advice or instructions shall be deemed to be commercially reasonable.

B.      Collection of Receivables. The Secured Party may, but shall not be obligated to, take all actions reasonable or necessary to preserve, enforce or collect the Receivables, including without limitation, the right to notify account debtors and obligors on Receivables to make direct payment to the

4



Secured Party, to permit any extension, compromise, or settlement of any of the Receivables for less than face value, or to sue on any Receivable, all without prior notice to the Debtor.

C.      Proceeds. The Secured Party may collect and apply all proceeds of the Collateral, and may endorse the name of the Debtor in favor of the Secured Party on any and all checks, drafts, money orders, notes, acceptances, or other instruments of the same or a different nature, constituting, evidencing, or relating to the Collateral. The Secured Party may receive and open all mail addressed to the Debtor and remove therefrom any cash or non‑cash items of payment constituting proceeds of the Collateral.

D.      Insurance Adjustments. The Secured Party may adjust, settle, and cancel any and all insurance covering any Collateral, endorse the name of the Debtor on any and all checks or drafts drawn by any insurer, whether representing payment for a loss or a return of unearned premium, and execute any and all proofs of claim and other documents or instruments of every kind required by any insurer in connection with any payment by such insurer.

The net proceeds of any disposition of the Collateral may be applied by the Secured Party, after deducting its reasonable expenses incurred in such disposition, to the payment in whole or in part of the Obligations in such order as the Secured Party may elect. The enumeration of the foregoing rights and remedies is not intended to be exhaustive, and the exercise of any right and/or remedy shall not preclude the exercise of any other rights or remedies, all of which are cumulative and non‑exclusive.

SECTION 6.      OTHER PROVISIONS.

A.      Amendment, Modification, and Waiver. Without the prior written consent of the Secured Party, no amendment, modification, or waiver of, or consent to any departure by the Debtor from, any provision hereunder shall be effective. Any such amendment, modification, waiver, or consent shall be effective only in the specific instance and for the specific purpose for which given. No delay or failure by the Secured Party to exercise any remedy hereunder shall be deemed a waiver thereof or of any other remedy hereunder. A waiver on any one occasion shall not be construed as a bar to or waiver of any remedy on any subsequent occasion.

B.      Costs and Attorneys’ Fees. Except as prohibited by law, if at any time the Secured Party employs counsel in connection with the creation, perfection, preservation, or release of the Secured Party's security interest in the Collateral or the enforcement of any of the Secured Party's rights or remedies hereunder, all of the Secured Party's reasonable attorneys’ fees arising from such services and all expenses, costs, or charges relating thereto shall become part of the Obligations secured hereby and be paid by the Debtor on demand.

C.      No Obligation to Make Loans. Nothing contained herein or in any financing statement or other document executed or filed in connection herewith shall be construed to obligate the Secured Party to make any loans or advances to the Debtor, whether pursuant to a commitment or otherwise.

D.      Revival of Obligations. To the extent the Debtor or any third party makes a payment or payments to the Secured Party or the Secured Party enforces its security interest or exercises any right of setoff, and such payment or payments or the proceeds thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, and/or required to be repaid to a trustee, receiver, or any other party under any bankruptcy, insolvency or other law or in equity, then, to the extent of such recovery, the Obligations or any part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment or payments had not been made, or such enforcement or setoff had not occurred.


5



E.      Performance by the Secured Party. In the event the Debtor shall at any time fail to pay or perform punctually any of its duties hereunder, the Secured Party may, at its option and without notice to or demand upon the Debtor, without obligation and without waiving or diminishing any of its other rights or remedies hereunder, fully perform or discharge any of such duties. All costs and expenses incurred by the Secured Party in connection therewith, together with interest thereon at the Secured Party's CoBank Base Rate plus four percent per annum, shall become part of the Obligations secured hereby and be paid by the Debtor upon demand.

F.      Indemnification, Etc. The Debtor hereby expressly indemnifies and holds the Secured Party harmless from any and all claims, causes of action, or other proceedings, and from any and all liability, loss, damage, and expense of every nature, arising by reason of the Secured Party's enforcement of its rights and remedies hereunder, or by reason of the Debtor's failure to comply with any environmental or other law or regulation. As to any action taken by the Secured Party hereunder, the Secured Party shall not be liable for any error of judgment or mistake of fact or law, absent gross negligence or willful misconduct on its part.

G.      Power of Attorney. The Debtor hereby appoints the Secured Party or the Secured Party's designee as its attorney‑in‑fact, which appointment is irrevocable, durable, and coupled with an interest, with full power of substitution, in the name of the Debtor or in the name of the Secured Party, to take any action which the Debtor is obligated to perform hereunder or which the Secured Party may deem necessary or advisable to accomplish the purposes of this Security Agreement. In taking any action in accordance with this Section, the Secured Party shall not be deemed to be the agent of the Debtor. The powers conferred upon the Secured Party in this Section are solely to protect its interest in the Collateral and shall not impose any duty upon the Secured Party to exercise any such powers.

H.      Continuing Effect. This Security Agreement, the Secured Party's security interest in the Collateral, and all other documents or instruments contemplated hereby shall continue in full force and effect until all of the Obligations have been satisfied in full, the Secured Party has no commitment to make any further advances to the Debtor, and the Debtor has sent a valid written demand to the Secured Party for termination of this Security Agreement.

I.      Binding Effect. This Security Agreement shall be binding upon and inure to the benefit of the Debtor and the Secured Party and their respective successors and assigns.

J.      Security Agreement as Financing Statement and Authorization to File. A photographic copy or other reproduction of this Security Agreement may be used as a financing statement. In addition, the Debtor authorizes the Secured Party to prepare and file financing statements describing the Collateral, amendments thereto, and continuation statements and file any financing statement, amendment thereto or continuation statement electronically. In addition, the Debtor authorizes the Secured Party to file financing statements describing any agricultural liens or other statutory liens held by the Secured Party.

K.      Governing Law. Subject to any applicable federal law, this Security Agreement shall be construed in accordance with and governed by the laws of the State of Colorado, except to the extent that the UCC provides for the application of the law of another state.

L.      Notices. All notices, requests, demands, or other communications required or permitted hereunder shall be in writing and shall be deemed to have been given when sent by registered or certified mail, return receipt requested, addressed to the other party at the respective addresses given above, or to such other person or address as either party designates to the other in the manner herein prescribed.


6



M.      Severability. The determination that any term or provision of this Security Agreement is unenforceable or invalid shall not affect the enforceability or validity of any other term or provision hereof.

IN WITNESS WHEREOF, the Debtor has executed this Security Agreement by its duly authorized officer as of the day and year shown below.

Date:
___July 29____________ , 2014
 
Debtor:
HLBE PIPELINE COMPANY, LLC ,
a Minnesota  limited liability company
 
 
By:
/s/ Steve A. Christensen
 
 
Title:
CEO


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SCHEDULE A

To Security Agreement Dated ______July 29_____________ , 2014

Executed By: HLBE PIPELINE COMPANY, LLC

Set forth below are the present locations (by county and state) of the Debtor’s fixtures.



County:
Jackson
State:
MN
County:
 
County:
 
County:
 
County:
 


8



SCHEDULE B

To Security Agreement Dated _____July 29,2014____________________ , 2014

Executed by: HLBE PIPELINE COMPANY, LLC

Set forth below is an explanation of any changes within the past ten (10) years to the Debtor’s name, identity or corporate structure through incorporation, merger, consolidation, joint venture or otherwise.



9

COLLATERAL ASSIGNMENT

THIS COLLATERAL ASSIGNMENT (“Assignment”), effective July 29, 2014, is made and executed by and between Agrinatural Gas, LLC, a Delaware limited liability company, having its principal place of business at 201 - 10th Street, P.O. Box 216, Heron Lake, Minnesota 56137 ("Assignor") and Heron Lake BioEnergy, LLC, a Minnesota limited liability company, having its principal place of business at 91246 - 390 th Ave., Heron Lake, Minnesota 56137 ("Assignee").
A.    Assignor and Assignee are parties to a Loan Agreement, Negotiable Promissory Note and Security Agreement dated as of July 29, 2014 (as amended, restated or otherwise modified from time to time, the “Credit Agreements”) under which Assignee has agreed to extend certain financial accommodations to the Assignor.
B.    As a condition to extending the credit facilities to Assignor under the Credit Agreements, Assignee has required the execution of this Assignment by Assignor.
AGREEMENT
Accordingly, in consideration of the foregoing, the parties agree as follows:
1.    Assignor does hereby collaterally grant, assign, transfer and set over unto the Assignee all of its right, title and interest in and to the leases, contracts and agreements described on Exhibit A annexed hereto (whether one or more, as the same have been or may be amended, restated, extended or otherwise modified from time to time, the “Contract” whether one or more), by and between the Assignor and various landowners named therein. Assignor acknowledges and agrees that it maintains full and complete copies of each said Contract at its principal place of business.
2.    Assignor agrees that Assignee does not assume any of the obligations or duties of Assignor under and with respect to the Contract unless and until Assignee shall have given the Assignor and the landowner named in the Contract written notice that it has affirmatively exercised its right to assume and perform under the Contract following the occurrence and during the continuance of an Event of Default under the Credit Agreements. In the event that the Assignee does not personally undertake to perform under the Contract, Assignee shall have no liability whatsoever for the performance of any of such obligations or duties. For the purpose of performing under the Contract, Assignee may assign the Contract, upon notice to Assignor and the landowner named in the Contract and subject to the terms of the Contract, to an entity that will own all or substantially all of the assets of the Assignor, but without any requirement of Assignor’s consent.
3.    Assignor represents and warrants there have been no prior assignments of any Contract, that each Contract is a valid and enforceable agreement, that neither Assignor nor any landowner named in each Contract is in default thereunder, and that all covenants, conditions and agreements have been performed as required therein, except those not due to be performed until after the date hereof. Assignor agrees that no material change in the terms thereof shall be valid without the prior written approval of the Assignee, which approval shall not be unreasonably withheld. Assignor agrees not to assign, sell, pledge, mortgage or otherwise transfer or encumber

1



its interest in the Contract so long as this Assignment is in effect, except as otherwise permitted under the Credit Agreements.
4.    Subject to Paragraph 5 below, Assignor hereby irrevocably constitutes and appoints the Assignee as attorney-in-fact to demand, receive and enforce the Assignor’s rights with respect to the Contract, to make payments under the Contract, if necessary, and to give appropriate receipt, releases and satisfactions for and on behalf of and in the name of Assignor, at the option of the Assignee, with the same force and effect as the Assignor could do if this Assignment had not been made.
5.    This Assignment shall constitute an absolute and present collateral assignment, provided that the Assignee shall have no right under this Assignment to take any actions under Paragraph 4 of this Assignment or enforce the provisions of the Contract until an Event of Default occurs under the Credit Agreements. Upon the occurrence and during the continuation of any Event of Default, the Assignee may, upon expiration of any applicable cure period and without affecting any of its rights or remedies against the Assignor under any other instrument, document, or agreement, exercise its rights under this Assignment as the Assignor’s attorney-in-fact in any manner permitted by law.
6.    The Assignor hereby agrees to indemnify and hold the Assignee harmless from and against any and all claims, demands, liabilities, losses, lawsuits, judgments, and costs and expenses, including without limitation reasonable attorneys’ fees, to which it may become exposed, or which it may incur, in exercising any of its rights under this Assignment.
7.    This Assignment shall be binding upon the Assignor, its successors and assigns, and shall inure to the benefit of the Assignee and its successors and assigns.
8.    This Assignment can be waived, modified, amended, terminated or discharged only explicitly in writing signed by the Assignee. A waiver signed by the Assignee shall be effective only in a specific instance and for the specific purpose given. Mere delay or failure to act shall not preclude the exercise or enforcement of any of the Assignee’s rights or remedies hereunder. All rights and remedies of the Assignee shall be cumulative and shall be exercised singularly or concurrently, at the Assignee’s option, and the exercise or enforcement of any one such right or remedy shall neither be a condition to nor bar the exercise or enforcement of any other remedy.
9.    All capitalized terms used in this Assignment, but not otherwise defined herein, shall have the meanings as set forth in the Credit Agreements.
10.    This Assignment may be executed in two or more counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument.
11.    This Assignment shall be binding upon the parties hereto, their successors and assigns and shall inure to the benefit of the Assignee and its successors or assigns.

[ Signatures found on following page. ]



2



ASSIGNOR: Agrinatural Gas, LLC,     ASSIGNEE: Heron Lake BioEnergy, LLC,
a Delaware limited liability             a Minnesota limited liability
company                     company


By:        /s/ Mychael L. Swan             

Print Name:      Mychael L. Swan            

Its.:       CEO              


By: /s/ Steve A. Christensen                   

Print Name: Steve A. Christensen                

Its.:        CEO            




By:       /s/ Ann T. Tessier              

Print Name:     Ann T. Tessier             

Its.:         CFO            


By:   /s/ Stacie Schuler                  

Print Name:         Stacie Schuler         

Its.:     CFO                



3




EXHIBIT “A”
TO
COLLATERAL ASSIGNMENT

The following property constitutes the “Contract” assigned pursuant to that certain Collateral Assignment dated and effective July 29, 2014:

1.
All of Assignor’s easements, easement agreements, and easement rights in which Assignor is the holder, dominant tenant or has any other beneficial interest whatsoever, whether now existing or hereafter acquired by Assignor, relating to or involving real property located in Brown, Cottonwood, Jackson and Nobles Counties, in the State of Minnesota, and in any such other counties in which Assignor may acquire future easement rights, and in locations represented on Attachment 1, pages 1 thru 12, to this Exhibit A.



[ Remainder intentionally blank. ]




4



Exhibit 31.1
 
CERTIFICATION PURSUANT TO 17 CFR 240.15d-14(a)
(SECTION 302 CERTIFICATION)
 
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 15, 2014
/s/ Steve Christensen
 
Steve Christensen, Chief Executive Officer
 
(Principal Executive Officer)





Exhibit 31.2
 
CERTIFICATION PURSUANT TO 17 CFR 240.15d-14(a)
(SECTION 302 CERTIFICATION)

I, Stacie Schuler, certify that:
1.
I have reviewed this quarterly report on 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 15, 2014
/s/ Stacie Schuler
 
Stacie Schuler, Chief Financial Officer
 
(Principal Financial Officer)





Exhibit 32.1
 
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the quarterly report on Form 10-Q of Heron Lake BioEnergy, LLC (the “Company”) for the quarter ended July 31, 2014 , as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Steve Christensen, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
 
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2,
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
 
 
/s/ Steve Christensen
 
Steve Christensen, Chief Executive Officer
 
Dated:
September 15, 2014





Exhibit 32.2
 
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the quarterly report on Form 10-Q of Heron Lake BioEnergy, LLC (the “Company”) for the quarter ended July 31, 2014 , as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Stacie Schuler, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
 
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2,
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
 
/s/ Stacie Schuler
 
Stacie Schuler, Chief Financial Officer
 
Dated:
September 15, 2014