Table of Contents

 

 

 

**UNITEDSTATES SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, DC 20549**

 

**FORM 10-Q**

 
| **x** | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.** |
|-------|------------|---------------------------------------------------------------------------------------------------------|

 

**FOR THEQUARTERLY PERIOD ENDED JUNE 30, 2008**

 
| **o** | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------|---------------------------------------------------------------------------------------------------------|

 

**FOR THETRANSITION PERIOD FROM           TO          **

 

**COMMISSION FILE NUMBER: 000-53042**

 

**OTTER TAILAG ENTERPRISES, LLC**

(Exactname of registrant as specified in its charter)

 

| **MINNESOTA**                                                    | ** ** | **EIN 41-2171784**                  |
|------------------------------------------------------------------|------------|-------------------------------------|
| (State  or other jurisdiction  of incorporation or organization) |       | (IRS  Employer  Identification No.) |

 

**24096 - 170th AvenueFergus Falls, MN 56537-7518**(Address of principal executive offices)

 

**(218) 998-4301**

(Registrant’stelephone number, including area code)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports) and (2) has been subject to such filing requirementsfor the past 90 days.

Yes  x No  o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filter or a smaller reportingcompany. See the definition 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 o                        | Smaller  reporting company x |
|----------------------------|---------------------------|-------------------------------------------------|-----------------------------------|
|                       |                      | (Do  not check if a smaller  reporting company) |                              |

 

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

 

As of August 14, 2008,the Company has outstanding 23,944,000 Class A Membership Units.

 

 

 

----

Tableof Contents

 

OTTERTAIL AG ENTERPRISES, LLCFORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDEDJUNE 30, 2008

 

TABLEOF CONTENTS

 
| ** **                                                                                               | ** ** | **Page** |
|----------------------------------------------------------------------------------------------------------|------------|----------|
| PART I —  FINANCIAL INFORMATION                                                                |       | 3        |
| Item 1.  Condensed Financial Statements (Unaudited)                                                 |       | 3        |
| Balance Sheets                                                                                           |       | 3        |
| Statements  of Operations                                                                                |       | 4        |
| Statements  of Cash Flows                                                                                |       | 6        |
| Condensed Notes to Unaudited Financial Statements                                                        |       | 7        |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations |       | 15       |
| Disclosure Regarding Forward-Looking Statements                                                          |       | 15       |
| Item 3. Quantitative and Qualitative Disclosures  About Market Risk                                 |       | 20       |
| Item 4. Controls and Procedures                                                                     |       | 21       |
| PART II  — OTHER INFORMATION                                                                   |       | 22       |
| Item 1.  Legal Proceedings                                                                          |       | 22       |
| Item 1A.  Risk Factors                                                                              |       | 22       |
| Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                     |       | 22       |
| Item 3. Defaults Upon Senior Securities                                                             |       | 22       |
| Item 4. Submission of Matters to a Vote of  Security Holders                                        |       | 22       |
| Item 5.  Other Information                                                                          |       | 22       |
| Item 6.  Exhibits                                                                                   |       | 22       |
| SIGNATURES                                                                                               |       | 23       |
| Exhibit Index                                                                                       |       | 24       |

 

2

----

Tableof Contents

 

**PART I— FINANCIAL INFORMATION**

Item 1. — CondensedFinancial Statements (Unaudited)

 

**OTTER TAIL AG ENTERPRISES, LLC**

CONDENSED BALANCE SHEETS

 
| ** **                                              | ** ** | **June 30, 2008** | ** **  | **September 30,  2007** | ** ** |
|---------------------------------------------------------|------------|-----------------------------|-------------|------------------------------|------------|
| ** **                                              | ** ** | **(Unaudited)**             | ** **  | ** **                   | ** ** |
| **ASSETS**                                              |       |                        |        |                         |       |
|                                                    |       |                        |        |                         |       |
| **Current Assets**                                      |       |                        |        |                         |       |
| Cash and equivalents                                    |       | $                           | 1,349,604   |                         | $          | 4,611,317 |   |
| Restricted cash                                         |       | 540,167                     |        | 2,138,555                    |       |
| Accounts receivable                                     |       | 5,949,420                   |        | —                       |       |
| Other receivables                                       |       | 3,986                       |        | 15,975                       |       |
| Inventory                                               |       | 5,332,015                   |        | —                       |       |
| Derivative instrument                                   |       | 49,682                      |        | 64,895                       |       |
| Prepaid expenses and other                              |       | 1,061,617                   |        | 18,173                       |       |
| Total current assets                                    |       | 14,286,492                  |        | 6,848,915                    |       |
|                                                    |       |                        |        |                         |       |
| **Property and Equipment**                              |       |                        |        |                         |       |
| Land and land improvements                              |       | 4,549,944                   |        | 4,484,577                    |       |
| Buildings                                               |       | 941,836                     |        | 434,516                      |       |
| Office equipment                                        |       | 141,203                     |        | 50,204                       |       |
| Plant and process equipment                             |       | 108,562,114                 |        | —                       |       |
| Construction in process                                 |       | —                      |        | 73,788,055                   |       |
|                                                    |       | 114,195,098                 |        | 78,757,352                   |       |
| Less accumulated depreciation                           |       | (2,139,491                  | )           | (9,158                       | )          |
| Net property and equipment                              |       | 112,055,606                 |        | 78,748,194                   |       |
|                                                    |       |                        |        |                         |       |
| **Other Assets**                                        |       |                        |        |                         |       |
| Debt service reserve                                    |       | 2,630,555                   |        | 2,640,643                    |       |
| Debt issuance costs, net of amortization                |       | 1,646,184                   |        | 1,714,974                    |       |
| Total other assets                                      |       | 4,276,739                   |        | 4,355,617                    |       |
|                                                    |       |                        |        |                         |       |
| **Total Assets**                                        |       | $                           | 130,618,837 |                         | $          | 89,952,726 |   |
|                                                    |       |                        |        |                         |       |
| **LIABILITIES AND MEMBERS’ EQUITY**                |       |                        |        |                         |       |
|                                                    |       |                        |        |                         |       |
| **Current Liabilities**                                 |       |                        |        |                         |       |
| Accounts payable                                        |       | $                           | 637,351     |                         | $          | 17,730 |   |
| Construction payable                                    |       | 1,589,746                   |        | 5,598,976                    |       |
| Construction payable- related party                     |       | —                      |        | 5,846,184                    |       |
| Accrued interest and other                              |       | 562,311                     |        | 729,349                      |       |
| Current maturities                                      |       | 6,191,550                   |        | —                       |       |
| Total current liabilities                               |       | 8,980,958                   |        | 12,192,239                   |       |
|                                                    |       |                        |        |                         |       |
| **Long-term debt, net of current maturities**           |       | 78,094,941                  |        | 32,636,362                   |       |
|                                                    |       |                        |        |                         |       |
| **Commitments and Contingencies**                       |       |                        |        |                         |       |
|                                                    |       |                        |        |                         |       |
| **Members’ Equity, 23,944,000 units  outstanding** |       | 43,542,938                  |        | 45,124,125                   |       |
|                                                    |       |                        |        |                         |       |
| **Total Liabilities and Members’ Equity**          |       | $                           | 130,618,837 |                         | $          | 89,952,726 |   |

 

Notes to Unaudited CondensedFinancial Statements are an integral part of this Statement.

 

3

----

Tableof Contents

 

**OTTER TAIL AG ENTERPRISES, LLC**

CONDENSED STATEMENTS OF OPERATIONS

 
| ** **                                            | ** ** | **Three Months  Ended** | ** ** | **Three Months  Ended** | ** ** |
|-------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                            | ** ** | **June 30, 2008**  | ** ** | **June 30, 2007**  | ** ** |
| ** **                                            | ** ** | **(Unaudited)**              | ** ** | **(Unaudited)**              | ** ** |
|                                                  |       |                         |       |                         |       |
| Revenues                                              |       | $                            | 36,017,233 |                         | $          | — |   |
|                                                  |       |                         |       |                         |       |
| Cost of sales                                         |       | 31,599,012                   |       | —                       |       |
|                                                  |       |                         |       |                         |       |
| Gross Profit                                          |       | 4,418,221                    |       | —                       |       |
|                                                  |       |                         |       |                         |       |
| Professional fees                                     |       | 191,896                      |       | 525,643                      |       |
| General and administrative                            |       | 1,585,280                    |       | 162,740                      |       |
| Total operating expenses                              |       | 1,777,176                    |       | 688,383                      |       |
|                                                  |       |                         |       |                         |       |
| **Operating Income (Loss)**                           |       | 2,641,045                    |       | (688,383                     | )          |
|                                                  |       |                         |       |                         |       |
| **Other income (expense)**                            |       |                         |       |                         |       |
| Interest expense                                      |       | (1,707,348                   | )          | —                       |       |
| Other income                                          |       | 2,004                        |       | 16,432                       |       |
| Interest income                                       |       | 27,596                       |       | 236,088                      |       |
| Total other income (expense), net                     |       | (1,677,748                   | )          | 252,520                      |       |
|                                                  |       |                         |       |                         |       |
| **Net Income (Loss)**                                 |       | $                            | 963,297    |                         | $          | (435,863 | ) |
|                                                  |       |                         |       |                         |       |
| **Weighted Average Units Outstanding – Basic**   |       | 23,925,000                   |       | 23,646,822                   |       |
|                                                  |       |                         |       |                         |       |
| **Net Income (Loss) Per Unit – Diluted**         |       | $                            | 0.05       |                         | $          | (0.02 | ) |
|                                                  |       |                         |       |                         |       |
| **Weighted Average Units Outstanding – Diluted** |       | 23,934,750                   |       | 23,646,822                   |       |
|                                                  |       |                         |       |                         |       |
| **Net Income (Loss) Per Unit – Diluted**         |       | $                            | 0.04       |                         | $          | (0.02 | ) |
|                                                       |            |                              |            |                              |            |  |  |  |  |

 

Notes to Unaudited CondensedFinancial Statements are an integral part of this Statement.

 

4

----

Tableof Contents

 

**OTTER TAIL AG ENTERPRISES, LLC**

CONDENSEDSTATEMENTS OF OPERATIONS

 
| ** **                                             | ** ** | **Nine Months  Ended** | ** ** | **Nine Months  Ended** | ** ** |
|--------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                             | ** ** | **June 30, 2008** | ** ** | **June 30, 2007** | ** ** |
| ** **                                             | ** ** | **(Unaudited)**             | ** ** | **(Unaudited)**             | ** ** |
|                                                   |       |                        |       |                        |       |
| Revenues                                               |       | $                           | 36,077,602 |                        | $          | — |   |
|                                                   |       |                        |       |                        |       |
| Cost of sales                                          |       | 32,007,313                  |       | —                      |       |
|                                                   |       |                        |       |                        |       |
| Gross Profit                                           |       | 4,070,289                   |       | —                      |       |
|                                                   |       |                        |       |                        |       |
| Professional fees                                      |       | 478,299                     |       | 802,146                     |       |
| General and administrative                             |       | 2,317,562                   |       | 385,104                     |       |
| Total operating expenses                               |       | 2,795,861                   |       | 1,187,250                   |       |
|                                                   |       |                        |       |                        |       |
| **Operating Income (Loss)**                            |       | 1,274,428                   |       | (1,187,250                  | )          |
|                                                   |       |                        |       |                        |       |
| **Other income (expense)**                             |       |                        |       |                        |       |
| Loss on derivatives                                    |       | (1,342,712                  | )          | —                      |       |
| Interest expense                                       |       | (1,719,885                  | )          | (172                        | )          |
| Other income                                           |       | 2,004                       |       | 16,932                      |       |
| Interest income                                        |       | 189,240                     |       | 1,577,745                   |       |
| Total other income (expense) net                       |       | (2,871,353                  | )          | 1,594,505                   |       |
|                                                   |       |                        |       |                        |       |
| **Net Income (Loss)**                                  |       | $                           | (1,596,924 | )                           | $          | 407,255 |   |
|                                                   |       |                        |       |                        |       |
| **Weighted Average Units Outstanding – Basic**    |       | 23,924,330                  |       | 21,521,817                  |       |
|                                                   |       |                        |       |                        |       |
| **Net Income (Loss) Per Unit – Basic**            |       | $                           | (0.07      | )                           | $          | 0.02 |   |
|                                                   |       |                        |       |                        |       |
| **Weighted Average Units Outstanding –  Diluted** |       | 23,924,330                  |       | 21,525,755                  |       |
|                                                   |       |                        |       |                        |       |
| **Net Income (Loss) Per Unit – Diluted**          |       | $                           | (0.07      | )                           | $          | 0.02 |   |

 

Notes to Unaudited CondensedFinancial Statements are an integral part of this Statement.

 

5

----

Tableof Contents

 

**OTTER TAIL AG ENTERPRISES, LLC**

CONDENSED STATEMENTS OF CASH FLOWS

 
| ** **                                                                                                | ** ** | **Nine Months Ended  June 30,  2008** | ** ** | **Nine Months Ended  June 30,  2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                                | ** ** | **(Unaudited)**                                      | ** ** | **(Unaudited)**                                      | ** ** |
| **Cash Flows from Operating Activities**                                                                  |       |                                                 |       |                                                 |       |
| Net income (loss)                                                                                         |       | $                                                    | (1,596,924 | )                                                    | $          | 407,255 |   |
| Adjustments to reconcile net income (loss)  to net cash used in operations:                               |       |                                                 |       |                                                 |       |
| Depreciation                                                                                              |       | 2,130,333                                            |       | 1,176                                                |       |
| Amortization of debt financing costs                                                                      |       | 97,261                                               |       | 315,050                                              |       |
| Unit based compensation                                                                                   |       | 9,737                                                |       | —                                               |       |
| Unrealized loss on derivative instruments                                                                 |       | 11,250                                               |       | —                                               |       |
| Change in assets and liabilities:                                                                         |       |                                                 |       |                                                 |       |
| Accounts receivable                                                                                       |       | (5,949,420                                           | )          | —                                               |       |
| Interest receivable                                                                                       |       | 11,989                                               |       | (47,637                                              | )          |
| Inventory                                                                                                 |       | (5,332,015                                           | )          | —                                               |       |
| Corn inventory deposit                                                                                    |       | (803,306                                             | )          | —                                               |       |
| Prepaid expenses and other                                                                                |       | (240,138                                             | )          | 4,690                                                |       |
| Derivative instruments                                                                                    |       | 3,963                                                |       | —                                               |       |
| Accounts payable                                                                                          |       | 619,620                                              |       | (205,807                                             | )          |
| Accrued interest and other                                                                                |       | (167,038                                             | )          | (574                                                 | )          |
| Net cash provided by (used in) operating  activities                                                      |       | (11,204,688                                          | )          | 474,153                                              |       |
|                                                                                                      |       |                                                 |       |                                                 |       |
| **Cash Flows from Investing Activities**                                                                  |       |                                                 |       |                                                 |       |
| Deposits on land                                                                                          |       | —                                               |       | 6,000                                                |       |
| Payments for purchase of land                                                                             |       | —                                               |       | (2,582,429                                           | )          |
| Capital expenditures                                                                                      |       | (90,999                                              | )          | (35,894                                              | )          |
| Payments for construction in process                                                                      |       | (45,196,160                                          | )          | (44,185,693                                          | )          |
| Net cash used in investing activities                                                                     |       | (45,287,159                                          | )          | (46,798,016                                          | )          |
|                                                                                                      |       |                                                 |       |                                                 |       |
| **Cash Flows from Financing Activities**                                                                  |       |                                                 |       |                                                 |       |
| Payments for notes payable to members                                                                     |       | —                                               |       | (13,500                                              | )          |
| Payments for long-term debt                                                                               |       | —                                               |       | (647                                                 | )          |
| Change in restricted cash                                                                                 |       | 1,608,476                                            |       | (5,024,070                                           | )          |
| Payments for debt issuance costs                                                                          |       | (45,767                                              | )          | (1,630,269                                           | )          |
| Payments for distributions                                                                                |       | —                                               |       | (5,566                                               | )          |
| Member contributions                                                                                      |       | —                                               |       | 42,200,000                                           |       |
| Proceeds from construction loan                                                                           |       | 51,667,425                                           |       | 26,010,000                                           |       |
| Proceeds for debt reserve funds                                                                           |       | —                                               |       | (3,195,640                                           | )          |
| Net cash provided by financing activities                                                                 |       | 53,230,134                                           |       | 58,340,308                                           |       |
|                                                                                                      |       |                                                 |       |                                                 |       |
| **Net Increase (Decrease) in Cash and  Equivalents**                                                      |       | (3,261,713                                           | )          | 12,016,445                                           |       |
| **Cash and Equivalents — Beginning of Period**                                                       |       | 4,611,317                                            |       | 1,195,046                                            |       |
| **Cash and Equivalents — End of Period**                                                             |       | $                                                    | 1,349,604  |                                                 | $          | 13,211,491 |   |
|                                                                                                      |       |                                                 |       |                                                 |       |
| **Supplemental Disclosure of Cash Flow  Information**                                                     |       |                                                 |       |                                                 |       |
| Interest paid, net of capitalized of  $2,595,717 and $729,349 at June 30, 2008 and 2007 respectively |       | $                                                    | 2,003,647  |                                                 | $          | — |   |
|                                                                                                      |       |                                                 |       |                                                 |       |
| **Supplemental Disclosure of Noncash  Operating, Investing and Financing Activities**                     |       |                                                 |       |                                                 |       |
| Deposit applied to land purchase                                                                          |       | $                                                    | —     |                                                 | $          | 6,000 |   |
| Deferred offering costs offset against  equity                                                            |       | $                                                    | —     |                                                 | $          | 224,996 |   |
| Fair value units issued for line of land  and construction                                                |       | $                                                    | 6,000      |                                                 | $          | 500,000 |   |
| Construction costs included in accounts  payable                                                          |       | $                                                    | 1,589,746  |                                                 | $          | 8,808,180 |   |
| Financing costs paid with debt proceeds                                                                   |       | $                                                    | 17,296     |                                                 | $          | — |   |

 

Notes to Unaudited CondensedFinancial Statements are an integral part of this Statement

 

6

----

Table of Contents

 

**OTTER TAIL AG ENTERPRISES, LLC**

**CONDENSED NOTES TO FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

*Basis of Presentation*

 

The accompanying unaudited condensed interim financials have beenprepared pursuant to the rules and regulations of the Securities andExchange Commission.  Certain informationand footnote disclosures normally included in annual financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been condensed or omitted as permitted by such rules andregulations.  These financial statementsand related notes should be read in conjunction with the financial statementsand notes thereto included in the Company’s audited financial statements forthe year ended September 30, 2007, contained in the Company’s RegistrationStatement on Form 10-12G, as amended, originally filed with the Securitiesand Exchange Commission on January 28, 2008.

 

In the opinion of management, the interim financial statements reflectall adjustments considered necessary for fair presentation.  The adjustments made to these statementsconsist only of normal recurring adjustments. The results reported in these condensed interim financial statementsshould not be regarded as necessarily indicative of results that may beexpected for the year ending September 30, 2008.

 

*Nature of Business*

 

Otter Tail Ag Enterprises, LLC, aMinnesota limited liability Company  (the“Company”) was organized with the intentions of developing, owning andoperating a 55 million gallon per year capacity dry-mill ethanol plant nearFergus Falls, Minnesota (the “Plant”). The Company was in the development stage until March 2008, when theCompany commenced operations.

 

*Accounting Estimates*

 

Management uses estimates and assumptionsin preparing these financial statements in accordance with generally acceptedaccounting principles.  Those estimatesand assumptions affect the reported amounts of assets and liabilities, thedisclosure of contingent assets and liabilities, and the reported revenues andexpenses.  Actual results could differfrom those estimates.

 

*Revenue Recognition*

 

The Company sells ethanol and relatedproducts pursuant to marketing agreements. Revenues from the production of ethanol and the related products arerecorded when the customer (the marketing companies as further discussed inNote 7) has taken title and assumed the risks and rewards of ownership, pricesare fixed or determinable and collectability is reasonably assured.  The Company’s products are sold FOB shippingpoint.

 

In accordance with the Company’sagreements for the marketing and sale of ethanol and related products,marketing fees and commissions due to the marketers are deducted from the grosssales price at the time payment is remitted to the Company.  Marketing fees remitted by the Company arepresented net in revenue.  Commissionswere approximately $85,000 for the nine months ended June 30, 2008.  No commissions were paid for the same periodending June 30, 2007.

 

*AccountsReceivable*

 

Creditterms are extended to customers in the normal course of business.  The Company performs ongoing creditevaluations of its customers’ financial condition and, generally, requires nocollateral.

 

Accountsreceivable are recorded at their estimated net realizable value.  Accounts are considered past due if paymentis not made on a timely basis in accordance with the Company’s creditterms.  Accounts considered uncollectibleare written off.  The Company’s estimateof the allowance for doubtful accounts is based on historical experience, itsevaluation of the current status of receivables, and unusual circumstances, ifany.  At June 30, 2008, the Companywas of the belief that such amounts would be collectible and thus an allowancewas not considered necessary.  It is atleast possible this estimate will change in the future.

 

7

----

Table of Contents

** **

**OTTER TAIL AG ENTERPRISES, LLC**

**CONDENSED NOTES TO FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

*Restricted Cash*

 

TheCompany maintains cash accounts set aside for requirements as part of thecapital lease financing agreement. At June 30, 2008 and September 30,2007, the total of these accounts was approximately $3,200,000 and $4,800,000,respectively.

 

*Inventories*

 

Inventories consist of raw materials; work in process and finishedgoods.  Corn is the primary raw materialand along with other raw materials, is stated at the lower of average cost ormarket.  Finished goods consist ofethanol, dried distiller grains and modified wet distiller grains, and arestated at the lower of cost or market, on a first-in, first-out basis.

 

*Property and Equipment*

 

Property and equipment is stated at cost.  Depreciation is provided over an estimateduseful life by use of the straight line depreciation method. Plant maintenanceand repairs are expensed as incurred; major improvements and betterments arecapitalized.  The Company initiated Plantoperations in March 2008 and began depreciating the plant at thattime.  Depreciation is computed using thestraight-line method over the following estimated useful lives:

 

| Land improvements           |   | 15-20 years |   |
|-----------------------------|--------|-------------|--------|
| Buildings                   |   | 10-40 years |   |
| Office equipment            |   | 5 years     |   |
| Plant and process equipment |   | 10-20 years |   |

 

*Long-livedAssets*

 

TheCompany tests long-lived assets or asset groups for recoverability when eventsor changes in circumstances indicate that their carrying amount may not berecoverable. Circumstances which could trigger a review include, but are notlimited to: significant decreases in the market price of the asset; significantadverse changes in the business climate or legal factors; accumulation of costssignificantly in excess of the amount originally expected for the acquisitionor construction of the asset; current period cash flow or operating lossescombined with a history of losses or a forecast of continuing losses associatedwith the use of the asset; and current expectation that the asset will morelikely than not be sold or disposed significantly before the end of itsestimated useful life.

 

Recoverabilityis assessed based on the carrying amount of the asset and its fair value whichis generally determined based on the sum of the undiscounted cash flowsexpected to result from the use and the eventual disposal of the asset, as wellas specific appraisal in certain instances. An impairment loss is recognized whenthe carrying amount is not recoverable and exceeds fair value. For the ninemonth periods ended June 30, 2008 and 2007, no impairment was recognizedon long-lived assets.

 

*Derivative Instruments*

 

TheCompany accounts for derivatives in accordance with SFAS No. 133, *Accounting for Derivative Instruments and HedgingActivities*(“SFAS No. 133”).SFAS No. 133 requires the recognition of derivatives in the balance sheetand the measurement of these instruments at fair value.

 

8

----

Tableof Contents

 

**OTTER TAIL AG ENTERPRISES, LLC**

**CONDENSED NOTES TO FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

Inorder for a derivative to qualify as a hedge, specific criteria must be met andappropriate documentation maintained. Gains and losses from derivatives that do not qualify as hedges, or areundesignated, must be recognized immediately in earnings.  If the derivative does qualify as a hedge,depending on the nature of the hedge, changes in the fair value of thederivative will be either offset against the change in fair value of the hedgedassets, liabilities, or firm commitments through earnings or recognized inother comprehensive income until the hedged item is recognized inearnings.  Changes in the fair value ofundesignated derivative are recorded in revenue or cost of goods sold based onthe commodity being hedged, when the plant is in operations. While the companywas in development stage the changes in the fair value of derivatives wererecorded in other income or expense.

 

Additionally,SFAS No. 133 requires a company to evaluate its contracts to determinewhether the contracts are derivatives. Certain contracts that literally meet the definition of a derivative maybe exempted as “normal purchases or normal sales.”  Normal purchases and normal sales arecontracts that provide for the purchase or sale of something other than afinancial instrument or derivative instrument that will be delivered in quantitiesexpected to be used or sold over a reasonable period in the normal course ofbusiness.  Contracts that meet therequirement of normal are documented as normal and exempted from the accountingand reporting requirements of SFAS No. 133, and therefore, are not markedto market in our financial statements.

 

*Fair Value of Financial Instruments*

 

Thecarrying value of cash and equivalents, restricted cash, receivables,derivative instruments, and payables approximate their fair value.

 

It is not currently practicable to estimate thefair value of the debt financing. Because these agreements contain certain unique terms, covenants, andrestrictions, as discussed in Note 4, there are no readily determinable similarinstruments on which to base an estimate of fair value.

 

*Environmental Liabilities*

 

TheCompany’s operations are subject to environmental laws and regulations adoptedby various governmental entities in the jurisdiction in which it operates.  These laws require the Company to investigateand remediate the effects of the release or disposal of materials at itslocation.  Accordingly, the Company hasadopted policies, practices and procedures in the areas of pollution control,occupational health, and the production, handling, storage and use of hazardousmaterials to prevent material environmental or other damage, and to limit thefinancial liability, which could result from such events.  Environmental liabilities are recorded whenthe liability is probable and the costs can be reasonably estimated.  No liabilities were recorded at June 30,2008 or 2007.

 

*Net Income (Loss) per Unit*

 

Basic net income (loss) per unit is computed bydividing net income by the weighted average number of members’ unitsoutstanding during the period.  Dilutednet income (loss) per unit is computed by dividing net income by the weightedaverage number of members’ units and members’ unit equivalents outstandingduring the period.  As of June 30,2008, the Company had 34,500 unit equivalents outstanding relating tooutstanding unit options and unvested restricted units. As of June 30,2007, the Company had 14,000 unit equivalents outstanding. At June 30,2008, the effects of 14,500 restricted units are excluded from the computationof diluted units outstanding as their effects would be anti-dilutive, due tothe Company’s net loss for the period ended June 30, 2008. Additionally,20,000 unit options were excluded from the computation of diluted unitsoutstanding as exercise price was equivalent to the Company’s average fairmarket unit value.

 

*Recently Issued Accounting Pronouncements*

 

InMay 2008, the FASB issued SFAS No. 162, “The Hierarchy of GenerallyAccepted Accounting Principles.” This Statement identifies the sources ofaccounting principles and the framework for selecting the principles to be usedin the preparation of financial statements of nongovernmental entities that arepresented in conformity with generally accepted accounting principles in theUnited States. This Statement is effective 60 days following the SEC’s approvalof the Public Company Accounting Oversight Board amendments to AU Section 411,*The Meaning of Present Fairly in Conformity WithGenerally Accepted Accounting Principles*.   The Company does not believe thatimplementation of this standard will have a material impact on its financialposition, results of operations or cash flows.

 

9

----

Tableof Contents

 

**OTTER TAIL AG ENTERPRISES, LLC**

**CONDENSED NOTES TO FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**NOTE 2.  INVENTORY**

 

Inventoriesconsist of the following as of June 30, 2008:

 
| Raw materials    |   | $         | 3,002,992 |   |
|------------------|--------|-----------|-----------|--------|
| Work in progress |   | 1,038,269 |      |
| Finished goods   |   | 947,146   |      |
| Spare parts      |   | 343,608   |      |
|             |   |      |      |
| Total            |   | $         | 5,332,015 |   |

 

**NOTE 3. DERIVATIVE INSTRUMENTS**

 

Inorder to reduce the risk caused by market fluctuations, the Company hedges itsanticipated corn and natural gas purchases by entering into options, futurescontracts, and swap agreements. These contracts are used with the intention tofix the purchase price of the Company’s anticipated requirements of corn andnatural gas in production activities. The fair value of these contracts isbased on quoted prices in active exchange-traded or over-the-counter markets.The fair value of the derivatives is continually subject to change due tochanging market conditions. The Company does not formally designate theseinstruments as hedges and, therefore, records in earnings adjustments causedfrom marking these instruments to market on a monthly basis.

 

AtJune 30, 2008 and September 30, 2007, the Company had recorded anasset for derivative instruments related to corn and natural gas option andfutures positions of approximately $50,000 and $65,000, respectively.  None of the positions open at June 30,2008 are designated as cash flow or fair value hedges. The Company has recordedgains of approximately $6,000 and $45,000 for the quarter ended June 30,2008 and for the fiscal year ended September 30, 2007, respectively, whichincludes an unrealized gain of approximately $430,000 and an unrealized gain ofapproximately $2,000 for the quarter ended June 30, 2008 and the fiscalyear ended September 30, 2007 included in cost of goods sold and otherincome, respectively. There were no derivative instruments as of June 30,2007.

 

**NOTE 4.  LONG-TERM DEBT**

 

Long-term debt consists of the following at:

** **

| ** **                                  | ** ** | **6/30/2008** | ** ** | **9/30/2007*** | ** ** |
|---------------------------------------------|------------|---------------|------------|----------------|------------|
| Construction and Term Loan, see terms below |       | $             | 35,000,000 |           | $          | — |   |
| Revolving line of credit, see terms below   |       | 3,943,214     |       | —         |       |
| New Market Tax Credit Loan, see terms below |       | 19,175,000    |       | 6,626,362      |       |
| County capital lease, (Note 5)              |       | 26,010,000    |       | 26,010,000     |       |
| Equipment financing                         |       | 158,277       |       | —         |       |
| Total long-term debt                        |       | 84,286,491    |       | 32,636,362     |       |
| Current maturities                          |       | (6,191,550    | )          | —         |       |
|                                        |       | $             | 78,094,941 |           | $          | 32,636,362 |   |

 

----

* Derived from audited financial statements.

 

Thepromissory notes described below are subject to credit agreements with variousfinancial and non-financial covenants that limit distributions, require minimumdebt service coverage, net worth and working capital requirements, and securedby all business assets.

 

10

----

Tableof Contents

 

**OTTER TAIL AG ENTERPRISES, LLC**

**CONDENSED NOTES TO FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

*New Market Tax Credit Loan*

 

InMarch 2007, the Company entered into the agreement with MMCDC New MarketsFund II, LLC (“NMF”) for the amount of $19,175,000. The Company has guaranteedit will be in compliance with the program over the tax credit recapture periodfrom September 2007 until September 2014. The NMF loan is dividedinto two portions: a term loan of $14,480,500 (the “Term Loan”) andsubordinated note for $4,694,500 (the “Subordinated Note”). The Term Loancontains a provision in which the Company must make interest only payments onthe 6th day of the first month following the initial advancement, August 2007,until the 85th month. On the sixth day of the 85th month and continuing for anadditional 48 months, the Company shall pay the amortized unpaid principaltogether with the accrued interest. The interest rate shall be calculated usingthe Wall Street Journal daily money rate (base rate) plus 1.0%.

 

TheSubordinated Note for $4,694,500 carries a fixed interest rate of 2.514%. Onthe first day of each month following the initial advance, August 2007,interest only payments will be made until September 2014 when a principalpayment of $400,000 is required.

 

*Construction and Term Loan*

 

InMarch 2007, the Company entered into an agreement with a lender for theconstruction financing.  The financecommitment has two phases; the construction loan (the “Construction Loan”),followed by term loan (the “Construction Term Loan”), term revolving note, anda revolving line of credit loan (the “Revolving Line of Credit Loan”).Conversion to the Construction Term Loan occurred on June 1, 2008.

 

*Construction Loan*

 

TheCompany obtained debt financing for the construction of the Plant from alending institution in the form of a term note (the “Term Note”) and revolvingpromissory note (the “Term Revolving Note”), as described below.  The Term Note provides for borrowings up to$35,000,000.  The Company made interestpayments for both loans during the construction phase at the LIBOR plus 3.15%,which totaled 5.74% at June 30, 2008. Interest will be paid quarterly inarrears on the first day of January, April, July and October. On June 1,2008, the loan converted into the Construction Term Loan and term revolvingloan (the “Construction Term Revolving Loan”).

 

*Construction Term Loan*

 

OnJune 1, 2008, a portion of the Construction Loan was converted to theConstruction Term Loan, totaling $29,000,000. The interest rate was reduced toLIBOR plus 2.95% on the Construction Term Loan. The agreement includes anoption to convert a portion of the Construction Term Loan to a fixed rate loan.The Company is required to make interest payments only on the 1st of day ofeach month for the first six months followed by 114 principal installments of$254,386 plus accrued interest beginning six months following substantialcompletion, payable in full in June 2018. In addition to the scheduledpayments, the Company will make additional principal payments equal to 65% ofthe Company’s excess cash flow not to exceed $2,000,000 per fiscal year and anaggregate total of $8,000,000.  As partof the financing agreement, the premium above LIBOR may be reduced to 2.65%based on attaining certain financial ratios.

 

11

----

Tableof Contents

 

**OTTER TAIL AG ENTERPRISES, LLC**

**CONDENSED NOTES TO FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

The financing agreement requires an annual servicing fee of$20,000.  The Company is initiallypermitted to make distributions up to 40% of net income.  For fiscal 2008 and thereafter, the Companymay make distributions which exceed 40% of net income as long as the Companyhas made the required excess cash flow payments and maintained the requiredfinancial covenants.  The financingagreement contains certain prepayment fees in the first three years of thescheduled payments. The Company is also required to obtain and maintainfinancial ratios on an annual basis.

 

*Construction Term Revolving Note*

 

The amount of the Construction Term Loan that converted to the TermRevolving Note was $6,000,000. The Company is required to pay interest on theprincipal advances monthly at the LIBOR rate plus 2.95% which totaled 5.54% at June 30,2008 and 8.37% as of September 30, 2007. The purpose of this loan is for cash and inventory management purpose.

 

*Revolving Line of Credit Loan*

 

The Company also has a Revolving Line of Credit loan with the same lendinginstitution for up to $6,000,000.  TheCompany is required to pay interest on the principal advances monthly at theLIBOR rate plus 2.95% which totaled 5.54% at June 30, 2008 and 8.37% as ofSeptember 30, 2007.  The purpose ofthis loan is for general and operating expenses. The maturity of the RevolvingLine of Credit loan is 364 days from commencement, on the loan maturity datethe principal and any outstanding accrued interest will be due. The Companypays a commitment fee of 0.35% on the unused portion of the revolvingpromissory note (the “Revolving Promissory Note”), payable quarterly inarrears. The interest rate is equal to LIBOR plus 2.95% if the Company’stangible owner’s equity (defined as tangible net worth plus subordinated debtdivided by total assets) is less than or equal to 60% or to LIBOR plus 2.65% ifthe tangible owner’s equity is greater than 60%. Principal and interest will bedue on March 30, 2009, and the unused commitment fee will now be duemonthly.

 

The Term Revolving Note as well as the Term Note and the Revolving Lineof Credit Loan are subject to a master loan agreement with various financialand non-financial covenants that limit distributions, require minimum debtservice coverage, net worth and working capital requirements, and secured byall business assets.

 

*EquipmentFinancing*

 

InApril 2008, the Company entered into two equipment financing agreementswith an unrelated party through 2013.  Payments range from $679 per monthto $2,468 per month with interest rates ranging from 4.56% to 5.5%.

 

At June 30, 2008, future minimum payments under the loans includingfuture minimum lease payments due under the capital lease (Note 5) are asfollows:

 
| 2008       |   | $          | 6,191,550  |   |
|------------|--------|------------|------------|--------|
| 2009       |   | 4,229,229  |       |
| 2010       |   | 4,875,943  |       |
| 2011       |   | 4,992,750  |       |
| 2012       |   | 5,118,348  |       |
| After 2012 |   | 58,878,671 |       |
| Total      |   | $          | 84,286,491 |   |

 

12

----

Tableof Contents

 

**OTTER TAIL AG ENTERPRISES, LLC**

**CONDENSED NOTES TO FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**NOTE 5.  CAPITAL LEASE**

 

InApril 2007, the Company entered into a long term equipment lease agreementwith Otter Tail County, Fergus Falls, Minnesota (the “County”) in order tofinance equipment for the Plant (the “Capital Lease”).  The Capital Lease has a term from May 1,2007 through November 2019. The County financed the purchase of equipmentthrough Subordinate Exempt Facility Revenue Bonds Series 2007A totaling$20,000,000, General Obligation Tax Abatement Bonds Series 2007B totaling$5,245,000, and Taxable General Obligation Tax Abatement Bonds Series 2007Ctotaling $765,000 (collectively the “Bonds”).

 

Underthe Capital Lease with the County, the Company started making payments on May 25,2008 and on the 25th of each month thereafter.  Until May 25, 2008, interest was beingpaid through the interest reserve fund included in restricted cash. The CapitalLease payments correspond to the interest of 1/6 the amount due on the bonds onthe next interest payment date. Capital Lease payments for principal start on November 25,2009 in an amount equal to 1/6 principal scheduled to become due on thecorresponding bonds on the next semi-annual principal payment date. The Companyalso began making lease payments of principal and interest that correspond tothe principal and interest the County will pay on the General Obligation Bonds Series 2007Band 2007C beginning February 25, 2008. Until that date, interest payments were financed through an interestreserve recorded as restricted cash. The Company made Capital Lease paymentsthat correspond to 1/6 the amount of interest payable due on the bonds on thefollowing February 1 or August 1 and principal amounts equaling 1/12of the principal due on the following February 1. The Company hasguaranteed that if such assessed lease payments are not sufficient for therequired Bond payments, the Company will provide such funds as are needed tofund the shortfall. The Capital Lease also includes an option to purchase theequipment at fair market value at the end of the lease term.

 

At June 30, 2008, future minimum lease paymentsunder the Capital Lease are as follows:

 
| 2008                                    |   | $          | 2,510,500  |   |
|-----------------------------------------|--------|------------|------------|--------|
| 2009                                    |   | 3,068,300  |       |
| 2010                                    |   | 3,675,000  |       |
| 2011                                    |   | 3,682,700  |       |
| 2012                                    |   | 3,675,500  |       |
| After 2012                              |   | 24,784,121 |       |
| Total                                   |   | $          | 41,396,121 |   |
| Less amount representing interest       |   | 15,386,121 |       |
| Present value of minimum lease payments |   | 26,010,000 |       |
| Current maturities                      |   | 440,000    |       |
| Noncurrent maturities                   |   | 25,570,000 |       |
|                                    |   | $          | 26,010,000 |   |

 

# **NOTE6.  OPERATING LEASES**

 

InFebruary 2008, the Company entered into an operating lease agreement for70 railroad cars for a minimum period of 36 months. The lease agreement shallcontinue for successive one month terms until terminated by either partyproviding a 30 day written advance notice to the other.  The Company will pay $600 per car per month,which may be adjusted according to the terms defined in the agreement. The termof this lease began in April 2008.

 

InApril 2008, the Company entered into an operating lease forequipment.  The Company is generally responsible for maintenance, taxes,and utilities for leased equipment.  The term of the lease is for fiveyears with monthly payments of $338.

 

13

----

Tableof Contents

 

**OTTER TAIL AG ENTERPRISES, LLC**

**CONDENSED NOTES TO FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**NOTE 7.  COMMITMENTSAND CONTINGENCIES**

 

*MarketingContracts*

 

InFebruary 2008, the Company entered into a marketing agreement with anunrelated party for the marketing, sale and delivery of all bulk grade drieddistiller grain with solubles (DDGS) the Company is expected to produce. The Company will receive payment for the products sold based on a percentage ofthe actual sales price as defined in the agreement.  The initial term isfor three years commencing as of the startup of production and will continueuntil terminated by either party providing a 90 day advance written notice.

 

*Natural Gas and Corn Contracts*

 

Inthe ordinary course of business, the Company enters into forward purchasecontracts for its commodity purchases and sales. At June 30, 2008, theCompany has forward corn purchase contracts to purchase approximately$16,680,000 through May 2009.

 

TheCompany has an agreement to purchase a minimum of 2,700 decatherms of naturalgas transportation per day through May 31, 2011 at market price plus$0.015 per dekatherm of natural gas.

 

14

----

Tableof Contents

 

**ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

We prepared the followingdiscussion and analysis to help you better understand our financial condition,changes in our financial condition, and results of operations for the three andnine month periods ended June 30, 2008, compared to the same periods ofthe prior fiscal year. This discussion should be read in conjunction with ourinterim condensed financial statements and notes included in Item 1 of Part 1of this Quarterly Report, and the audited financial statements as of September30, 2007 and notes thereto and Management’s Discussion and Analysis containedin our Registration Statement on Form 10-12G, as amended, originally filedwith the Securities and Exchange Commission on January 28, 2008.

 

**DISCLOSUREREGARDING FORWARD-LOOKING STATEMENTS**

 

This Quarterly Reportcontains forward-looking statements within the meaning of Section 21E ofthe Exchange Act. Forward-looking statements are all statements other thanstatements of historical fact, including without limitation those statementsthat are identified by the words “anticipates,” “believes,” “continue,” “could,”“estimates,” “expects,” “future,” “hope,” “intends,” “may,” “plans,” “potential,”“predicts,” “should,” “target,” and similar expressions, and include statementsconcerning plans, objectives, goals, strategies, future events or performance,and underlying assumptions (many of which are based, in turn, upon furtherassumptions) and other statements that are other than statements of historicalfacts. From time to time, the Company may publish or otherwise make availableforward-looking statements of this nature, including statements containedwithin this Item 2 – “Management’s Discussion and Analysis of FinancialCondition and Results of Operations.”

 

Forward-looking statementsinvolve risks and uncertainties, which could cause actual results or outcomesto differ materially from those expressed.  The Company’s expectations,beliefs and projections are expressed in good faith and are believed by theCompany to have a reasonable basis, including without limitation, management’sexamination of historical operating trends, data contained in the Company’srecords and other data available from third parties. Nonetheless, the Company’sexpectations, beliefs or projections may not be achieved or accomplished. Forward-looking statements are subject to known and unknown risks anduncertainties, including those risks described in “Item 1A - Risk Factors”of our Registration Statement on Form 10-12G as amended, originally filedwith the Securities and Exchange Commission on January 28, 2008, asupdated in Part II, Item 1A of this Quarterly Report.

 

Any forward-lookingstatement contained in this document speaks only as of the date on which thestatement is made, and the Company undertakes no obligation to update anyforward-looking statement or statements to reflect events or circumstances thatoccur after the date on which the statement is made or to reflect theoccurrence of unanticipated events. New factors emerge from time to time, andit is not possible for management to predict all of the factors, nor can itassess the effect ofeachfactor on the Company’s business or the extent to which any factor, orcombination of factors, may cause actual results to differ materially fromthose contained in any forward-looking statement. All forward-lookingstatements, whether written or oral and whether made by or on behalf of theCompany, are expressly qualified by the risk factors and cautionary statementsin this Quarterly Report, including statements contained within “Part II,Item 1A — Risk Factors,” and in the Company’s Registration Statement on Form 10-12G,as amended, originally filed with the Securities and Exchange Commission on January 28,2008, and include:

 

·                                The availability and adequacy of our cashflow to meet our requirements, including payment of loans;

 

·                                Economic, competitive, demographic, businessand other conditions in our local, regional and national markets;

 

·                                Changes in the availability and price ofcorn;

 

15

----

Tableof Contents

 

·                                Changes in the environmental regulations thatapply to our Plant operations;

 

·                                The occurrence of certain events causing aneconomic impact in the agriculture, oil, or automobile markets;

 

·                                Lack of transport, storage, and blendinginfrastructure preventing ethanol from reaching high demand markets;

 

·                                Changes and advances in ethanol productiontechnology;

 

·                                Changes in interest rates or the availabilityof credit;

 

·                                Our ability to retain key employees andmaintain labor relations;

 

·                                Changes or developments in laws, regulationsor taxes in the ethanol, agricultural or energy industries;

 

·                                Actions taken or not taken by third parties,including our suppliers and competitors, as well as legislative, regulatory,judicial and other governmental authorities;

 

·                                Competition in the ethanol industry;

 

·                                The loss of any license or permit;

 

·                                The loss of our Plant due to casualty,weather, mechanical failure or any extended or extraordinary maintenance orinspection that may be required;

 

·                                Changes in our business strategy, capital tosupport capital improvements and development; and

 

·                                Other factors discussed under the sectionentitled “RISK FACTORS” or elsewhere in this document

 

*Summary*

 

Otter Tail Ag Enterprises,LLC, a Minnesota limited liability company (the “Company,” “Otter Tail,” “we,” “our,”or “us”), owns and operates a nameplate 55 million gallon annualproduction plant of undenatured ethanol in Fergus Falls, Minnesota (the “Plant”).

 

**Liquidityand Capital Resources**

 

*Overview*

 

As of June 30, 2008, wehad total assets of approximately $131,000,000 consisting primarily of cash,restricted cash, accounts receivable, inventory, derivative instruments,financing costs and property, plant, and equipment.  As of June 30,2008, we had current liabilities of approximately $9,000,000 consistingprimarily of accounts payable, accrued liabilities, and current maturities oflong-term debt related to the construction of the plant and long-termliabilities of approximately $78,100,000 consisting primarily of bank debtfinancing and capital lease financing for the construction of the Plant.

 

For the nine months ended June 30,2008, cash used in operating activities was approximately $11,200,000, cashused in investing activities was approximately $45,300,000 and cash provided byfinancing activities was approximately $53,200,000.

 

16

----

Table of Contents

 

As of June 30, 2008, wehad remaining material commitments in the amount of approximately $1,400,000related to our construction agreement with Harris Mechanical ContractingCompany (“Harris”).  As of June 30, 2008, we had incurredapproximately $86,800,000 to Harris and paid approximately $85,400,000primarily from the proceeds from our equity financings and bankborrowings.  Based on our cash on hand as of the date hereof, includingthe loan proceeds available to us as described in Note 4 of the FinancialStatements, we believe that we will have adequate cash reserves and availablelines of credit to fund operations unless unforeseen events occur.

 

As of June 30, 2008, wehave used all funds remaining from our equity financings.  Current andremaining operating expenses will be paid for from our operatingactivities.  We anticipate that we have sufficient funds available fromour operations, including approximately $1,300,000 in cash and approximately$6,000,000 in current accounts receivable which we believe we will be able towholly realize, to meet our working capital requirements unless unforeseenevents occur.

 

The following table showscash flows for the nine month periods ended June 30, 2008 and 2007:

 

| ** **                                  | ** ** | **Nine Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                  | ** ** | **June 30, 2008**     | ** ** | **June 30, 2007**     | ** ** |
| ** **                                  | ** ** | **(Unaudited)**                 | ** ** | **(Unaudited)**                 | ** ** |
| **Cash Flows from Operating Activities**    |       | (11,204,688                     | )          | 474,153                         |       |
| **Cash Flows used in Investing Activities** |       | (45,287,159                     | )          | (46,798,016                     | )          |
| **Cash Flows from Financing Activities**    |       | 53,230,134                      |       | 58,340,308                      |       |

 

***Cash Flow From Operations***

 

The net cash flow receivedfor operating activities in the nine months ended June 30, 2008 decreasedapproximately $11,700,000 over that for the nine months ended June 30,2007.  The decreased receipts during the nine months ended June 30,2008 were primarily due to the Plant becoming operational in March 2008.Prior to March 2008, the Company was in the developmental stage.  Asof June 30, 2008 our capital needs are being adequately met through cashfrom our operating activities and our current credit facilities.

 

***Cash Flow From Investing Activities***

 

Cash used for investingactivities decreased by approximately $1,500,000 for the nine months ended June 30,2008 compared to the nine months ended June 30, 2007, primarily becausethe Plant is operational as of June 30, 2008, and construction-relatedpayments significantly decreased during this period.

 

***Cash Flow From Financing Activities***

 

Since our inception, we havegenerated significant cash inflows from bank financing arrangements and memberequity contributions.  Proceeds for the nine months ended June 30,2008 from our bank financing arrangements decreased by approximately $5,100,000compared to the bank proceeds for the nine months ended June 30,2007.  This is primarily due to the proceeds from member contributionsbeing recognized in the period for the nine months ended June 30, 2007.

 

***Results of Operations for the Three and Nine Months Ended June 30,2008 and June 30, 2007***

 

**Results ofOperations**

 

***Revenues***

 

The increase in revenuesfrom the quarter and nine months ended June 30, 2008 compared to thequarter and nine months ended June 30, 2007 is due to the Plant becomingoperational in March 2008. Prior to March 2008, the Company was inthe developmental stage.

 

17

----

Table of Contents

 

***Cost of Sales***

 

Our cost of sales as apercentage of revenues is 88% and 89% for the three and nine months ended June 30,2008.  We had no cost of sales for quarter and nine months ended June 30,2007, as we began producing ethanol during March 2008.  The high costof sales relative to revenues is a function of our Plant becoming operationaltowards the end of our second fiscal quarter.

 

***Operating Expenses***

 

Our operating expenses wereapproximately $1,800,000 and $2,800,000 for the three and nine months ended June 30,2008.  Compared to the three and nine month periods ended June 30,2007, our operating expenses increased by approximately $1,100,000, or 258%,and $1,600,000, or 235%, respectively.  These increases are primarily dueto the Plant becoming operational as of March 2008 as well as professionaland consulting fees.  For the nine months ended June 30, 2008, ourmaterial operating expenses were: 1) approximately $2,300,000 related togeneral and administrative expenses; 2) and approximately $480,000 relatedto professional fees. Some major factors impacting professional fees for thenine months ended June 30, 2008 were IT support and legal and accountingfees for Securities and Exchange Commission (“SEC”) filings.  In the nine months ended June 30, 2007,our material operating expenses were: 1) approximately $390,000 related togeneral and administrative expenses; and 2) approximately $800,000 forprofessional fees.

 

**CapitalResources**

 

***Short-term Debt Sources***

 

We have a revolvingpromissory note with Agstar Financial Services, PCA (“Agstar”) for up to$6,000,000.  We are required to pay interest on the principal advancesmonthly at the LIBOR rate plus 2.95%, which totaled 5.54% at June 30,2008.  The purpose of this loan is for general and operatingexpenses.  The maturity of this line of credit is 364 days fromcommencement; on the loan maturitydate, the principal and any outstanding accrued interest will bedue.  We pay a commitment fee of 0.35% on the unused portion of therevolving promissory note.  As of June 30, 2008 and September 30,2007, the Company had balances of approximately $3,900,000 and none on thisloan.

 

***Long-Term Debt Sources***

 

We have entered into twoloan agreements and one capital lease agreement for financing of thePlant.  The total loan commitment is $60,000,000 and the capital lease is$26,010,000, and both are described further below.

 

We have entered into asenior debt financing agreement for a construction loan of $35,000,000 fromAgstar, which includes a term and revolving loan (collectively, the “ConstructionLoan”).  We made interest payments for the Construction Loan during theconstruction phase at LIBOR plus 3.15%, which totaled 5.74% at June 30,2008.  We will pay interest quarterly in arrears on the first day ofJanuary, April, July and October.  The Company converted to a termloan and term revolving loan on June 1, 2008.

 

On June 1, 2008 a portion ofthe Construction Loan converted to a term loan in the amount of $29,000,000(the “Term Loan”).  The interest rate will be reduced to LIBOR plus 2.95%with an option to convert to a fixed rate loan.  We are required to makeinterest payments only on the 1st day of each month for the first six monthsfollowed by 114 principal installments of $254,386 plus accrued interestbeginning six months following substantial completion, payable in full in June 2018. In addition to the scheduled payments, we will be required to makeadditional principal payments equal to 65% of our excess cash flow not toexceed $2,000,000 per fiscal year and an aggregate total of $8,000,000. As part of the financing agreement, the premium above LIBOR may be reduced to2.65% based on financial ratios.  Commitment fees of $20,000 were chargedat the time of conversion and will be charged annually thereafter.

 

18

----

Tableof Contents

 

The maximum amount of theConstruction Loan that could be converted to the term revolving loan is$6,000,000 (the “Revolving Loan”).  We are required to pay interest on theprincipal advances monthly at the LIBOR rate plus 2.95% which totaled 5.54% at June 30,2008 and 8.37% at September 30, 2007.  The purpose of the RevolvingLoan is for cash and inventory management purpose.  We pay a commitmentfee of 0.35% on the unused portion of the revolving promissory note.

 

***Capital Lease***

 

In April 2007, weentered into a long term equipment lease agreement (the “Equipment LeaseAgreement”) with Otter Tail County, Fergus Falls, Minnesota (the “County”) inorder to finance equipment for the Plant (the “Capital Lease”).  TheEquipment Lease Agreement has a term from May 1, 2007 through November 2019.The County financed the purchase of equipment through Subordinate ExemptFacility Revenue Bonds Series 2007A totaling $20,000,000, GeneralObligation Tax Abatement Bonds Series 2007B totaling $5,245,000, andTaxable General Obligation Tax Abatement Bonds Series 2007C totaling$765,000 (collectively, the “Bonds”).

 

Under the Equipment LeaseAgreement with the County, we started making payments on May 25, 2008 andhave and will make payments on the 25th of each month.  Payments forprincipal start on November 25, 2009 in an amount equal to 1/6 principalscheduled to become due on the corresponding Bonds on the next semi-annualprincipal payment date. We also make Capital Lease payments of principal andinterest that correspond to the principal and interest the County pays on theGeneral Obligation Bonds Series 2007B and 2007C.   We pay Capital Lease payments that correspondto 1/6 the amount of interest payable due on the Bonds on February 1 or August 1of each year and principal amounts equaling 1/12 of the principal due each February 1. We have guaranteed that if such assessed lease payments are not sufficient forthe required Bond payments, we will provide such funds as are needed to fundthe shortfall.  The Capital Lease also includes an option to purchase theequipment at fair market value at the end of the lease term.

 

On March 30, 2007, weentered into a loan arrangement with NMF for the amount of $19,175,000 (the “NMFLoan”).  The tax credit period of the NMF Loan is from September 2007to September 2014.  The NMF Loan is divided into two portionsincluding a term loan of $14,480,500, which we shall make interest onlypayments on beginning the 6th day of the first month following the initialadvancement until the 85th month.  On the 6th day of the 85th month andcontinuing for an additional 48 months we shall pay the amortized unpaidprincipal together with the accrued interest.  The interest rate shall becalculated using the Wall Street Journal daily money rate (base rate) plus 100basis points, which was 6.00% as of June 30, 2008.  In addition thereis a subordinated loan note for $4,694,500 which will carry an interest rate of2.514%.  On the 1st day of each month following the initial advance, whichoccurred in August 2007, we will make interest only payments until September 2014when we will make a principal payment of $400,000.

 

**Grants**

 

On October 1, 2007, wereceived a Value-Added Producer Grant from the United States Department ofAgriculture in the amount of $300,000.  The funding period of the grantbegan on that date and will conclude no later than December 31,2008.  The grant funds were used only for Plant operation start-up costsand development of local wet distillers grains markets.

 

**CriticalAccounting Estimates**

 

Our most critical accountingpolicies, which are those that require significant judgment, include valuationof derivative instruments and inventory. An in-depth description of these canbe found in our Registration Statement on Form 10-12G, as amended,originally filed with the SEC on January 28, 2008. Management has notchanged the method of calculating and using estimates and assumptions inpreparing our condensed financial statements in accordance with generallyaccepted accounting principles.  There have been no changes in thepolicies for our accounting estimates for the quarter ended June 30, 2008.

 

19

----

Tableof Contents

 

**Off-BalanceSheet Arrangements**

 

We have not entered into anyoff-balance sheet arrangements that have or are reasonably likely to have acurrent or future effect on our financial condition, revenues or expenses,results of operations, liquidity, capital expenditures or capital resourcesthat are material to investors.

 

**ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We are exposed to the impactof market fluctuations associated with commodity prices and interest rates asdiscussed below.  We have no exposure to foreign currency risk, as all ofour business is conducted in United States Dollars.  We use derivativefinancial instruments as part of an overall strategy to manage marketrisk.  We use cash, futures and option contracts to hedge changes to thecommodity prices of corn and ethanol. We do not enter into these derivativefinancial instruments for trading or speculative purposes, nor do we designatethese contracts as hedges for accounting purposes pursuant to the requirementsof Statement of Financial Accounting Standards No. 133, *Accounting for Derivative Instruments and HedgingActivities*.

 

**InterestRate Risk**

 

We expect to be exposed tomarket risk from changes in interest rates on our existing debtfacilities.  Exposure to interest rate risk results from holding ourcredit agreements.

 

We have used and expect touse debt to finance a significant amount of our expenditures in fiscal2008.  These agreements will expose us to market risk related to changesin interest rates.

 

**CommodityPrice Risk**

 

We are exposed to marketrisk from changes in commodity prices.  Exposure to commodity price riskresults from our dependence on corn and natural gas in the ethanol productionprocess, and our reliance on sales of ethanol.  We seek to minimize therisks from fluctuations in the prices of corn and ethanol through the use ofderivative instruments.  In practice, as markets move, we actively manageour risk and adjust hedging strategies as appropriate.  Although webelieve our hedge positions accomplish an economic hedge against our futurepurchases, they are not designated as such for hedge accounting purposes, whichwould match the gain or loss on our hedge positions to the specific commoditypurchase being hedged.  We are marking to market our hedge positions,which means as the current market price of our hedge positions changes, thegains and losses are immediately recognized in our cost of goods sold.

 

The immediate recognition ofhedging gains and losses can cause net income to be volatile from quarter toquarter due to the timing of the change in value of the derivative instrumentsrelative to the cost and use of the commodity being hedged.  At June 30,2008, the fair value of our derivative instruments for corn and ethanol is anasset in the amount of $49,682.  At June 30, 2007, we heldno derivative instruments for corn or ethanolderivative instruments.  There are several variables that could affect theextent to which our derivative instruments are impacted by price fluctuationsin the cost of corn or ethanol.  However, it is likely that commodity cashprices will have the greatest impact on the derivative instruments with deliverydates nearest the current cash price.

 

We estimate that ourexpected corn usage will be approximately 19.5 million bushels per year for theproduction of 55 million gallons of undenatured ethanol.  We have priceprotection in place for a portion of our expected corn usage through December 2008using forward contracts, Chicago Board of Trade futures and options, andover-the-counter option contracts.  As we move forward, additionalprotection may be necessary.  As corn prices move in reaction to markettrends and information, our income statement will be affected depending on the impactsuch market movements have on the value of our derivative instruments.  Aswe move forward, additional price protection may be required to solidify ourmargins.  Depending on market movements, crop prospects and weather, theseprice protection positions may cause immediate adverse effects, but areexpected to produce long-term positive growth for us.

 

20

----

Tableof Contents

 

A sensitivity analysis hasbeen prepared to estimate our exposure to corn, gasoline and natural gas pricerisk. The table presents the net fair value of our derivative instruments as ofJune 30, 2008, September 30, 2007 and June 30, 2007 and thepotential loss in fair value resulting from a hypothetical 10% adverse changein such prices. The fair value of the positions is a summation of the fairvalues calculated by valuing each net position at quoted market prices as ofthe applicable date. The results of this analysis, which may differ from actualresults, are as follows:

 

| ** **              | ** ** | **Fair Value** | ** ** | **Effect of  Hypothetical  Adverse Change —  Market Risk** | ** ** |
|-------------------------|------------|---------------------|------------|-------------------------------------------------------------------------------------|------------|
| June 30, 2008      |       | $                   | 49,682     |                                                                                | $          | (4,970 | ) |
| September 30, 2007 |       | $                   | 64,895     |                                                                                | $          | (6,490 | ) |
| June 30, 2007      |       | $                   | —     |                                                                                | $          | — |   |

 

**LiabilityRisk**

 

We have obtained insurancefor our risks through our insurance company, Willis of Minnesota (“Willis”). The various coverages and deductibles are as follows:

 

·                                Property — $50,000 deductible;

·                                General liability — No deductible;

·                                Automobile — No deductible;

·                                Worker’s compensation — No deductible;

·                                Directors and officers — $10,000 deductible;

·                                Crime — $5,000 deductible;

·                                Environmental — $50,000 deductible; and

·                                Umbrella — $10,000 SIR.

 

Our premiums to Willis arestructured such that we have made a prepaid collateral deposit of estimatedlosses related to the above coverage.

 

**ITEM 4.CONTROLS AND PROCEDURES**

 

***Evaluation of Disclosure Controls and Procedures***

 

Our Chief Executive Officerand Chief Financial Officer, after evaluating the effectiveness of ourdisclosure controls and procedures (as defined in Rule 13a-15(e) underthe Securities Exchange Act of 1934, as amended), as of June 30, 2008 (the“Evaluation Date”), have concluded that our disclosure controls and procedures[are effective] in ensuring that material information required to be disclosedis included in the reports that we file with the Securities and ExchangeCommission.

 

***Changes in Internal Controls***

 

There have been [no changes]in our internal control over financial reporting that occurred during thefiscal quarter ended June 30, 2008, that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

21

----

Tableof Contents

 

**PART II— OTHER INFORMATION**

 

**ITEM 1.LEGAL PROCEEDINGS**

 

None.

 

**ITEM 1A.RISK FACTORS**

 

In addition to the otherinformation set forth in this report, including the important information underthe heading “Disclosure Regarding Forward-Looking Statements,” you shouldcarefully consider the “Risk Factors” discussed in our Registration Statementon Form 10-12G, as amended, originally filed with SEC on January 28,2008. “Risk Factors” are conditions that may cause investment in our Company tobe speculative or risky.  We are not currently aware of factors other thanthose set forth in our Registration Statement on Form 10-12G, as amended,originally filed with SEC on January 28, 2008 that would have aforeseeable effect on the level of risk associated with investment in ourCompany; however, additional risks and uncertainties not currently known to usor that we currently deem to be immaterial might materially adversely affectour actual business, financial condition and/or operating results.

 

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

 

None.

 

**ITEM 3.DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

**ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

None.

 

**ITEM 5.OTHER INFORMATION**

 

None.

 

**ITEM 6. EXHIBITS**

 

See Exhibit Indexfollowing the signature page of this report.

 

22

----

Tableof Contents

 

**SIGNATURES**

 

In accordance with therequirements of the Securities Exchange Act of 1934, the registrant caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|                       | OTTER TAIL AG ENTERPRISES,  LLC |
|----------------------------|---------------------------------|
|                       |                            |   |
| Date: August 19, 2008 | By:                        | /s/ Kelly Longtin |
|                       |                            | Kelly Longtin |
|                       |                            | Chief Executive Officer |

 

23

----

Tableof Contents

 

**EXHIBIT INDEX**

 

**OTTER TAIL AG ENTERPRISES, LLCFORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2008**

 
| 31.1*  |   | Certification by Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 (Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934). |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                             |
| 31.2*  |   | Certification by Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 (Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934). |
|   |   |                                                                                                                                                                             |
| 32.1*  |   | Certification pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                              |
|   |   |                                                                                                                                                                             |
| 32.2*  |   | Certification pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                              |

 

----

*    Filed herewith.

 

24

----