##### ** **

**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**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 MARCH 31, 2008**

 

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

 

**FORTHE TRANSITION PERIOD FROM           TO**

 

**COMMISSIONFILE NUMBER: 000-53042**

 

**OTTERTAIL AG ENTERPRISES, LLC**

(Exact name ofregistrant as specified in its charter)

 

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

 

**24096- 170th Avenue Fergus 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 markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filter or a smaller reporting company. See the definition of “largeaccelerated filer, accelerated filer,” and “smaller reporting company” in Rule 12b-2of 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 xNo

 

As of May 20, 2008,the Company has outstanding 23,944,000 Class A Membership Units.

 

 

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OTTER TAIL AG ENTERPRISES, LLCFORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDEDMARCH 31, 2008

 

TABLE OF CONTENTS

 
| ** **                                                                                                | **Page** |
|-----------------------------------------------------------------------------------------------------------|----------|
| PART I —  FINANCIAL INFORMATION                                                                 | 1        |
| Item 1.  Condensed Financial Statements (Unaudited)                                                  | 1        |
| Condensed  Balance Sheets                                                                                 | 1        |
| Condensed  Statements of Operations                                                                       | 2        |
| Condensed  Statements of Cash Flows                                                                       | 4        |
| Notes to Unaudited  Condensed Financial Statements                                                        | 5        |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations | 13       |
| Disclosure  Regarding Forward-Looking Statements                                                          | 13       |
| Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                  | 19       |
| 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       |

 

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**PART I— FINANCIAL INFORMATION**

Item 1. — CondensedFinancial Statements (Unaudited)

 

**OTTER TAIL AG ENTERPRISES, LLC**

CONDENSED BALANCESHEETS

 
| ** **                                              | ** ** | **March 31, 2008** | ** **  | **September 30, 2007** | ** ** |
|---------------------------------------------------------|------------|-------------------------|-------------|-----------------------------|------------|
| ** **                                              | ** ** | **(Unaudited)**         | ** **  | ** **                  | ** ** |
| **ASSETS**                                              |       |                    |        |                        |       |
| ** **                                              |       |                    |        |                        |       |
| **Current Assets**                                      | ** ** | ** **              | ** **  | ** **                  | ** ** |
| Cash and equivalents                                    |       | $                       | 4,287,058   |                        | $          | 4,611,317 |   |
| Restricted cash                                         |       | 1,432,287               |        | 2,138,555                   |       |
| Accounts receivable                                     |       | 60,369                  |        | —                      |       |
| Other receivables                                       |       | 192,096                 |        | 15,975                      |       |
| Inventory                                               |       | 4,690,482               |        | —                      |       |
| Derivative instrument                                   |       | 454,633                 |        | 64,895                      |       |
| Prepaid expenses and other                              |       | 3,913,500               |        | 18,173                      |       |
| Total current assets                                    |       | 15,130,425              |        | 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                             |       | 106,050,494             |        | —                      |       |
| Construction in process                                 |       | —                  |        | 73,788,055                  |       |
|                                                    |       | 111,683,477             |        | 78,757,352                  |       |
| Less accumulated depreciation                           |       | (27,710                 | )           | (9,158                      | )          |
| Net property and equipment                              |       | 111,655,767             |        | 78,748,194                  |       |
|                                                    |       |                    |        |                        |       |
| **Other Assets**                                        | ** ** | ** **              | ** **  | ** **                  | ** ** |
| Debt service reserve                                    |       | 2,667,622               |        | 2,640,643                   |       |
| Debt issuance costs, net of amortization                |       | 1,669,121               |        | 1,714,974                   |       |
| Total other assets                                      |       | 4,336,744               |        | 4,355,617                   |       |
|                                                    |       |                    |        |                        |       |
| **Total Assets**                                        |       | $                       | 131,022,936 |                        | $          | 89,952,726 |   |
| ** **                                              | ** ** | ** **              | ** **  | ** **                  | ** ** |
| **LIABILITIES AND MEMBERS’ EQUITY**                | ** ** | ** **              | ** **  | ** **                  | ** ** |
| ** **                                              | ** ** | ** **              | ** **  | ** **                  | ** ** |
| **Current Liabilities**                                 | ** ** | ** **              | ** **  | ** **                  | ** ** |
| Accounts payable                                        |       | $                       | 1,534,259   |                        | $          | 17,730 |   |
| Construction payable                                    |       | 1,121,340               |        | 5,598,976                   |       |
| Construction payable- related party                     |       | 5,060,974               |        | 5,846,184                   |       |
| Accrued interest and other                              |       | 1,140,932               |        | 729,349                     |       |
| Current maturities                                      |       | 1,457,544               |        | —                      |       |
| Total current liabilities                               |       | 10,315,049              |        | 12,192,239                  |       |
|                                                    |       |                    |        |                        |       |
| **Long-term debt, net of current  maturities**          |       | 78,130,496              |        | 32,636,362                  |       |
|                                                    |       |                    |        |                        |       |
| **Commitments and Contingencies**                       | ** ** | ** **              | ** **  | ** **                  | ** ** |
|                                                    |       |                    |        |                        |       |
| **Members’ Equity, 23,944,000  units outstanding** |       | 42,577,392              |        | 45,124,125                  |       |
|                                                    |       |                    |        |                        |       |
| **Total Liabilities and Members’ Equity**          |       | $                       | 131,022,936 |                        | $          | 89,952,726 |   |

 

Notes to UnauditedCondensed Financial Statements are an integral part of this Statement.

 

1

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**OTTER TAIL AG ENTERPRISES, LLC**

CONDENSEDSTATEMENTS OF OPERATIONS

 
| ** **                                             | ** ** | **Three Months Ended**  | ** ** | **Three Months Ended**  | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                             | ** ** | **March 31, 2008** | ** ** | **March 31, 2007** | ** ** |
| ** **                                             | ** ** | **(Unaudited)**         | ** ** | **(Unaudited)**         | ** ** |
|                                                   |       |                    |       |                    |       |
| Revenues                                               |       | $                       | 60,369     |                    | $          | — |   |
|                                                   |       |                    |       |                    |       |
| Cost of sales                                          |       | 408,301                 |       | —                  |       |
|                                                   |       |                    |       |                    |       |
| Gross Profit                                           |       | (347,932                | )          | —                  |       |
|                                                   |       |                    |       |                    |       |
| Professional fees                                      |       | 174,680                 |       | 1,426                   |       |
| General and administrative                             |       | 399,607                 |       | 105,052                 |       |
| Total operating expenses                               |       | 574,287                 |       | 106,478                 |       |
| ** **                                             | ** ** | ** **              | ** ** | ** **              | ** ** |
| **Operating Loss**                                     |       | (922,219                | )          | (106,478                | )          |
| ** **                                             | ** ** | ** **              | ** ** | ** **              | ** ** |
| **Other income (expense)**                             | ** ** | ** **              | ** ** | ** **              | ** ** |
| Interest income                                        |       | 56,029                  |       | 338,842                 |       |
| Total other income, net                                |       | 56,029                  |       | 338,842                 |       |
|                                                   |       |                    |       |                    |       |
| **Net Income (Loss)**                                  |       | $                       | (866,190   | )                       | $          | 232,364 |   |
| ** **                                             | ** ** | ** **              | ** ** | ** **              | ** ** |
| **Weighted Average Units Outstanding  – Basic**   | ** ** | 23,925,000              | ** ** | 23,511,646              | ** ** |
| ** **                                             | ** ** | ** **              | ** ** | ** **              | ** ** |
| **Net Income (Loss) Per Unit –  Basic**           |       | $                       | (0.03      | )                       | $          | 0.01 |   |
| ** **                                             |       |                    |       |                    |       |
| **Weighted Average Units  Outstanding – Diluted** |       | 23,925,000              |       | 23,525,646              |       |
| ** **                                             |       |                    |       |                    |       |
| **Net Income (Loss) Per Unit –  Diluted**         |       | (0.03                   | )          | 0.04                    |       |

 

Notes to UnauditedCondensed Financial Statements are an integral part of this Statement.

 

2

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**OTTER TAIL AG ENTERPRISES, LLC**

CONDENSEDSTATEMENTS OF OPERATIONS

 
| ** **                                             | ** ** | **Six Months Ended**    | ** ** | **Six Months Ended**    | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                             | ** ** | **March 31, 2008** | ** ** | **March 31, 2007** | ** ** |
| ** **                                             | ** ** | **(Unaudited)**         | ** ** | **(Unaudited)**         | ** ** |
|                                                   |       |                    |       |                    |       |
| Revenues                                               |       | $                       | 60,369     |                    | $          | — |   |
|                                                   |       |                    |       |                    |       |
| Cost of sales                                          |       | 408,301                 |       | —                  |       |
|                                                   |       |                    |       |                    |       |
| Gross Profit                                           |       | (347,932                | )          | —                  |       |
|                                                   |       |                    |       |                    |       |
| Professional fees                                      |       | 286,403                 |       | 276,503                 |       |
| General and administrative                             |       | 732,282                 |       | 222,458                 |       |
| Total operating expenses                               |       | 1,018,685               |       | 498,961                 |       |
| ** **                                             | ** ** | ** **              | ** ** | ** **              | ** ** |
| **Operating Loss**                                     |       | (1,366,617              | )          | (498,961                | )          |
| ** **                                             | ** ** | ** **              | ** ** | ** **              | ** ** |
| **Other income (expense)**                             | ** ** | ** **              | ** ** | ** **              | ** ** |
| Loss on derivatives                                    |       | (1,342,712              | )          | —                  |       |
| Interest expense                                       |       | (12,537                 | )          | —                  |       |
| Interest income                                        |       | 161,644                 |       | 1,342,080               |       |
| Total other income, net                                |       | (1,193,605              | )          | 1,342,080               |       |
|                                                   |       |                    |       |                    |       |
| **Net Income (Loss)**                                  |       | $                       | (2,560,221 | )                       | $          | 843,119 |   |
| ** **                                             | ** ** | ** **              | ** ** | ** **              | ** ** |
| **Weighted Average Units Outstanding  – Basic**   | ** ** | 23,923,995              | ** ** | 20,442,237              | ** ** |
| ** **                                             | ** ** | ** **              | ** ** | ** **              | ** ** |
| **Net Income (Loss) Per Unit –  Basic**           |       | $                       | (0.10      | )                       | $          | 0.04 |   |
| ** **                                             |       |                    |       |                    |       |
| **Weighted Average Units  Outstanding – Diluted** |       | 23,923,995              |       | 20,456,237              |       |
| ** **                                             |       |                    |       |                    |       |
| **Net Income (Loss) Per Unit –  Diluted**         |       | (0.10                   | )          | 0.04                    |       |

 

Notes to UnauditedCondensed Financial Statements are an integral part of this Statement.

 

3

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**OTTER TAIL AG ENTERPRISES, LLC**

CONDENSEDSTATEMENTS OF CASH FLOWS

 
| ** **                                                                                            | ** ** | **Six Months Ended  March 31,  2008** | ** ** | **Six Months Ended  March 31,  2007** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                            | ** ** | **(Unaudited)**                            | ** ** | **(Unaudited)**                            | ** ** |
| **Cash Flows from Operating Activities**                                                              | ** ** | ** **                                 | ** ** | ** **                                 | ** ** |
| Net income (loss)                                                                                     |       | $                                          | (2,560,221 | )                                          | $          | 843,119 |   |
| Adjustments to reconcile net loss to net cash used in operations:                                     |       |                                       |       |                                       |       |
| Depreciation                                                                                          |       | 18,552                                     |       | 189                                        |       |
| Amortization of debt financing costs                                                                  |       | 64,049                                     |       | —                                     |       |
| Unit based compensation                                                                               |       | 7,487                                      |       | 2,875                                      |       |
| Unrealized loss on derivative instruments                                                             |       | 442,755                                    |       | —                                     |       |
| Change in assets and liabilities:                                                                     |       |                                       |       |                                       |       |
| Accounts receivable                                                                                   |       | (60,369                                    | )          | —                                     |       |
| Grant receivable                                                                                      |       | (187,500                                   | )          | —                                     |       |
| Interest receivable                                                                                   |       | 11,379                                     |       | —                                     |       |
| Inventory                                                                                             |       | (4,690,482                                 | )          | —                                     |       |
| Corn inventory deposit                                                                                |       | (3,223,424                                 | )          | —                                     |       |
| Prepaid expenses and other                                                                            |       | (671,903                                   | )          | 3,366                                      |       |
| Derivative instruments                                                                                |       | (832,493                                   | )          | —                                     |       |
| Accounts payable                                                                                      |       | 1,516,529                                  |       | (47,296                                    | )          |
| Accrued interest and other                                                                            |       | (411,583                                   | )          | (574                                       | )          |
| Net cash provided by (used in) operating activities                                                   |       | (10,577,224                                | )          | 801,679                                    |       |
|                                                                                                  |       |                                       |       |                                       |       |
| **Cash Flows from Investing Activities**                                                              | ** ** | ** **                                 | ** ** | ** **                                 | ** ** |
| Payments for purchase of land                                                                         |       | —                                     |       | (691,436                                   | )          |
| Capital expenditures                                                                                  |       | —                                     |       | (2,341                                     | )          |
| Payments for construction in process                                                                  |       | (37,359,806                                | )          | (24,744,256                                | )          |
| Net cash used in investing activities                                                                 |       | (37,359,806                                | )          | (25,438,033                                | )          |
|                                                                                                  |       |                                       |       |                                       |       |
| **Cash Flows from Financing Activities**                                                              | ** ** | ** **                                 | ** ** | ** **                                 | ** ** |
| Payments for notes payable to members                                                                 |       | —                                     |       | (13,500                                    | )          |
| Payments for long-term debt                                                                           |       | —                                     |       | (384                                       | )          |
| Change in restricted cash                                                                             |       | 679,289                                    |       | —                                     |       |
| Payments for debt issuance costs                                                                      |       | (899                                       | )          | (557,667                                   | )          |
| Payments for distributions                                                                            |       | —                                     |       | (5,567                                     | )          |
| Member contributions                                                                                  |       | —                                     |       | 42,200,000                                 |       |
| Proceeds from construction loan                                                                       |       | 46,934,381                                 |       | —                                     |       |
| Net cash provided by financing activities                                                             |       | 47,612,771                                 |       | 41,622,882                                 |       |
|                                                                                                  |       |                                       |       |                                       |       |
| **Net Increase (Decrease) in Cash and Equivalents**                                                   |       | (324,259                                   | )          | 16,986,528                                 |       |
| **Cash and Equivalents — Beginning of Period**                                                   |       | 4,611,317                                  |       | 1,195,046                                  |       |
| **Cash and Equivalents — End of Period**                                                         |       | $                                          | 4,287,058  |                                       | $          | 18,181,574 |   |
| ** **                                                                                            | ** ** | ** **                                 | ** ** | ** **                                 | ** ** |
| **Supplemental Disclosure of Cash Flow Information**                                                  | ** ** | ** **                                 | ** ** | ** **                                 | ** ** |
| Interest paid, net of capitalized of $2,595,717 and $729,349 at March  31, 2008 and 2007 respectively |       | $                                          | 12,537     |                                       | $          | — |   |
|                                                                                                  |       |                                       |       |                                       |       |
| **Supplemental Disclosure of Noncash Operating,  Investing and Financing Activities**                 | ** ** | ** **                                 | ** ** | ** **                                 | ** ** |
| Deposit applied to land purchase                                                                      |       | $                                          | —     |                                       | $          | 6,000 |   |
| Deferred offering costs offset against equity                                                         |       | $                                          | —     |                                       | $          | 224,996 |   |
| Units issued for line of land and construction                                                        |       | $                                          | 6,000      |                                       | $          | — |   |
| Construction costs included in accounts payable                                                       |       | $                                          | 6,182,314  |                                       | $          | 7,041,792 |   |
| Financing costs included in accounts payable                                                          |       | $                                          | —     |                                       | $          | 159,274 |   |
| Financing costs paid with debt proceeds                                                               |       | $                                          | 17,296     |                                       | $          | — |   |

 

Notes to UnauditedCondensed Financial Statements are an integral part of this Statement.

 

4

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**OTTER TAIL AG ENTERPRISES, LLC**

**NOTESTO FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**NOTE 1.  SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

*Basis of Presentation*

 

The accompanying unaudited condensed interim financial statements havebeen prepared 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 ofmanagement, the interim financial statements reflect all adjustments considerednecessary for fair presentation.  Theadjustments made to these statements consist only of normal recurringadjustments.  The results reported inthese condensed interim financial statements should not be regarded asnecessarily indicative of results that may be expected for the entire year.

 

*Nature of Business*

 

OtterTail Ag Enterprises, LLC, a Minnesota Limited Liability Company (the “Company”),was organized with the intentions of developing, owning and operating anameplate 55 million gallon per year capacity plant producing undenaturedethanol near Fergus Falls, Minnesota (the “Plant”).  On March 31, 2008, the Plant beganoperating activities and ceased being a development stage company. However, theCompany had not fully completed performance testing as per the performanceguarantee.

 

*Revenue Recognition*

 

TheCompany sells ethanol and related products pursuant to marketingagreements.  Revenues from the productionof ethanol and the related products are recorded when the customer (themarketing companies as further discussed in Note 8) has taken title and assumedthe risks and rewards of ownership, prices are fixed or determinable andcollectability is reasonably assured. The Company’s products are sold FOB shipping point.

 

Inaccordance with the Company’s agreements for the marketing and sale of ethanoland related products, marketing fees and commissions due to the marketers arededucted from the gross sales price at the time payment is remitted to the Company.  Marketing fees remitted by the Company arepresented net in revenue.

 

*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 March 31, 2008, the Companywas of the belief that such 

 

5

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amountswould be collectible and thus an allowance was not considered necessary.  It is possible this estimate will change inthe future.

 

*Restricted Cash*

 

TheCompany maintains cash accounts set aside for requirements as part of a capitallease financing agreement. At March 31, 2008 and September 30, 2007,the total of these accounts was approximately $4,100,000 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 the lower of cost or estimated fairvalue.  Depreciation is provided over anestimated useful 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 its estimateduseful 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 recognizedwhen the carrying amount is not recoverable and exceeds fair value.  For the six month periods ended March 31,2008 and 2007, no impairment was recognized on long-lived assets.

 

*CapitalizedInterest*

 

TheCompany’s policy is to capitalize interest cost incurred on debt during theconstruction of major projects exceeding one year as guided by Statement ofFinancial Accounting Standards (“SFAS”) No. 34, *Capitalizationof Interest Cost*.  For thequarter ended March 31, 2008 and the fiscal 

 

6

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yearended September 30, 2007, the Company capitalized interest costs totalingapproximately $1,100,000 and $785,000, respectively.

 

*DerivativeInstruments*

 

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.

 

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.  Prior to operations, changes in the fairvalue of derivatives were recorded 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 a financialinstrument 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 the Company’s financial statements.

 

*Fair Value of Financial Instruments*

 

The carrying value of cash and equivalents,restricted cash, receivables, derivative instruments, and payables approximatestheir 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*

 

The Company’s operations are subject to environmental laws andregulations adopted by various governmental entities in the jurisdiction inwhich it operates.  These laws requirethe Company to investigate and remediate the effects of the release or disposalof materials at its location. Accordingly, the Company has adopted policies, practices and proceduresin the areas of pollution control, occupational health, and the production,handling, storage and use of hazardous materials to prevent materialenvironmental or other damage, and to limit the financial liability, whichcould result from such events. Environmental liabilities are recorded when the liability is probableand the costs can be reasonably estimated. No liabilities were recorded at March 31, 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’ 

 

7

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unit equivalents outstanding during theperiod.  As of March 31, 2008, theCompany had 34,500 unit equivalents outstanding relating to outstanding unitoptions and unvested restricted units. As of March  31, 2007, the Company had14,000 unit equivalents outstanding. At March 31, 2008, the effects of 14,500restricted units are excluded from the computation of diluted units outstandingas their effects would be anti-dilutive, due to the Company’s net loss for theperiod ended March 31, 2008. Additionally, 20,000 unit options wereexcluded from the computation of diluted units outstanding as exercise pricewas equivalent to the Company’s average fair market unit value.

 

**NOTE 2.  INVENTORY**

 

Inventoriesconsist of the following as of March 31, 2008:

 

| Raw materials    |   | $         | 3,026,453 |   |
|------------------|--------|-----------|-----------|--------|
| Work in progress |   | 1,397,453 |      |
| Finished goods   |   | —    |      |
| Spare Parts      |   | 266,576   |      |
|             |   |      |      |
| Total            |   | $         | 4,690,482 |   |

 

**NOTE 3.  DERIVATIVEINSTRUMENTS**

 

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.

 

AtMarch 31, 2008 and September 30, 2007, the Company had recorded anasset for derivative instruments related to corn and natural gas option andfutures positions of approximately $455,000 and $65,000,respectively. None of the positions open at March 31, 2008 aredesignated as cash flow or fair value hedges. The Company has recorded a netloss of approximately $408,000 and gain of approximately $45,000 for thequarter ended March 31, 2008 and the fiscal year ended September 30,2007, respectively, which includes an unrealized loss of approximately $418,000and an unrealized gain of approximately $2,000 for the quarter ended March 31,2008 and the fiscal year ended September 30, 2007 included in cost ofgoods sold and other income, respectively. There were no derivative instrumentsas of March 31, 2007.

 

8

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**NOTE 4.  LONG-TERM DEBT**

 

Long-term debt consists of the following at:

 
| ** **                                   | ** ** | **3/31/2008** | ** ** | **9/30/2007*** | ** ** |
|----------------------------------------------|------------|---------------|------------|----------------|------------|
| Construction and Term  Loan, see terms below |       | $             | 34,403,040 |           | $          | — |   |
|                                         |       |          |       |           |       |
| New Markets Fund II Loan,  see terms below   |       | 19,175,000    |       | 6,626,362      |       |
|                                         |       |          |       |           |       |
| County capital lease,  (Note 5)              |       | 26,010,000    |       | 26,010,000     |       |
|                                         |       |          |       |           |       |
| Total long-term debt                         |       | 79,588,040    |       | 32,636,362     |       |
|                                         |       |          |       |           |       |
| Current maturities                           |       | (1,457,544    | )          | —         |       |
|                                         |       | $             | 78,130,496 |           | $          | 32,636,362 |   |

 

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*Derived from audited financial statements.

 

The promissory notes described below are subject to credit agreementswith various financial and non-financial covenants that limit distributions,require minimum debt service coverage, net worth and working capitalrequirements, and secured by all business assets.

 

*New Market Tax Credit Loan*

 

In March 2007, the Company entered into theagreement with MMCDC New Markets Fund II, LLC (“NMF”) for the amount of$19,175,000. The Company has guaranteed it will be in compliance with theprogram over the tax credit recapture period from September 2007 until September 2014.The NMF loan is divided into two portions: a term loan of $14,480,500 (the “TermLoan”) and subordinated note for $4,694,500 (the “Subordinated Note”). The TermLoan contains a provision in which the Company must make interest only paymentson the sixth 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 accrued interest. The interest rate shall be calculated using theWall Street Journal daily money rate (base rate) plus 1.0%. The balanceoutstanding on this loan totaled approximately $14,500,000 and $5,000,000 on March 31,2008 and September 30, 2007, respectively.

 

The Subordinated Note for $4,694,500 carries afixed interest rate of 2.514%. On the first day of each month following theinitial advance, August 2007, interest only payments will be made until September 2014,when a principal payment of $400,000 is required. The balance outstanding onthis note totaled approximately $4,700,000 and $1,600,000 on March 31,2008 and September 30, 2007, respectively.

 

*Construction and Term Loan*

 

In March 2007,the Company entered into an agreement with a lender for the construction financing.  The finance commitment has two phases: theconstruction loan (the “Construction Loan”), followed by term loan (the “ConstructionTerm Loan”), term revolving note, and a revolving line of credit loan (the “RevolvingLine of Credit Loan”). Conversion to this will occur upon final completion ofthe project, expected to occur on or about June 1, 2008. Subsequent toquarter end, the Company amended the Revolving Line of Credit Loan to beavailable immediately.

 

*Construction Loan*

 

The Company obtained debt financing for the construction of the Plantfrom a lending institution in the form of a term note (the “Term Note”) andrevolving promissory note (the “Term Revolving Note”), as described below.  The Term Note provides for borrowings up to$35,000,000.  The Company will makeinterest payments for both loans during the construction phase at the LIBORplus 3.15%, which totaled 6.315% at March 31, 2008. Interest will be paidquarterly in arrears on the first day of January, April, July and October.At completion of the Plant, the loan will convert into the Construction TermLoan and term revolving loan (the “Construction Term Revolving Loan”). Thebalance outstanding as of March 31, 2008 was approximately$34,400,000.  There was no balanceoutstanding as of September 30, 2007.

 

9

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*Construction Term Loan*

 

Upon satisfactory completion of the Plant a portion of the ConstructionLoan will convert to the Construction Term Loan, totaling $29,000,000. Theinterest rate will be reduced to LIBOR plus 2.95% on the Construction TermLoan. The agreement includes an option to convert a portion of the ConstructionTerm Loan to a fixed rate loan. The Company is required to make interestpayments only on the 1st of day of each month for the first sixmonths followed 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, the Company will make additionalprincipal payments equal to 65% of the Company’s excess cash flow not to exceed$2,000,000 per fiscal year and an aggregate total of $8,000,000.  As part of the financing agreement, thepremium above LIBOR may be reduced to 2.65% based on attaining certainfinancial ratios.

 

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 maximum amount of the Construction Term Loan that will convert tothe Term Revolving Note is $6,000,000. The Company is required to pay intereston the principal advances monthly at the LIBOR rate plus 3.15% which totaled6.315% at March 31, 2008 and 8.37% as of September 30, 2007.  The purpose of this loan is for cash andinventory management purpose.

 

*Revolving Line of Credit Loan*

 

The Company also has a Revolving Line of Credit Loan with the samelending institution for up to $4,000,000. The Company is required to pay interest on the principal advancesmonthly at the LIBOR rate plus 2.95% which totaled 6.115% at March 31,2008 and 8.37% as of September 30, 2007. The purpose of this loan is for general and operating expenses. Thematurity of the Revolving Line of Credit Loan is 364 days from commencement, onthe loan maturity date the principal and any outstanding accrued interest willbe due. The Company pays a commitment fee of 0.35% on the unused portion of therevolving promissory note (the “Revolving Promissory Note”), payable quarterlyin arrears. Subsequent to quarter end, the Company amended the Revolving Lineof Credit Loan. The interest rate was amended to LIBOR plus 2.95% if theCompany’s tangible owner’s equity (defined as tangible net worth plussubordinated debt divided by total assts) is less than or equal to 60% or toLIBOR plus 2.65% if the tangible owner’s equity is greater than 60%. Principaland interest will be due on March 30, 2009, and the unused commitment feewill now be due monthly.

 

The Revolving Promissory Note as well as the Term Note and theRevolving Line of Credit Loan are subject to a master loan agreement withvarious financial and non-financial covenants that limit distributions, requireminimum debt service coverage, net worth and working capital requirements, andsecured by all business assets.

 

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At March 31, 2008, future minimum payments under the loans are asfollows:

 
| 2008       |   | $          | 1,017,500  |   |
|------------|--------|------------|------------|--------|
| 2009       |   | 3,052,600  |       |
| 2010       |   | 3,052,600  |       |
| 2011       |   | 3,052,600  |       |
| 2012       |   | 3,052,600  |       |
| After 2012 |   | 40,350,140 |       |
| Total      |   | $          | 53,578,040 |   |

 

**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 will start making payments on May 25,2008 and on the 25th of each month thereafter. Until May 25, 2008, interestis being paid through the interest reserve fund included in restricted cash.The Capital Lease payments correspond to the interest of 1/6 the amount due onthe Bonds on the next interest payment date. Capital Lease 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. The Company will also make lease payments of principaland interest that correspond to the principal and interest the County will payon the General Obligation Bonds Series 2007B and 2007C beginning February 25,2008.  Until that date, interest paymentswill be financed through an interest reserve recorded as restricted cash. TheCompany will pay Capital Lease payments that correspond to 1/6 the amount ofinterest payable due on the Bonds on the following February 1 or August 1and principal amounts equaling 1/12 of the principal due on the following February 1.The Company has guaranteed that if such assessed lease payments are notsufficient for the required Bond payments, the Company will provide such fundsas are needed to fund the shortfall. The Capital Lease also includes an optionto purchase the equipment at fair market value at the end of the lease term.

 

Asof March 31, 2008 and September 30, 2007, the Company has recordedequipment under the Capital Lease in construction in progress totalingapproximately $20,400,000 and approximately $835,000 in financing costs whichwill be amortized using the effective interest method over the term of theCapital Lease. Restricted funds held by a trustee for lease payments totaledapproximately $4,100,000 at March 31, 2008 and $4,800,000 at September 30,2007.

 

At March 31, 2008, future minimum leasepayments under 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                               |   | 23,784,121 |       |
| 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 |   |

# ** **

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**NOTE 6.EQUIPMENT FINANCING**

 

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%.

 

# **NOTE 7. 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 begins in April 2008; no payments were made on the lease asof March 31, 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.

 

**NOTE8.  COMMITMENTS AND CONTINGENCIES**

 

*Construction Contracts*

 

InOctober 2006, the Company entered into a contract for the design, engineering,procurement and construction services for construction of the Plant with finalcompletion expected to be April 1, 2008 but no later than June 2008.  The total contract price is approximately$86.8 million. The contract also calls for delay damages if the Plant is not “SubstantiallyCompleted”, as determined by the contract, by April 1, 2008.  The Contractor and Company are in discussionrelated to the payment based on this completion date.  The contract may be terminated without causeupon written notice subject to payment to the contract for all work executed,reasonable and documented expenses, fifteen percent profit on the sum of theitems listed above.  If the contract isterminated for cause, the Company may give written notice that it intends toterminate and if the contractor fails to correct the default then the Companymay give a second written notice declaring the agreement terminated fordefault. In addition, the contractor agreed to accept $500,000 in 250,000 Class Aunits at $2.00 per unit in place of cash payment. The Company will hold theright of first refusal for repurchase of these units. Total costs under thisagreement were $86,917,300 and $59,494,800 as of March 31, 2008 and September 30,2007, respectively, with approximately $4,300,000 and $3,000,000 of retainageincluded in construction payables.

 

*Marketing Contracts*

 

InApril 2006, the Company entered into a marketing agreement with anunrelated party for the sale and marketing of all of the ethanol the Companyexpects to produce.  The Company agreesto pay a fixed fee per gallon for each gallon of ethanol sold for certainmarketing costs, which are recorded net in revenues, and storage andtransportation costs, which are recorded in cost of goods sold.  The initial term of the agreement is for 12months beginning on the first day of the month the Company ships ethanol, andwill be automatically extended for an additional 12 months unless either partygives a 90 day advance written notice of termination.

 

InFebruary 2008, the Company entered into a marketing agreement with anunrelated party for the marketing, sale and delivery of all bulk grade drieddistillers grains with solubles (“DDGS”) the Company is expected toproduce.  The Company will receive payment for the products sold based ona percentage of the actual sales price as defined in the

 

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agreement.  Theinitial term is for three years commencing as of the startup of production andwill continue until terminated by either party providing a 90 day advancewritten notice.

 

*NaturalGas and Corn Contracts*

 

Inthe ordinary course of business, the Company enters into forward purchasecontracts for its commodity purchases and sales. At March 31, 2008, theCompany has forward corn purchase contracts to purchase approximately$16,680,000.

 

Currently,the Company has an agreement to purchase a minimum of 2,700 decatherms ofnatural gas transportation per day through May 31, 2011 at market priceplus $0.015 per decatherm of natural gas.

 

**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Weprepared the following discussion and analysis to help you better understandour financial condition, changes in our financial condition, and results of operationsfor the three month period ended March 31, 2008, compared to the sameperiod of the prior fiscal year. This discussion should be read in conjunctionwith our interim condensed financial statements and notes included inItem 1 of Part 1 of this Quarterly Report, and the audited condensedfinancial statements and notes thereto and Management’s Discussion and Analysiscontained in our Registration Statement on Form 10-12G, as amended,originally filed with the Securities and Exchange Commission on January 28,2008.

 

**DISCLOSURE REGARDINGFORWARD-LOOKING STATEMENTS**

 

ThisQuarterly Report contains forward-looking statements within the meaning of Section 21Eof the 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 “Item 2 - Management’s Discussion and Analysis of Financial Conditionand Results of Operations.”

 

Forward-lookingstatements involve risks and uncertainties, which could cause actual results oroutcomes to differ materially from those expressed.  The Company’s expectations, beliefs andprojections are expressed in good faith and are believed by the Company to havea reasonable basis, including without limitation, management’s examination ofhistorical operating trends, data contained in the Company’s records and otherdata available from third parties. Nonetheless, the Company’s expectations,beliefs or projections may not be achieved or accomplished.  Forward-looking statements are subject toknown and unknown risks and uncertainties, including those risks described in “Item 1A- Risk Factors” of our Registration Statement on Form 10-12G as amended,originally filed with the Securities and Exchange Commission on January 28,2008, as updated in Part II, Item 1A of this Quarterly Report.

 

Anyforward-looking statement contained in this document speaks only as of the dateon which the statement is made, and the Company undertakes no obligation toupdate any forward-looking statement or statements to reflect events orcircumstances that occur after the date on which the statement is made or toreflect the occurrence of unanticipated events. New factors emerge from time totime, and it is not possible for management to predict all of the factors, norcan it assess the effect of

 

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eachfactor 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 onJanuary 28, 2008, and include:

 

·                  The availability andadequacy of our cash flow to meet its requirements, including payment of loans;

 

·                  Economic, competitive,demographic, business and other conditions in our local, regional and nationalmarkets;

 

·                  Changes in the availabilityand price of corn;

 

·                  Changes in the environmentalregulations that apply to our Plant operations;

 

·                  The occurrence of certainevents causing an economic impact in the agriculture, oil, or automobilemarkets;

 

·                  Lack of transport, storage,and blending infrastructure preventing ethanol from reaching high demandmarkets;

 

·                  Changes and advances inethanol production technology;

 

·                  Changes in interest rates orthe availability of credit;

 

·                  Our ability to retain keyemployees and maintain labor relations;

 

·                  Changes or developments inlaws, regulations or taxes in the ethanol, agricultural or energy industries;

 

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

 

·                  Competition in the ethanolindustry;

 

·                  The loss of any license orpermit;

 

·                  The loss of our Plant due tocasualty, weather, mechanical failure or any extended or extraordinarymaintenance or inspection that may be required;

 

·                  Changes in our businessstrategy, capital to support capital improvements and development; and

 

·                  Other factors discussedunder the section entitled “RISK FACTORS” or elsewhere in this document

 

*Summary*

 

OtterTail Ag Enterprises, LLC, a Minnesota limited liability company (the “Company,”“Otter Tail,” “we,” “our,” or “us”), owns and operates a nameplate55 million gallon annual production plant of undenatured ethanol in FergusFalls, Minnesota (the “Plant”).

 

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**Liquidityand Capital Resources**

 

*Overview*

 

Asof March 31, 2008, we had total assets of approximately $131,000,000consisting primarily of cash, accounts receivable, inventory, derivative instruments,financing costs and property, Plant, and equipment.  As of March 31, 2008, we had currentliabilities of approximately $10,300,000 consisting primarily of accountspayable, accrued liabilities, and current maturities of long-term debt relatedto the construction of the plant and long-term liabilities of approximately$78,100,000 consisting primarily of bank debt financing and capital leasefinancing for the construction of the Plant.

 

Forthe six months ended March 31, 2008, cash used in operating activities wasapproximately $10,600,000, cash used in investing activities was approximately$37,400,000 and cash provided by financing activities was approximately$47,600,000.

 

Asof March 31, 2008, we had remaining material commitments in the amount ofapproximately $5,100,000 related to our construction agreement with HarrisMechanical Contracting Company (“Harris”). As of March 31, 2008, we had incurred approximately $86,900,000 toHarris and paid approximately $81,800,000 primarily from the proceeds from ourequity financings and bank borrowings. Based on our cash on hand as of the date hereof, including the loanproceeds available to us as described in Note 4 of the Financial Statements, webelieve that we will have adequate cash reserves and available lines of creditto fund operations unless unforeseen events occur.

 

Asof March 31, 2008, we have used all funds remaining from our equityfinancings.  Current and remainingoperating expenses, including all remaining construction costs, will be paidfor with the proceeds from our loan agreements. We anticipate that we have sufficient funds available from our term loanagreements, approximately $35,000,000 at March 31, 2008, and $4,000,000from our line of credit agreement to meet our working capital requirementsunless unforeseen events occur.

 

Thefollowing table shows cash flows for the six month periods ended March 31,2008 and 2007:

 

| ** **                                  | ** ** | **Six Months Ended**    | ** ** | **Six Months Ended**    | ** ** |
|---------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                  | ** ** | **March 31, 2008** | ** ** | **March 31, 2007** | ** ** |
| ** **                                  | ** ** | **(Unaudited)**         | ** ** | **(Unaudited)**         | ** ** |
| **Cash Flows from Operating Activities**    |       | (10,577,224             | )          | 801,679                 |       |
| **Cash Flows used in Investing Activities** |       | (37,359,806             | )          | (25,438,033             | )          |
| **Cash Flows from Financing Activities**    |       | 47,612,771              |       | 41,622,882              |       |

 

***Cash Flow From Operations***

 

Thenet cash flow received for operating activities in six months ended March 31,2008 decreased approximately $11,000,000 over that for the six months ended March 31,2007.  The decreased receipts during thesix months ended March 31, 2008 were primarily due to the Plant becomingoperational very late in the quarter, on March 31, 2008, with cashsubsequently being generated through ethanol and by-product sales.  As of March 31, 2008 our capital needsare being adequately met through cash from our operating activities and ourcurrent credit facilities.

 

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***Cash Flow From Investing Activities***

 

Cashused for investing activities increased by approximately $10,600,000 for thesix months ended March 31, 2008 compared to the six months ended March 31,2007, primarily because we were completing the final phases of our Plantconstruction.  We used cash provided bythe debt financing for capital expenditures, primarily for costs related toPlant construction and for equipment purchases.

 

***Cash Flow From Financing Activities***

 

Sinceour inception, we have generated significant cash inflows from bank financingarrangements and member equity contributions. Proceeds for the six months ended March 31, 2008 from our bankfinancing arrangements increased by approximately $6,000,000 compared to thebank proceeds from the six months ended March 31, 2007.  This is primarily due to the necessity offinancing for the final phases of Plant construction.

 

***Results of Operations for the Three and Six Months Ended March 31,2008 and March 31, 2007***

 

**Resultsof Operations**

 

***Revenues***

 

Theincrease in revenues from the quarter and six months ended March 31, 2008compared to the quarter and six months ended March 31, 2007 is due to thePlant becoming operational in March 2008. Prior to March 2008, theCompany was in the developmental stage.

 

***Cost of Sales***

 

Our cost of goods soldas a percentage of revenues is 676% for both the three and six months ended March 31,2008.  We had no cost of goods sold forquarter and six months ended March 31, 2007, as we began producing ethanolduring March 2008.  The high costsof goods sold relative to revenues is a function of our Plant becomingoperational towards the end of our second fiscal quarter.

 

***Operating Expenses***

 

Ouroperating expenses were approximately $574,000 and $1,019,000 for the quarterand six months ended March 31, 2008. Compared to the three and six month periods ended March 31, 2007, ouroperating expenses increased by approximately $368,000 or 345%, and $420,000,or 84%, respectively.  These increasesare primarily due to the Plant becoming operational as of March 2008 aswell as professional and consulting fees. For the six months ended March 31, 2008, our material operatingexpenses were: 1) approximately $730,000 related to general andadministrative expenses; and 2) approximately $286,000 related toprofessional fees. Some major factors impacting professional fees for the sixmonths ended March 31, 2008 were IT support and legal and audit fees forSecurities and Exchange Commission (“SEC”) filings. In the six months ended March 31,2007, our material operating expenses were: 1) approximately $222,000related to general and administrative expenses; and 2) approximately$277,000 for professional fees.

 

**CapitalResources**

 

***Short-term Debt Sources***

 

We have a revolving promissory note with AgstarFinancial Services, PCA (“Agstar”) for up to $4,000,000.  We are requiredto pay interest on the principal advances monthly at the LIBOR rate plus 2.95%,which totaled 6.115% at March 31, 2008.  The purpose of this loan isfor general and operating expenses.  The maturity of this line of creditis 364 days from commencement; on the loan maturity 

 

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date,the principal and any outstanding accrued interest will be due.  We pay acommitment fee of 0.35% on the unused portion of the revolving promissorynote.  As of March 31, 2008 and September 30, 2007, no amountshad been advanced on the loan.

 

***Long-Term Debt Sources***

 

We have entered into two loan agreements and onecapital lease agreement for financing of the Plant.  The total loancommitment is $58,000,000 and the capital lease is $26,010,000, and both aredescribed further below.

 

We have entered into a senior debt financingagreement for a construction loan of $35,000,000 from Agstar, which includes aterm and revolving loan (collectively, the “Construction Loan”).  We willmake interest payments for the Construction Loan during the construction phaseat LIBOR plus 3.15%, which totaled 6.315% at March 31, 2008.  We willpay interest quarterly in arrears on the first day of January, April, July andOctober.  At completion of the project, the loan will convert to a termloan and term revolving loan.

 

Upon completion of the project, up to 50% of the ConstructionLoan will convert 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 convertto a fixed rate loan.  We are required to make interest payments only onthe 1st day of each month for the first six months followed by 114 principalinstallments of $254,386 plus accrued interest beginning six months followingsubstantial completion, payable in full in June 2018.  In addition tothe scheduled payments, we  will be requiredto make additional principal payments equal to 65% of our excess cash flow notto exceed $2,000,000 per fiscal year and an aggregate total of$8,000,000.  As part of the financing agreement, the premium above LIBORmay be reduced to 2.65% based on financial ratios.  Commitment fees willbe charged at the time of conversion from the Construction Loan to the TermLoan and will be charged annually thereafter.

 

The maximum amount of the Construction Loan that canbe converted to the term revolving loan is $6,000,000 (the “Revolving Loan”). We are required to pay interest on the principal advances monthly at the LIBORrate plus 3.15% which totaled 6.315% at March 31, 2008 and 8.37% at September 30,2007.  The purpose of the Revolving Loan is for cash and inventorymanagement purpose.  We pay a commitment fee of 0.35% on the unusedportion of the revolving promissory note.

 

***Capital Lease***

 

In April 2007, we entered into a long termequipment lease agreement (the “Equipment Lease Agreement”) with Otter TailCounty, Fergus Falls, Minnesota (the “County”) in order to finance equipmentfor the Plant (the “Capital Lease”).  The Equipment Lease Agreement has aterm from May 1, 2007 through November 2019. The County financed thepurchase of equipment through Subordinate Exempt Facility Revenue Bonds Series 2007Atotaling $20,000,000, General Obligation Tax Abatement Bonds Series 2007Btotaling $5,245,000, and Taxable General Obligation Tax Abatement Bonds Series 2007Ctotaling $765,000 (collectively, the “Bonds”).

 

Under the Equipment Lease Agreement with the County,we will start making payments on May 25, 2008 and on the 25thof each month, thereafter.  Until May 25,2008, interest is being paid through the interest reserve fund included inrestricted cash. The payments correspond to the interest of 1/6 the amount dueon the Bonds on the next interest payment date. Payments for principal start onNovember 25, 2009 in an amount equal to 1/6 principal scheduled to becomedue on the corresponding Bonds on the next semi-annual principal payment date.We will also make Capital Lease payments of principal and interest thatcorrespond to the principal and interest the County will

 

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payon the General Obligation Bonds Series 2007B and 2007C beginning February 25,2008.  Until that date interest paymentswill be financed through an interest reserve recorded as restricted cash. Wewill pay Capital Lease payments that correspond to 1/6 the amount of interestpayable due on the Bonds on the following February 1 or August 1 andprincipal amounts equaling 1/12 of the principal due on the following February 1.  We have guaranteed that if such assessedlease payments are not sufficient for the required Bond payments, we willprovide such funds as are needed to fund the shortfall.  The Capital Leasealso includes an option to purchase the equipment at fair market value at theend of the lease term.

 

As of March 31, 2008 and September 30,2007, we have recorded equipment under the Capital Lease in construction inprogress totaling approximately $20,400,000 and approximately $835,000 infinancing costs, which will be amortized using the effective interest methodover the term of the Capital Lease.  Restricted funds held by a trusteefor Capital Lease payments totaled approximately $4,100,000 at March 31,2008 and $4,779,200 at September 30, 2007.

 

On March 30, 2007, we entered into a loanarrangement with NMF for the amount of $19,175,000 (the “NMF Loan”).  Thetax credit period of the NMF Loan is from September 2007 to September 2014. The NMF Loan is divided into two portions including a term loan of $14,480,500,which we shall make interest only payments on beginning the 6th day of thefirst month following the initial advancement until the 85th month.  Onthe 6th day of the 85th month and continuing for an additional 48 months weshall pay the amortized unpaid principal together with the accruedinterest.  The interest rate shall be calculated using the Wall StreetJournal daily money rate (base rate) plus 100 basis points.  In additionthere is a subordinated loan note for $4,694,500 which will carry an interestrate of 2.514%.  On the 1st day of each month following the initialadvance, which occurred in August 2007, we will make interest onlypayments until September 2014 when we will make a principal payment of$400,000.

 

**Contractual Obligations and Commercial Commitments**

 

We have the followingcontractual obligations as of March 31, 2008:

 
| ** **                       | ** ** | **Payments Due By Period** | ** **  |
|----------------------------------|------------|-------------------------------------------|-------------|
| **Contractual Obligations** | ** ** | **Total**                                 | ** **  | **Less than  1 year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **More than  5 Years** | ** ** |
| Long-Term Debt Obligations       |       | $                                         | 53,578,038  |   | $ | 1,017,544 |   | $ | 6,105,264 |   | $ | 6,105,263 |   | $ | 40,349,967 |   |
| Capital Lease                    |       | 26,010,000                                |        | 440,000 |   | 2,935,000 |   | 3,940,000 |   | 18,695,000 |   |
| Operating Leases                 |       | 1,547,215                                 |        | 519,011 |   | 1,020,406 |   | 7,798 |   | — |   |
| Interest (1)                     |       | 42,353,648                                |        | 5,110,722 |   | 11,183,147 |   | 9,839,505 |   | 16,220,273 |   |
| Purchasing Obligations (2)  |       | 57,579,623                                |        | 34,469,663 |   | 21,652,830 |   | 1,457,130 |   | — |   |
|                             |       |                                      |        |   |   |   |   |   |   |   |   |
| **Total**                        |       | $                                         | 181,068,524 |   | $ | 41,556,940 |   | $ | 42,896,647 |   | $ | 21,349,696 |   | $ | 75,265,240 |   |

 

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(1)  Interest is estimated at the current market rates - 7.81% and stated rates onBonds related to Capital Lease.

(2)  Purchase obligations include obligations related to our marketing agreements,natural gas, corn and ethanol agreements, and consulting agreements.

 

**Grants**

 

On October 1, 2007, we received a Value-AddedProducer Grant from the United States Department of Agriculture in the amountof $300,000.  The funding period of the grant began on that date and willconclude no later than December 31, 2008.  The grant funds were usedonly for Plant operation start-up costs and development of local wet distillersgrains markets.

 

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**Critical Accounting Estimates**

 

Ourmost critical accounting policies, which are those that require significantjudgment, include valuation of derivative instruments and inventory. Anin-depth description of these can be found in our Registration Statement on Form 10-12G,as amended, originally filed with the SEC on January 28, 2008. Management hasnot changed the method of calculating and using estimates and assumptions inpreparing our condensed financial statements in accordance with generallyaccepted accounting principles.  Therehave been no changes in the policies for our accounting estimates for thequarter ended March 31, 2008.

 

**Off-Balance Sheet Arrangements**

 

Wehave not entered into any off-balance sheet arrangements that have or arereasonably likely to have a current or future effect on our financialcondition, revenues or expenses, results of operations, liquidity, capitalexpenditures or capital resources that are material to investors.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

 

We are exposed to the impact of market fluctuationsassociated with commodity prices and interest rates as discussed below. We have no exposure to foreign currency risk, as all of our business isconducted in United States Dollars.  We use derivative financialinstruments as part of an overall strategy to manage market risk.  We usecash, futures and option contracts to hedge changes to the commodity prices ofcorn and ethanol. We do not enter into these derivative financial instrumentsfor trading or speculative purposes, nor do we designate these contracts ashedges for accounting purposes pursuant to the requirements of Statement ofFinancial Accounting Standards No. 133, *Accountingfor Derivative Instruments and Hedging Activities*.

 

**Interest Rate Risk**

 

We expect to be exposed to market risk from changesin interest rates on our existing debt facilities.  Exposure to interestrate risk results from holding our credit agreements.

 

We expect to use debt to finance a significantamount of our expenditures in 2008.  These agreements will expose us tomarket risk related to changes in interest rates.

 

**Commodity Price Risk**

 

We are exposed to market risk from changes incommodity prices.  Exposure to commodity price risk results from ourdependence on corn and natural gas in the ethanol production process, and ourreliance on sales of ethanol.  We seek to minimize the risks fromfluctuations in the prices of corn and ethanol through the use of derivativeinstruments.  In practice, as markets move, we actively manage our riskand adjust hedging strategies as appropriate.  Although we believe ourhedge positions accomplish an economic hedge against our future purchases, theyare not designated as such for hedge accounting purposes, which would match thegain or loss on our hedge positions to the specific commodity purchase beinghedged.  We are marking to market our hedge positions, which means as thecurrent market price of our hedge positions changes, the gains and losses areimmediately recognized in our cost of goods sold.

 

The immediate recognition of hedging gains andlosses can cause net income to be volatile from quarter to quarter due to thetiming of the change in value of the derivative instruments relative to thecost and use of the commodity being hedged.  At March 31, 2008, thefair value of our derivative instruments for corn and ethanol is an asset inthe amount of $454,633.  At March 31, 2007, we held 

 

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noderivative instruments for corn or ethanol derivative instruments.  Thereare several variables that could affect the extent to which our derivativeinstruments are impacted by price fluctuations in the cost of corn orethanol.  However, it is likely that commodity cash prices will have thegreatest impact on the derivative instruments with delivery dates nearest thecurrent cash price.

 

We estimate that our expected corn usage will beapproximately 19.5 million bushels per year for the production of 55 milliongallons of undenatured ethanol.  We have price protection in place for a portionof our expected corn usage through December 2008 using forward contracts,Chicago Board of Trade futures and options, and over-the-counter optioncontracts.  As we move forward, additional protection may benecessary.  As corn prices move in reaction to market trends andinformation, our income statement will be affected depending on the impact suchmarket movements have on the value of our derivative instruments.  As wemove 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.

 

A sensitivity analysis has been prepared to estimate our exposure tocorn, gasoline and natural gas price risk. The table presents the net fairvalue of our derivative instruments as of March 31, 2008, September 30,2007 and March 31, 2007 and the potential loss in fair value resulting from ahypothetical 10% adverse change in such prices. The fair value of the positionsis a summation of the fair values calculated by valuing each net position atquoted market prices as of the applicable date. The results of this analysis,which may differ from actual results, are as follows:

 

| ** **          | ** ** | **Fair Value** | ** ** | **Effect of  Hypothetical  Adverse Change —  Market Risk** | ** ** |
|---------------------|------------|---------------------|------------|-------------------------------------------------------------------------------------|------------|
| March 31, 2008 |       | $                   | 454,633    |                                                                                | $          | (45,463 | ) |
| September 30, 2007  |       | $                   | 64,895     |                                                                                | $          | (6,490 | ) |
| March 31, 2007 |       | $                   | —     |                                                                                | $          | — |   |

 

**Liability Risk**

 

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

·                  Property —$50,000 deductible;

·                  Generalliability — No deductible;

·                  Automobile — Nodeductible;

·                  Worker’scompensation — No deductible;

·                  Directors andofficers — $10,000 deductible;

·                  Crime — $5,000deductible;

·                  Environmental —$50,000 deductible; and

·                  Umbrella —$10,000 SIR.

 

Our premiums to Willis are structured such that wehave made a prepaid collateral deposit of estimated losses related to the abovecoverage.

 

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**ITEM 4. CONTROLS AND PROCEDURES**

 

***Evaluation of Disclosure Controls andProcedures***

 

OurChief Executive Officer and Chief Financial Officer, after evaluating theeffectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) underthe Securities Exchange Act of 1934, as amended), as of March 31, 2008(the “Evaluation Date”), have concluded that our disclosure controls andprocedures are effective in ensuring that material information required to bedisclosed is included in the reports that we file with the Securities andExchange Commission.

 

***Changes in Internal Controls***

 

Therehave been no changes in our internal control over financial reporting thatoccurred during the fiscal quarter ended March 31, 2008, that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

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**PART II — OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

None.

 

**ITEM 1A. RISK FACTORS**

 

Inaddition to the other information set forth in this report, including theimportant information under the heading “Disclosure Regarding Forward-LookingStatements,” you should carefully consider the “Risk Factors” discussed in ourRegistration Statement on Form 10-12G, as amended, originally filed withSEC on January 28, 2008. “Risk Factors” are conditions that may causeinvestment in our Company to be speculative or risky.  We are not currently aware of factors otherthan those set forth in our Registration Statement on Form 10-12G, asamended, 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 ANDUSE OF PROCEEDS**

 

None.

 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

None.

 

**ITEM 5. OTHER INFORMATION**

 

None.

 

**ITEM 6. EXHIBITS**

 

SeeExhibit Index following the signature page of this report.

 

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**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: May 20, 2008 | By:                        | /s/ Kelly Longtin |
|                    |                            | Kelly Longtin |
|                    |                            | Chief Executive Officer |

 

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**EXHIBIT INDEX**

 

**OTTERTAIL AG ENTERPRISES, LLCFORM 10-Q FOR THE QUARTER ENDED MARCH 31, 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.                                              |

 

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*     Filed herewith.

 

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