UNITED
STATES 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
THE QUARTERLY PERIOD ENDED JUNE 30, 2010





            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934




FOR
THE TRANSITION PERIOD FROM
           TO




COMMISSION
FILE NUMBER: 000-53042




OTTER
TAIL AG ENTERPRISES, LLC


(Exact
name of registrant as specified in its charter)





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




24096
- 170th Avenue


Fergus Falls, MN
56537-7518


(Address
of principal executive offices)


(218)
998-4301


(Registrant’s
telephone number, including area code)




Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.


Yes 
x No 





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


Yes  No





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filter or a smaller reporting company. See
the definition of “large accelerated filer, accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.


Large
      accelerated filer  
            Accelerated
      filer  
            Non-accelerated
      filer  
            Smaller
      Reporting Company  x(Do
      not check if a Smaller Reporting Company)




Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).


 Yes
x No




As of
August 11, 2010, the Company has outstanding 23,944,000 Class A Membership
Units.










OTTER
TAIL AG ENTERPRISES, LLC


FORM 10-Q
QUARTERLY REPORT FOR THE QUARTER ENDED


JUNE 30,
2010




TABLE OF
CONTENTS






PagePART I – FINANCIAL INFORMATION
            2Item 1.  Condensed Financial Statements
      (Unaudited)
            2Condensed Balance Sheets
            2Condensed Statements of Operations
            3Condensed Statements of Cash Flows
            5Condensed Notes to Unaudited Financial
    Statements
            6Item 2.  Management’s Discussion and Analysis of
      Financial Condition and Results of Operations
            18Disclosure Regarding Forward-Looking
      Statements
            18Item 3.  Quantitative and Qualitative Disclosures
      About Market Risk
            25Item 4.  Controls and Procedures
            25PART II – OTHER INFORMATION
            25Item 1.  Legal Proceedings
            25Item 1A.  Risk Factors
            26Item 2.  Unregistered Sales of Equity Securities
      and Use of Proceeds
            26Item 3.  Defaults Upon Senior
      Securities
            26Item 4.  (Removed and Reserved)
            26Item 5.  Other Information
            26Item 6.  Exhibits
            26SIGNATURES
            27Exhibit Index
            28Section 302
      CertificationSection 906
      Certification


i




PART I —
FINANCIAL INFORMATION


Item 1. —CONDENSED FINANCIAL STATEMENTS
(Unaudited)




OTTER TAIL AG
ENTERPRISES, LLC


(Debtor
in Possession)


CONDENSED
BALANCE SHEETS





June
      30, 2010
            
            
            September 30,
      2009(Unaudited)ASSETSCurrent
      AssetsCash
      and equivalents
            
            $
            7,171,661
            
            
            $
            4,058,000Restricted
      cash
            
            
            2,151,117
            
            
            
            2,790,971Accounts
      receivable
            
            
            2,623,322
            
            
            
            2,829,033Inventory
            
            
            3,244,299
            
            
            
            3,827,702Prepaid
      expenses and other
            
            
            868,439
            
            
            
            400,902Total
      current assets
            
            
            16,058,838
            
            
            
            13,906,608Property
      and EquipmentLand
      and land improvements
            
            
            4,388,517
            
            
            
            4,388,517Buildings
            
            
            941,836
            
            
            
            941,836Office
      equipment
            
            
            141,203
            
            
            
            141,203Plant
      and process equipment
            
            
            96,511,879
            
            
            
            96,499,794101,983,435
            
            
            
            101,971,350Less
      accumulated depreciation
            
            
            (15,544,686
            )
            
            
            (10,724,936
            )Net
      property and equipment
            
            
            86,438,749
            
            
            
            91,246,414Other
      Asset
            
            
            150,459
            
            
            
            ---Total
      Assets
            
            $
            102,648,046
            
            
            $
            105,153,022LIABILITIES AND
      MEMBERS’ EQUITYLiabilities
      Not Subject to Compromise Current Liabilities:Accounts
      payable
            
            
            430,660
            
            
            
            646,809Accrued
      Liabilities
            
            
            85,697
            
            
            
            182,086Current
      liabilities not subject to compromise
            
            
            516,357
            
            
            
            828,895Liabilities Subject to
      Compromise:Operating
      line of credit
            
            $
            4,365,003
            
            
            $
            6,000,000Accounts
      payable
            
            
            42,866
            
            
            
            ---Construction
      payable- related party
            
            
            254,564
            
            
            
            254,564Accrued
      interest
            
            
            4,040,104
            
            
            
            2,976,949Current
      maturities of long-term debt
            
            
            76,940,593
            
            
            
            80,113,970Total
      Liabilities Subject to Compromise
            
            
            85,643,130
            
            
            
            89,345,483Total
      current liabilities
            
            
            86,159,487
            
            
            
            90,174,378Commitments
      and ContingenciesMembers’
      Equity, 23,944,000 units outstandingMembers’
      equity
            
            
            45,239,972
            
            
            
            45,237,798Accumulated
      deficit
            
            
            (28,751,413
            )
            
            
            (30,259,154
            )Total
      Members’ Equity
            
            
            16,488,559
            
            
            
            14,978,644Total
      Liabilities and Members’ Equity
            
            $
            102,648,046
            
            
            $
            105,153,022




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




2




OTTER TAIL AG ENTERPRISES, LLC


(Debtor
in Possession)


CONDENSED
STATEMENTS OF OPERATIONS





Three
      Months Ended
            
            
            Three
      Months EndedJune
      30, 2010
            
            
            June
      30, 2009(Unaudited)
            
            
            (Unaudited)Revenues
            
            $
            22,896,826
            
            
            $
            24,046,092Cost
      of sales
            
            
            21,742,307
            
            
            
            24,849,792Impairment
      of plant and process equipment
            
            
            ---
            
            
            
            12,500,000Gross
      profit (loss)
            
            
            1,154,519
            
            
            
            (13,303,700
            )Professional
      fees
            
            
            67,140
            
            
            
            218,434General
      and administrative
            
            
            440,023
            
            
            
            331,503Total
      operating expenses
            
            
            507,163
            
            
            
            549,937Earnings
      (loss) before reorganization items
            
            
            647,356
            
            
            
            (13,853,637
            )Reorganization
      itemsProfessional
      fees
            
            
            360,157
            
            
            
            ---Other
      income (expense)Interest
      expense
            
            
            (1,149,104
            )
            
            
            (1,130,989
            )Interest
      income
            
            
            9,266
            
            
            
            5,820Total
      other expenses, net
            
            
            (1,139,838
            )
            
            
            (1,125,169
            )Net
      Loss
            
            $
            (852,639
            )
            
            $
            (14,788,806
            )Weighted
      Average Units Outstanding – Basic & Diluted
            
            
            23,944,000
            
            
            
            23,944,000Net
      Loss Per Unit – Basic– Basic & Diluted
            
            $
            (0.04
            )
            
            $
            (0.63
            )




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




3




OTTER
TAIL AG ENTERPRISES, LLC


(Debtor
in Possession)


CONDENSED
STATEMENTS OF OPERATIONS





Nine
      Months Ended
            
            
            Nine
      Months EndedJune
      30, 2010
            
            
            June
      30, 2009(Unaudited)
            
            
            (Unaudited)Revenues
            
            $
            76,492,620
            
            
            $
            72,276,413Cost
      of sales
            
            
            69,206,054
            
            
            
            75,121,443Impairment
      of plant and process equipment
            
            
            ---
            
            
            
            12,500,000Lower
      of cost or market adjustment
            
            
            ---
            
            
            
            168,422Gross
      profit (loss)
            
            
            7,286,566
            
            
            
            (15,513,452
            )Professional
      fees
            
            
            309,055
            
            
            
            583,515General
      and administrative
            
            
            1,228,170
            
            
            
            1,090,818Total
      operating expenses
            
            
            1,537,225
            
            
            
            1,674,333Earnings
      (loss) before reorganization items
            
            
            5,749,341
            
            
            
            (17,187,785
            )Reorganization
      itemsProfessional
      fees
            
            
            826,600
            
            
            
            ---Other
      income (expense)Interest
      expense
            
            
            (3,437,126
            )
            
            
            (3,337,653
            )Impairment
      on financing costs
            
            
            ---
            
            
            
            (1,496,476
            )Interest
      income
            
            
            22,126
            
            
            
            23,524Total
      other expenses, net
            
            
            (3,415,000
            )
            
            
            (4,810,605
            )Net
      Income (Loss)
            
            $
            1,507,741
            
            
            $
            (21,998,390
            )Weighted
      Average Units Outstanding – Basic & Diluted
            
            
            23,942,494
            
            
            
            23,939,131Net
      Income (Loss) Per Unit – Basic & Diluted
            
            $
            0.06
            
            
            $
            (0.92
            )




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




4




OTTER TAIL AG ENTERPRISES, LLC


(Debtor
in Possession)


CONDENSED
STATEMENTS OF CASH FLOWS





Nine
      Months Ended
              June
      30, 2010
            
            
            Nine
      Months Ended
              June
      30, 2009(Unaudited)
            
            
            (Unaudited)Cash
      Flows from Operating ActivitiesNet
      income (loss)
            
            $
            1,507,741
            
            
            $
            (21,998,390
            )Adjustments
      to reconcile net loss to net cash used in operations:Depreciation
            
            
            4,819,750
            
            
            
            5,455,898Amortization
      of debt financing costs
            
            
            ---
            
            
            
            59,796Impairment
      of debt financing costs
            
            
            ---
            
            
            
            1,496,476Impairment
      of plant and process equipment
            
            
            ---
            
            
            
            12,500,000Lower
      of cost or market adjustment
            
            
            ---
            
            
            
            168,422Other
      income
            
            
            (150,459
            )Unit-based
      compensation
            
            
            2,174
            
            
            
            2,250Change
      in assets and liabilities:Accounts
      receivable
            
            
            205,711
            
            
            
            (641,970
            )Inventory
            
            
            583,403
            
            
            
            1,884,692Prepaid
      expenses and other
            
            
            (467,537
            )
            
            
            (121,374
            )Accounts
      payable
            
            
            (173,283
            )
            
            
            11,284Accrued
      purchase commitments
            
            
            ---
            
            
            
            (3,599,998
            )Accrued
      interest and other
            
            
            966,766
            
            
            
            1,018,301Net
      cash provided by (used in) operating activities
            
            
            7,294,266
            
            
            
            (3,764,613
            )Cash
      Flows from Investing ActivitiesCapital
      expenditures
            
            
            (12,085
            )
            
            
            (26,339
            )Net
      cash used in investing activities
            
            
            (12,085
            )
            
            
            (26,339
            )Cash
      Flows from Financing ActivitiesPayments
      for long-term debt
            
            
            (3,173,377
            )
            
            
            (216,470
            )Change
      in restricted cash
            
            
            639,854
            
            
            
            1,257,501Proceeds
      from line of credit
            
            
            ---
            
            
            
            1,965,651Prepayments
      on pre-petition secured line of credit
            
            
            (1,634,997
            )
            
            
            ---Net
      cash provided by (used in) financing activities
            
            
            (4,168,520
            )
            
            
            3,006,682Net
      Increase (Decrease) in Cash and Equivalents
            
            
            3,113,661
            
            
            
            (784,270
            )Cash
      and Equivalents — Beginning of Period
            
            
            4,058,000
            
            
            
            1,138,768Cash
      and Equivalents — End of Period
            
            $
            7,171,661
            
            
            $
            354,498Supplemental
      Disclosure of Cash Flow InformationInterest
      paid
            
            $
            2,373,971
            
            
            $
            1,568,750Supplemental
      Disclosure of Noncash Operating, Investing and Financing
      ActivitiesConstruction
      costs included in accounts payable
            
            $
            254,564
            
            
            $
            254,564




Notes to
Unaudited Condensed Financial Statements are an integral part of this
Statement





5




OTTER TAIL AG ENTERPRISES, LLC


(Debtor
in Possession)


Condensed
Notes to Unaudited Financial Statements


June
30, 2010 and 2009






NOTE
1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Basis of
Presentation





The
accompanying unaudited condensed interim financials have been prepared pursuant
to the rules and regulations of the Securities and Exchange
Commission.  Certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted as permitted by such rules and
regulations.  These financial statements and related notes should be
read in conjunction with the financial statements and notes thereto included in
the Company’s audited financial statements for the year ended September 30,
2009, contained in the Company’s Annual Report on Form 10-K, as amended,
originally filed with the Securities and Exchange Commission on December 31,
2009.





In the
opinion of management, the interim financial statements reflect all adjustments
considered necessary for fair presentation.  The adjustments made to
these statements consist only of normal recurring adjustments.  The
results reported in these condensed interim financial statements should not be
regarded as necessarily indicative of results that may be expected for the
entire year.





In
accordance with accounting principles generally accepted in the United States,
we have applied authoritative guidance on Financial Reporting by Entities in
Reorganization under the Bankruptcy Code, in preparing the condensed
financial statements.  This guidance requires that the financial
statements, for periods subsequent to the Chapter 11 filing, distinguish
transactions and events that are directly associated with the reorganization
from the ongoing operations of the business.  Accordingly, certain
expenses (including professional fees), realized gains and losses, and
provisions for losses that are realized or incurred in the bankruptcy
proceedings are recorded in reorganization items on the accompanying condensed
statements of operations. In addition, pre-petition obligations that may be
impacted by the bankruptcy reorganization process have been classified on the
condensed balance sheet at June 30, 2010 in “liabilities subject to
compromise.”  These liabilities are reported at the amounts expected
to be allowed by the United States Bankruptcy Court for the District of
Minnesota (the “Bankruptcy Court”), even if they may be settled for less. As of
June 30, 2010, no adjustments have been made to the liabilities subject to
compromise due to the status of the bankruptcy case. As a result of the
bankruptcy filing under Chapter 11 (the “Bankruptcy Filing”), realization of
assets and liquidation of liabilities are subject to uncertainty. While
operating as a debtor-in-possession (“DIP”) under the protection of Chapter 11,
and subject to Bankruptcy Court approval or otherwise as permitted in the normal
course of business, the Company may sell or otherwise dispose of assets and
liquidate or settle liabilities for amounts other than those reflected in the
condensed financial statements.  Further, a plan of reorganization
could materially change the amounts and classifications reported in our
condensed financial statements.  Our historical financial statements
do not give effect to any adjustments to the carrying value of assets or amounts
of liabilities that might be necessary as a consequence of confirmation of a
plan of reorganization.





Nature of
Business





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





Accounting
Estimates





Management
uses estimates and assumptions in preparing these consolidated financial
statements in accordance with generally accepted accounting principles in the
United States of America.  Those estimates and assumptions affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities, and the reported revenues and expenses.  The Company
uses estimates and assumptions in accounting for the following significant
matters, among others:  liabilities subject to compromise and
realization of the assets due to the bankruptcy filing, economic lives of
property, plant, and equipment; valuation of inventory; and assumptions used in
the analysis of long-lived assets impairment.  Actual results may
differ from previously estimated amounts, and such differences may be material
to the financial statements.  The Company periodically reviews
estimates and assumptions, and the effects of any such revisions are reflected
in the period in which the revision is made.





6
 
 OTTER
TAIL AG ENTERPRISES, LLC
 (Debtor
in Possession)
 Condensed
Notes to Unaudited Financial Statements
 June
30, 2010 and 2009


Revenue
Recognition





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





In
accordance with the Company’s agreements for the marketing and sale of ethanol
and related products, marketing fees due to the marketers are deducted from the
gross sales price at the time payment is remitted to the
Company.  Marketing fees remitted by the Company are presented net in
revenue.  Marketing fees were approximately $136,000 for the three
months ended June 30, 2010 and approximately $129,000 for the three months ended
June 30, 2009, respectively. Marketing fees were approximately $409,000 for the
nine months ended June 30, 2010 and approximately $394,000 for the nine month
period ended June 30, 2009.





Accounts
Receivable





Credit
terms are extended to customers in the normal course of business.  The
Company performs ongoing credit evaluations of its customers’ financial
condition and, generally, requires no collateral.





Accounts
receivable are recorded at their estimated net realizable
value.  Accounts are considered past due if payment is not made on a
timely basis in accordance with the Company’s credit terms.  Accounts
considered uncollectible are written off.  The Company’s estimate of
the allowance for doubtful accounts is based on historical experience, its
evaluation of the current status of receivables, and unusual circumstances, if
any.  At June 30, 2010, the Company was of the belief that such
amounts would be collectible and thus an allowance was not considered
necessary.  It is possible this estimate will change in the
future.





Restricted Cash and Debt
Service Reserve





The
Company maintains cash accounts set aside for requirements as part of the
capital lease financing agreement.  At June 30, 2010 and September 30,
2009, the total of these accounts was approximately $2,200,000 and $2,800,000,
respectively.





Inventories





Inventories
consist of raw materials, work in process, finished goods and spare
parts.  Corn is the primary raw material and along with other raw
materials, is stated at the lower of average cost or market.  Finished
goods consist of ethanol, dried distiller grains, and modified wet distiller
grains and are stated at the lower of cost or market on a first-in, first-out
basis.





Property and
Equipment





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





7
 
 OTTER
TAIL AG ENTERPRISES, LLC
 (Debtor
in Possession)
 Condensed
Notes to Unaudited Financial Statements
 June
30, 2010 and 2009


Land
      improvements
            15-20    yearsBuildings
            10-40    yearsOffice
      equipment
            5     yearsPlant
      and process equipment
            10-20    years





Long-lived
Assets




Depreciation
and amortization of our property, plant and equipment is applied on the
straight-line method by charges to operations at rates based upon the expected
useful lives of individual or groups of assets placed in service. Economic
circumstances or other factors may cause management’s estimates of expected
useful lives to differ from the actual useful lives. Differences between
estimated lives and actual lives may be significant, but management does not
expect events that occur during the normal operation of our Plant related to
estimated useful lives to have a significant effect on results of
operations.




Long-lived
assets, including property, plant, equipment and investments, are evaluated for
impairment on the basis of undiscounted cash flows whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. An impaired asset is written down to its estimated fair market
value based on the best information available. Considerable management judgment
is necessary to estimate future cash flows and may differ from actual cash
flows. Management recorded an impairment of $12.5 million at June 30, 2009 based
on their assessment of the risks and rewards related to the ownership of these
assets and the expected cash flows generated from the operation of the
Plant.  Management assesses the need for plant impairment on a
quarterly basis depending on events or changes in circumstances that indicate
the carrying amount of an asset may not be recoverable.  The most
recent assessment was carried out for the quarter ending June 30, 2010 and no
impairment was recorded for the quarter ending June 30, 2010. Future impairment
analysis will depend on the Company generating positive cash flow from
operations of the plant and successful reorganization under Chapter 11
bankruptcy.





Fair Value of Financial
Instruments




The
carrying value of cash and equivalents, restricted cash, receivables, accounts
payable and other working capital items approximate fair value, due to the short
term nature of these instruments.





Senior
debt consisting of a term loan of approximately $31,656,000 and a revolving line
of credit of approximately $4,365,000 that bear a variable interest rate that
fluctuates with the market and therefore approximates fair value combined with a
New Markets Tax Credit Loan of $19,175,000. The Company has subordinated debt
consisting of an Otter Tail County (the “County”) capital lease of $26,010,000
that bear a fixed interest rate.  Due to the current defaults under
the senior and subordinate loan agreements and the Company’s bankruptcy
proceedings, at the present time, the Company is unable to enter into
replacement debt and therefore is unable to determine a fair value of the fixed
rate subordinate debt.





Environmental
Liabilities





The
Company’s operations are subject to environmental laws and regulations adopted
by various governmental entities in the jurisdiction in which it
operates.  These laws require the Company to investigate and remediate
the effects of the release or disposal of materials at its
location.  Accordingly, the Company has adopted policies, practices,
and procedures in the areas of pollution control, occupational health, and the
production, handling, storage, and use of hazardous materials to prevent
material environmental or other damage, and to limit the financial liability,
which could result from such events.  Environmental liabilities are
recorded when the liability is probable and the costs can be reasonably
estimated.  No liabilities were recorded at June 30, 2010 or
2009.





8
 
 OTTER
TAIL AG ENTERPRISES, LLC
 (Debtor
in Possession)
 Condensed
Notes to Unaudited Financial Statements
 June
30, 2010 and 2009


Net Income (Loss) per
Unit





Basic net
income (loss) per unit is computed by dividing net income by the weighted
average number of members’ units outstanding during the
period.  Diluted net income (loss) per unit is computed by dividing
net income by the weighted average number of members’ units and members’ unit
equivalents outstanding during the period.  As of June 30, 2009, the
Company had 12,600 unit equivalents outstanding. At June 30, 2009, the effects
of 12,600 restricted units are excluded from the computation of diluted units
outstanding as their effects would be anti-dilutive, due to the Company’s net
loss for the period ended June 30, 2009.





NOTE
2. CHAPTER 11 BANKRUPTCY PROCEEDINGS




On
October 30, 2009 (the “Petition Date”), the Company filed a voluntary petition
for relief (collectively, the “Bankruptcy Filing”) under Chapter 11 of Title 11
of the United States Code (the “Bankruptcy Code”) with the United States
Bankruptcy Court for the District of Minnesota, Case number
09-61250.  The Company’s negotiated Chapter 11 bankruptcy filing, In
re:  Otter Tail Ag Enterprises, LLC, was done with the approval of the
Company’s senior lenders.  Under Chapter 11, certain claims in
existence prior to the filing of the petition for relief under the Bankruptcy
Code are stayed while the Company continues business operations as a
debtor-in-possession, or DIP.




The
Company is currently operating as “debtor in possession” (DIP) under the
jurisdiction of the Bankruptcy Court and in accordance with the applicable
provisions of the Bankruptcy Code and orders of the Bankruptcy Court. In
general, as DIP, the Company is authorized under the Bankruptcy Code to continue
to operate as an ongoing business but may not engage in transactions outside of
the ordinary course of business without the approval of the Bankruptcy
Court.





At a
hearing held on November 4, 2009, the Bankruptcy Court granted the Company’s
“First Day Motions.”  The relief granted by the Bankruptcy Court
through the First Day Motions was designed to stabilize the Company’s operations
and business relationships with vendors, lenders, employees, and others,
minimize the effects of the commencement of the Bankruptcy Filing, and preserve
the value of the Company’s assets.  The First Day Motions allowed,
among other things, the payment of vendors and other providers in the ordinary
course for goods and services ordered pre-petition but received on or after the
Petition Date and other business-related payments necessary to maintain the
operation of the Company’s businesses.  The First Day Motions also
included the payment of pre-petition employee wages, salaries, and
benefits.  The Company has retained, with Bankruptcy Court approval, legal
and financial professionals to advise the Company on the bankruptcy proceedings
and certain other “ordinary course” professionals.  From time to time, the
Company may seek Bankruptcy Court approval for the retention of additional
professionals.





On
November 20, 2009, certain of the Company’s lenders (the “DIP Lenders”) entered
into a Cash Collateral Agreement allowing the DIP the use of cash available to
the Company to operate and maintain the business.  The Cash Collateral
Agreement provides, subject to certain conditions as described in the agreement
that cash is available to, among other things:  (i) fund the working
capital and general corporate needs of the Company and the costs of the
Bankruptcy Filing in accordance with an approved budget and (ii) provide
adequate protection, in accordance with the terms of the Cash Collateral
Agreement, to the pre-petition agent and pre-petition lenders under the
Company’s existing credit facilities.  The Cash Collateral Agreement
provides that the revolving line of credit will bear interest at the standard
rates applicable in the line of credit agreement (See Note 6).





In order
to successfully exit Chapter 11, the Company will need to obtain confirmation by
the Bankruptcy Court of a plan of reorganization that satisfies the requirements
of the Bankruptcy Code (the “Chapter 11 Plan”).  A Chapter 11 Plan
could, among other things, resolve the Company’s pre-petition obligations, set
forth the revised capital structure of the newly reorganized entity, and provide
for corporate governance subsequent to exit from bankruptcy.  As provided
in the Bankruptcy Code, the Company has the exclusive right for 120 days after
the Petition Date to file a Chapter 11 Plan and 60 additional days to solicit
and obtain necessary acceptances.  Such periods may be extended by the
Bankruptcy Court for cause up to 18 months and 20 months, respectively, after
the Petition Date.  If the Company’s exclusivity period lapses, any party
in interest may file a Chapter 11 Plan for the Company.  The
exclusivity period ended on April 22, 2010; however, the Company filed its
initial Chapter 11 Plan on February 25, 2010.





9
 
 OTTER
TAIL AG ENTERPRISES, LLC
 (Debtor
in Possession)
 Condensed
Notes to Unaudited Financial Statements
 June
30, 2010 and 2009


The
interested parties revised the Chapter 11 Plan to incorporate the agreed upon
terms, in order to file with the Court on or before June 9, 2010. A Second
Amended Chapter 11 Plan was filed on June 11, 2010 and was subsequently approved
by the Bankruptcy Court on June 14, 2010.  On a parallel track, we
revised and updated the equity offering prospectus to include the terms of the
tentative agreement and filed the prospectus with the Minnesota State Department
of Commerce, in order that the Company may engage in the equity raise, as
required by the Chapter 11 Plan.  The documents were declared
effective on June 23, 2010 when the Company commenced holding investor meetings
to solicit investment in new equity.  The Company currently has
approximately $8.5 million in commitments from potential investors.





Although
the Company has filed a Chapter 11 Plan that provides for emergence from Chapter
11 bankruptcy, there can be no assurance that the Chapter 11 Plan will be
confirmed by the Bankruptcy Court or that any such plan will be
consummated.  In order to successfully emerge from bankruptcy, the Company
will need to, among other things, obtain approval from their senior lenders for
restructuring their debt and obtain additional equity of $12,000,000 to meet
requirements as outlined in the Cash Collateral Agreement.  The
Bankruptcy Court has scheduled the Company’s Chapter 11 Plan confirmation
hearing for August 18, 2010.





Under
Section 365 of the Bankruptcy Code, the Company may assume, assume and assign,
or reject executor contracts and unexpired leases, including real property,
railcars, and equipment leases subject to the approval of the Bankruptcy Court
and certain other conditions.  Rejection constitutes a
court-authorized breach of the lease or contract in question and, subject to
certain exceptions, relieves the Company of future obligations under such lease
or contract, but creates a pre-petition claim for damages caused by such breach
or rejection, subject to the Company’s right to review and contest such claim.
Parties whose contracts or leases are rejected may file claims against the
Company for damages.  Generally, the assumption of an executory
contract or unexpired lease requires the Company to cure all prior defaults
under such executor contract or unexpired lease, including all arrearages, and
to provide adequate assurance of future performance.  In this regard,
the Company’s financial statements include amounts classified as “liabilities
subject to compromise” that the Company believes that the Bankruptcy Court will
allow as claim amounts as a result of the Company’s rejection of various
executory contracts and unexpired leases.  Additional amounts may be
included in “pre-petition liabilities subject to compromise” in future periods
if additional executory contracts and unexpired leases are rejected. Conversely,
the Company would expect that the assumption of certain executory contracts and
unexpired leases may convert certain liabilities shown in future financial
statements as subject to compromise to post-petition liabilities.  Due
to the uncertain nature of many of the potential claims, the Company is unable
to project the magnitude of such claims with any degree of
certainty.





Chapter
11 of the Bankruptcy Code provides that unless the terms of section 1129(b) of
the Bankruptcy Code are satisfied, for a bankruptcy court to confirm a Chapter
11 Plan as a consensual plan, the holders of impaired claims against a debtor in
each class of impaired claims must accept such plan by the requisite majorities
set forth in the Bankruptcy Code.  An impaired class of claims shall
have accepted a Chapter 11 Plan if:  (a) the holders of at least
two-thirds in amount of the claims in such class actually voting on a plan have
voted to accept it; and (b) more than one-half in number of the holders in such
class actually voting on the plan have voted to accept it.  Pursuant
to the provisions of the Bankruptcy Code, only holders of allowed claims or
equity interests in classes of claims or equity interests that are impaired and
that are not deemed to have rejected a Chapter 11 Plan are entitled to vote to
accept or reject such proposed plan.  Generally, a claim or interest
is impaired under a plan if the holder’s legal, equitable, or contractual rights
are altered under such plan.  Classes of claims or equity interests
under a Chapter 11 Plan in which the holders of claims or equity interests are
unimpaired are deemed to have accepted such plan and are not entitled to vote to
accept or reject the proposed plan.  In addition, classes of claims or
equity interests in which the holders of claims or equity interests will not
receive or retain any property on account of their claims or equity interests
are deemed to have rejected the plan and are not entitled to vote to accept or
reject the plan. Under circumstances specified in the so-called “cramdown”
provisions of Section 1129(b) of the Bankruptcy Code, the Bankruptcy Court may
confirm a plan even if such plan has not been accepted by all impaired
classes.  The precise requirements and evidentiary showing for
confirming a Chapter 11 Plan notwithstanding its rejection by one or more
impaired classes of claims or equity interests depends upon a number of factors,
including the status and seniority of the claims or equity interests, in the
rejecting class — i.e., secured claims or unsecured claims, subordinated or
senior claims, or common stock.





10
 
 OTTER
TAIL AG ENTERPRISES, LLC
 (Debtor
in Possession)
 Condensed
Notes to Unaudited Financial Statements
 June
30, 2010 and 2009


Under the
priority scheme established by the Bankruptcy Code, unless creditors agree
otherwise, post-petition liabilities and pre-petition liabilities must be
satisfied in full before unit holders of the Company are entitled to receive any
distribution or retain any property under a plan of
reorganization.  The ultimate recovery, if any, to creditors and unit
holders of the Company will not be determined until confirmation and
consummation of a Chapter 11 Plan.  No assurance can be given as
to what values, if any, will be ascribed in the Bankruptcy Case to each of these
constituencies or what types or amounts of distributions, if any, they would
receive.  Accordingly, the Company urges that appropriate caution be
exercised with respect to existing and future investments in any of the
Company’s member units or any of the Company’s liabilities.





The
Company has incurred and will continue to incur significant costs associated
with the reorganization.  The amount of these costs, which are being
expensed as incurred, are expected to significantly affect the Company’s results
of operations.





NOTE
3. GOING CONCERN





The
ability of the Company to continue as a going concern is dependent upon, among
other things:  (i) the Company’s ability to comply with the terms and
conditions of the Cash Collateral Agreement, including raising $12 million in
additional equity; (ii) the ability of the Company to maintain adequate cash on
hand; (iii) the ability of the Company to generate cash from operations;
(iv) the ability of the Company to consummate a Chapter 11 Plan under the
Bankruptcy Code; (v) the cost and outcome of the reorganization process; and
(vi) the Company’s ability to achieve profitability. Uncertainty as to the
outcome of these factors raises substantial doubt about the Company’s ability to
continue as a going concern.  The Company is currently evaluating
various courses of action to address the issues the Company is facing. There can
be no assurance that any of these efforts will be successful.





These
factors raise substantial doubt about the Company’s ability to continue as a
going concern.  The accompanying financial statements have been
prepared assuming that the Company will continue as a going concern, except as
described below related to the Company filing Chapter 11
bankruptcy.





The
potential adverse publicity associated with the Bankruptcy Filing and the
resulting uncertainty regarding the Company’s future prospects may hinder the
Company’s ongoing business activities and its ability to operate, fund, and
execute its business plan by impairing relations with existing and potential
customers; negatively impact the ability of the Company to attract, retain, and
compensate key executives and employees and to retain employees generally; limit
the Company’s ability to obtain trade credit; and impair present and future
relationships with vendors and service providers.





NOTE
4.  NEW EQUITY OFFERING





In June
2010, the Company filed a Minnesota registered offering for a maximum of 24
million Class B and C units at a cost of $0.50 per unit.  This
offering is limited to residents of the state of Minnesota.  The
subscriber was required to purchase a minimum of 12,500 units
($6,250).  The offering will expire one year from the effective date
of the offering.  The offering was declared effective June 23,
2010.  The Company is in the process of soliciting investments based
upon the disclosure statement and re-organization plan as approved by the Courts
on June 14, 2010.  The Company currently has approximately $8.5
million in commitments from potential investors.





11
 
 OTTER
TAIL AG ENTERPRISES, LLC
 (Debtor
in Possession)
 Condensed
Notes to Unaudited Financial Statements
 June
30, 2010 and 2009


NOTE
5. INVENTORY





Inventories
consist of the following:




June
      30, 2010 (unaudited)
            
            
            September
      30, 2009*Raw
      materials
            
            $
            1,399,616
            
            
            $
            1,896,519Work
      in progress
            
            
            1,014,533
            
            
            
            1,017,363Finished
      goods
            
            
            449,306
            
            
            
            520,059Spare
      parts
            
            
            380,844
            
            
            
            393,761Total
            
            $
            3,244,299
            
            
            $
            3,827,702




* Derived
from audited financial statements





The
Company obtained approximately 100% of its corn purchases from one supplier in
the three month periods ended June 30, 2010 and 2009.  The Company has
a formal supply agreement, (see NOTE 8, Marketing and Procurement Contracts for
further information on the contract).





Each day
the Company fixes the price of corn it needs to maintain operations, converting
its basis contracts into fixed price contracts using the Chicago Board of Trade
price of the day.  At June 30, 2010, the Company has fixed purchase
contracts to purchase approximately 118,000 bushels costing approximately
$382,000.





The
Company has adopted a risk management strategy that reflects working in present
day market values, securing corn on a “basis” program, and pricing daily once it
takes possession, this philosophy aligns the procurement of corn with the sale
of ethanol; corn is estimated to be approximately 80% of the Company’s
production costs while ethanol is approximately 85% of revenue.





The
Company currently holds approximately 3,657,000 bushels of corn under contract
in this manner at a rate of $0.35 per bushel basis through February
2011.





NOTE
6.  BANK FINANCING





Short-term
debt consists of the following at:


June
      30, 2010
              (unaudited)
            
            
            September
      30, 2009*Construction
      and Term Loan, see terms below
            
            $
            31,656,137
            
            
            $
            34,806,137New
      Markets Tax Credit Loan, see terms below
            
            
            19,175,000
            
            
            
            19,175,000County
      capital lease, (Note 7)
            
            
            26,010,000
            
            
            
            26,010,000Equipment
      financing
            
            
            99,456
            
            
            
            122,833Total
      short-term debt
            
            $
            76,940,593
            
            
            $
            80,113,970Revolving
      line of credit, see terms below
            
            $
            4,365,003
            
            
            $
            6,000,000





* Derived
from audited financial statements





The loans
described below are subject to credit agreements with various financial and
non-financial covenants that limit distributions, require minimum debt service
coverage, net worth and working capital requirements, and secured by all
business assets.





12
 
 OTTER
TAIL AG ENTERPRISES, LLC
 (Debtor
in Possession)
 Condensed
Notes to Unaudited Financial Statements
 June
30, 2010 and 2009


On March
20, 2009, the Company entered into a Forbearance Agreement with the Senior
Lender which requires that the Senior Lender not pursue certain remedies
available to them until April 30, 2009, which was the end of the Forbearance
Period.  The terms of the Forbearance Agreement requires the Company
to pay the current principal amounts due as well as all accrued interest at the
end of the Forbearance Period.  At that time, if unable to pay the
amounts due after the Forbearance Period as required under the Forbearance
Agreement, the Senior Lender may:  (1) declare a default under the
loans; and (2) consent to remedial action taken by subordinate lenders and may
provide notice of default and/or acceleration.





On June
3, 2009, the Company received a notice letter from its senior lender stating the
Company is in default of its loan agreement and that the Company is in default
under its subordinate lender agreements.  Under the terms of the
notice letter, the Company had to cure all defaults prior to June 15, 2009 or
the entire amount due under the agreements would become
accelerated.  The Company failed to make these payments under the
notice by June 15, 2009.





On July
21, 2009, the Company’s senior lender declared the principal and interest
balance under the Construction Term Note, Term Revolving Note, and Revolving
Line of Credit Loan immediately due and payable.





On August
31, 2009, the Company received a summons and complaint from their senior lender
and MMCDC New Markets Fund II, LLC (“NMF”) for its defaults on the loan
agreements to begin foreclosure proceedings.





The
original terms of the various loans are discussed below.





New Market Tax Credit
Loan





In March
2007, the Company entered into the agreement with NMF for the amount of
$19,175,000.  The Company has guaranteed it will be in compliance with
the program 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 “Term Loan”) and
subordinated note for $4,694,500 (the “Subordinated Note”).  The Term
Loan contains a provision in which the Company must make interest-only payments
on the 6th day of the first month following the initial advancement, August 2007
until the 85th month. On the sixth day of the 85th month and continuing for an
additional 48 months, the Company shall pay the amortized unpaid principal
together with the accrued interest.  The interest rate shall be
calculated using the Wall
Street Journal daily money rate (base rate) plus 1.0%.





The
Subordinated Note for $4,694,500 carries a fixed interest rate of
2.51%.  On the first day of each month following the initial advance
in August 2007, interest-only payments will be made until September 2014 when a
principal payment of $400,000 is required.





As of
June 30, 2010 the Company is being charged a default interest rate of 5.00% on
the term loan and 4.51% on the subordinated note along with late charges for
non-payment.  The Company has recommenced interest only payments on
this loan as part of the terms of the Cash Collateral Agreement.





Construction Term
Loan





Upon
satisfactory completion of the Plant, a portion of the Construction Loan
converted to a Construction Term Loan totaling $29,000,000.  The
interest rate charged is LIBOR plus 2.95% which totaled 3.30% as of June 30,
2010 and 3.23% as of September 30, 2009, respectively, on the Construction Term
Loan.  The agreement includes an option to convert a portion of the
Construction Term Loan to a fixed rate loan.  The Company is required
to make interest payments only on the first day of each month for the first six
months followed by 114 principal installments of $254,386 plus accrued interest
beginning six months following substantial completion payable in full in June
2018.  In addition to the scheduled payments, the Company will make
additional principal 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, the premium above
LIBOR may be reduced to 2.65% based on attaining certain financial
ratios.  The Company has recommenced interest only payments on this
loan as part of the terms of the Cash Collateral Agreement.





13
 
 OTTER
TAIL AG ENTERPRISES, LLC
 (Debtor
in Possession)
 Condensed
Notes to Unaudited Financial Statements
 June
30, 2010 and 2009


The
financing agreement requires an annual servicing fee of $20,000.  The
Company is initially permitted to make distributions up to 40% of net
income.  The Company may make distributions which exceed 40% of net
income as long as the Company has made the required excess cash flow payments
and maintained the required financial covenants.  The financing
agreement contains certain prepayment fees in the first three years of the
scheduled payments.  The Company is also required to obtain and
maintain financial ratios on an annual basis.





Construction Term Revolving
Note





The
amount of the Construction Term Revolving Note that converted to the Term
Revolving Note is $6,000,000. The Company is required to pay interest on the
principal advances monthly at the LIBOR rate plus 2.95% which totaled 3.30% at
June 30, 2010 and 3.23% as of September 30, 2009.  The purpose of this
loan was for cash and inventory management.  The Company has
recommenced interest only payments on this loan as part of the terms of the Cash
Collateral Agreement.





Revolving Line of Credit
Loan





The
Company also has a Revolving Line of Credit loan with the same lending
institution for up to $6,000,000.  The Company is required to pay
interest on the principal advances monthly at the LIBOR rate plus 2.95% which
totaled 3.30% at June 30, 2010 and 3.23% as of September 30,
2009.  The purpose of this loan is for general and operating
expenses.  The maturity of the Revolving Line of Credit loan is 364
days from commencement; on the loan maturity date, the principal and any
outstanding accrued interest will be due.  The Company pays a
commitment fee of 0.35% on the unused portion of the revolving promissory note
(the “Revolving Promissory Note”) payable quarterly in arrears.  The
interest rate is equal to LIBOR plus 2.95% if the Company’s tangible owner’s
equity (defined as tangible net worth plus subordinated debt divided by total
assets) is less than or equal to 60% or to LIBOR plus 2.65% if the tangible
owner’s equity is greater than 60%.  As of June 30, 2010,
approximately $4,365,000 was advanced against the line of credit.  The
Company has made two one time principal payments and commenced interest only
payments on this loan as part of the terms of the Cash Collateral
Agreement.





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





Exit
Financing





On
February 1, 2010, the Company entered into term sheets for exit financing with
the Senior Lender and NMF.  The exit financing term sheet with the
Senior Lender modifies the Construction Term Loan and Construction Term
Revolving Note, combining them into one term note, in the amount of $35,000,000
which will mature on June 1, 2013.  Additionally, the exit financing
term sheet modifies the Revolving Line of Credit Loan to a 364 day revolving
credit facility in an amount not to exceed the lesser of 75% of eligible
accounts receivable and inventory or $4,000,000 and will mature 364 days
following the effective date of the plan.




Interest
on the term and revolving loans will bear interest at a fixed rate of 6.5%
through May 31, 2013, however the rate is subject to changes in the three-year
U.S. Treasury bond rate between the date of the term sheet and the effective
date of the plan.  The term note will be payable in a special
principal payment of $3,150,000 on the first day of the calendar month following
the effective date of the plan and the balance of the note in equal monthly
installments of principal and interest over a period of ten
years.  All current default interest will be deferred until June 1,
2013.  The loans will be secured by a first priority perfected
security interest in all of the Company’s assets.




The exit
term sheets of the NMF loan reaffirm all of the terms of the original
agreements, except for it provides for the deferral of default interest until
the present maturity dates as provided in the original agreements.




14
 
 OTTER
TAIL AG ENTERPRISES, LLC
 (Debtor
in Possession)
 Condensed
Notes to Unaudited Financial Statements
 June
30, 2010 and 2009


These
term sheets are contingent upon certain requirements, such as a confirmation
order confirming the plan, payments of certain accrued regular interest,
establishment of a debt reserve account equivalent to six months interest and
obtaining subscription agreements of up to $12,000,000.





Equipment
Financing





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





NOTE
7.  LEASES





Capital
Lease





In April
2007, the Company entered into a long term equipment lease agreement with Otter
Tail County, Fergus Falls, Minnesota (the “County”) in order to finance
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 equipment through 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 2007C totaling $765,000 (collectively the “Bonds”).





Under the
Capital Lease with the County, the Company started making payments on May 25,
2008 and on the 25th of each
month thereafter.  Until May 25, 2008, interest was 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 on the bonds on
the next interest payment date. Capital Lease payments for principal started on
November 25, 2009 in an amount equal to 1/6 principal scheduled to become due on
the corresponding bonds on the next semi-annual principal payment
date.  The Company must also make lease payments of principal and
interest that correspond to the principal and interest the County must pay on
the General Obligation Bonds Series 2007B and 2007C beginning February 25,
2008.  Until that date, interest payments were financed through an
interest reserve recorded as restricted cash.  The Company must pay
Capital Lease payments that correspond to 1/6 the amount of interest payable due
on the bonds on the following February 1 or August 1 and 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 not sufficient
for the required Bond payments, the Company will provide such funds as are
needed to fund the shortfall.  The Capital Lease also includes an
option to purchase the equipment at fair market value at the end of the lease
term.





The
Company failed to make basic payments on the Capital Lease as of December 31,
2008, which caused the Company to default on the Capital
Lease.  Accordingly, the Capital Lease has been reclassified to
current maturities of long-term debt.





Operating
Leases





In
February 2008, the Company entered into an operating lease agreement for 70
railroad cars for a minimum period of 36 months.  The lease agreement
shall continue for successive one month terms until terminated by either party
providing 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 term of this lease began in April
2008.





15


OTTER
TAIL AG ENTERPRISES, LLC
 (Debtor
in Possession)
 Condensed
Notes to Unaudited Financial Statements
 June
30, 2010 and 2009


NOTE
8.  COMMITMENTS AND CONTINGENCIES





Marketing and Procurement
Contracts





In
February 2008, the Company entered into a marketing agreement with an unrelated
party for the marketing, sale, and delivery of all bulk grade Dried Distillers
Grains with Solubles the Company is expected to produce.  The Company will
receive payment for the products sold based on a percentage of the actual sales
price as defined in the agreement.  The initial term is for three years
commencing as of the start-up of production and will continue until terminated
by either party providing 90 day advance written notice.





In
February 2007, the Company entered into a procurement agreement with an
unrelated party for the purchase of corn.  The term of this agreement
shall be for five years followed by an automatic renewal term of one year unless
terminated by either party giving 90 days advance written notice.  A
procurement fee shall be paid on a per bushel basis during the term of the
contract.  The contract also provides for additional third-party
storage in the local surrounding area for a minimum of two turns per
year.  In January 2009, this contract was amended changing the
procurement fee structure.





In July
2006, the Company entered into a marketing agreement for the sale and marketing
of all the ethanol the Company expects to produce.  The Company agrees
to pay a fixed fee per gallon of ethanol sold for certain marketing, storage,
and transportation costs, which will be included in cost of goods
sold.  The initial term of the agreement shall be for 12 months
beginning the first day of the month the Company ships ethanol and will be
automatically extended for an additional 12 months unless either party gives 90
days advance written notice of termination.





In
January 2008, the Company entered into a marketing agreement with an unrelated
party to purchase wet distillers grains and solubles the Company is expected to
produce.  The agreement commences on completion and start-up of
operations of the plant and continues for two years.  The agreement
will remain in effect thereafter unless 90 days advance written notice is
provided by either party.





Natural
Gas





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





Management
Agreements





In May
2006, the Company entered into an agreement with an unrelated party to manage
the Company’s supply of natural gas.  The term of the agreement
continues through April 30, 2011, and shall continue on a year to year basis
thereafter until terminated by either party giving 60 days written advance
notice.  The Company also executed a sale and purchase agreement with
the unrelated party for natural gas.  Either party may terminate the
agreement by providing a 30 day advance written notice.  The Company
is also required to hold a cash collateral account with the supplier as a form
of deposit in the amount of $975,000.





NOTE
9. FAIR VALUE





The
Company uses a fair value hierarchy that has three levels of inputs, both
observable and unobservable, with use of the lowest possible level of input to
determine fair value. Fair value is defined as the price that would be received
to sell an asset or pay to transfer a liability in an orderly transaction
between market participants at the measurement date in the principal or most
advantageous market.  Level 1 inputs include quoted market prices in
an active market or the price of an identical asset or
liability.  Level 2 inputs are market data, other than Level 1, that
are observable either directly or indirectly.  Level 2 inputs include
quoted market prices for similar assets or liabilities, quoted market prices in
an inactive market, and other observable information that can be corroborated by
market data.  Level 3 inputs are unobservable and corroborated by
little or no market data.  The Company uses valuation techniques in a
consistent manner from year to year.





16
 
 OTTER
TAIL AG ENTERPRISES, LLC
 (Debtor
in Possession)
 Condensed
Notes to Unaudited Financial Statements
 June
30, 2010 and 2009


The
following table provides information on those assets and liabilities that are
measured at fair value on a recurring basis:





June
      30, 2010Fair
      Value Carrying Amount in the Balance Sheet
            
            
            Fair
      Value Measurement UsingLevel
      1
            
            
            Level
      2
            
            
            Level
      3AssetsMoney
      market funds (included in restricted cash)
            
            $
            1,176,117
            
            
            $
            1,176,117
            
            
            $
            -
            
            
            $
            -




The fair
value of the money market funds is based on quoted market prices in an active
market.





NOTE
10. LONG-LIVED ASSETS





In 2008,
the Company completed construction of its ethanol production facilities with
installed capacity of 55 million gallons per year.  In accordance
with the Company’s policy for evaluating impairment of long-lived assets,
management has evaluated the facilities for possible impairment based on
projected future cash flows from operations of these
facilities.  Management has determined that the undiscounted cash
flows from operations of these facilities over their estimated useful lives do
not exceed their carrying values, and therefore, impairment has been recognized
totaling approximately $12,500,000 as of June 30, 2009.  In
determining future undiscounted cash flows, the Company has made significant
assumptions concerning the future viability of the ethanol industry, the future
price of corn in relation to the future price of ethanol, and the overall demand
in relation to production and supply capacity.  Due to these
significant assumptions, the Company has determined that the impairment charge
is a significant estimate.  Given the recent completion of the
facilities in 2008, replacement cost would likely approximate the carrying value
of approximately $86,000,000 of the facilities at June 30, 2010. However, there
have been recent transactions between independent parties to purchase plants at
prices substantially below the carrying value of the facilities.  Some
of the facilities have been in bankruptcy and may not be representative of
transactions outside of bankruptcy.  Given these circumstances, should
management be required to adjust the carrying value of the facilities to fair
value at some future point in time, the adjustment could be significant and
could significantly impact the Company’s financial position and results of
operation.  No adjustment has been made in these financial statements
for this uncertainty.





17





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





We
prepared the following discussion and analysis to help you better understand our
financial condition, changes in our financial condition, and results of
operations for the three and nine month periods ended June 30, 2010 compared to
the same period of the prior fiscal year.  This discussion should be
read in conjunction with our interim condensed financial statements and notes
included in Item 1 of Part I of this Quarterly Report, and the audited condensed
financial statements and notes thereto, and Management’s Discussion and Analysis
contained in our Annual Report on Form 10-K for the fiscal year ended September
30, 2009.





DISCLOSURE
REGARDING FORWARD-LOOKING STATEMENTS





This
Quarterly Report contains forward-looking statements within the meaning of
Section 21E of the Exchange Act. Forward-looking statements are all statements
other than statements of historical fact, including without limitation, those
statements that 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 statements concerning plans, objectives, goals, strategies, future
events or performance, and underlying assumptions (many of which are based, in
turn, upon further assumptions) and other statements that are other than
statements of historical facts.  From time to time, the Company may
publish or otherwise make available forward-looking statements of this nature,
including statements contained within “Item 2 – Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”





Forward-looking
statements involve risks and uncertainties, which could cause actual results or
outcomes to differ materially from those expressed.  The Company’s
expectations, beliefs, and projections are expressed in good faith and are
believed by the Company to have a reasonable basis, including without
limitation, management’s examination of historical operating trends, data
contained in the Company’s records, and other data available from third
parties.  Nonetheless, the Company’s expectations, beliefs, or
projections may not be achieved or accomplished.  Forward-looking
statements are subject to known and unknown risks and uncertainties, including
those risks described in “Item 1A – Risk Factors” of our Annual Report on Form
10-K for the fiscal year ended September 30, 2009, as updated in Part II, Item
1A of this Quarterly Report.





Any
forward-looking statement contained in this document speaks only as of the date
on which the statement is made, and the Company undertakes no obligation to
update any forward-looking statement or statements to reflect events or
circumstances that occur after the date on which the statement is made or to
reflect the occurrence of unanticipated events.  New factors emerge
from time to time, and it is not possible for management to predict all of the
factors, nor can it assess the effect of each factor on the Company’s business
or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking
statement.  All forward-looking statements, whether written or oral
and whether made by or on behalf of the Company, are expressly qualified by the
risk factors and cautionary statements in this Quarterly Report, including
statements contained within “Part II, Item 1A – Risk Factors,” and in the
Company’s Annual Report on Form 10-K for the fiscal year ended September 30,
2009, and include the following:





·
            
            our
      ability to successfully emerge from the Chapter 11 bankruptcy process and
      continue normal business
operations;




·
            
            our
      ability to comply in the future with covenants under our debt financing
      agreements with senior lenders;





·
            
            the
      availability and adequacy of our cash flow to meet our requirements,
      including payment of loans;·
            
            economic,
      competitive, demographic, business, and other conditions in our local,
      regional, and national markets;




18


·
            
            changes
      in the availability and price of corn;·
            
            changes
      in the availability and price of natural gas;·
            
            changes
      in the environmental regulations that apply to our Plant
      operations;·
            
            the
      occurrence of certain events causing an economic impact in the
      agriculture, oil, or automobile markets;·
            
            lack
      of transport, storage, and blending infrastructure preventing ethanol from
      reaching high demand markets;·
            
            changes
      and advances in ethanol and other renewable fuels production
      technology;·
            
            changes
      in interest rates or the availability of credit and limitations and
      restrictions contained in the instruments and agreements governing our
      indebtedness;·
            
            the
      results of our hedging transactions and other risk mitigation
      strategies;·
            
            our
      ability to retain key employees and maintain labor
    relations;·
            
            our
      ability to develop diverse revenue streams;·
            
            our
      ability to implement additional financial and management controls,
      reporting systems and procedures, and comply with Section 404 of the
      Sarbanes-Oxley Act, as amended;·
            
            changes
      or developments in laws, regulations, tariffs, or taxes in the ethanol,
      agricultural, or energy industries;·
            
            competition
      in the ethanol industry and excess capacity in the
    industry;·
            
            litigation
      against us or any third party suppliers;·
            
            the
      loss of any license or permit;·
            
            the
      lack of a public market for our membership units and restrictions on unit
      transfer;·
            
            the
      loss of our Plant due to casualty, weather, mechanical failure, or any
      extended or extraordinary maintenance or inspection that may be required;
      and·
            
            changes
      in our business strategy, capital to support capital improvements and
      development.





Summary





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





19


Liquidity
and Capital Resources





Overview





As of
June 30, 2010, we had total assets of approximately $102,600,000 consisting of
primarily cash and cash equivalents, accounts receivable, inventory, property,
plant, and equipment.  As of June 30, 2010, we had current liabilities
of approximately $86,200,000 consisting primarily of accounts payable, line of
credit, and outstanding debt.  All of our long-term debt, consisting
of approximately $76,900,000 of bank debt financing and capital lease financing
for the construction of the Plant, has been reclassified as current maturities
of long-term debt because we were in default as of February 1, 2009 on our
capital lease with Otter Tail County, Fergus Falls, Minnesota (the “County”) for
failure to make basic payments (defined as payments equal to the aggregate
amount of principal and interest outstanding on the bonds issued by the County
in conjunction with the capital lease), and we have failed to make interest
payments specifically on the Subordinate Exempt Facility Revenue Bonds Series
2007A bonds since December 31, 2008.  We have also failed to make
certain interest payments on the MMCDC New Markets Fund II, LLC (“NMF”) Tax
Credit Loans.  In addition, as of February 15, 2009, we were in
default under our Master Loan Agreement with AgStar Financial Services, P.C.A.
(“AgStar”) for failure to pay principal and interest due.  Under the
terms of our respective agreements with AgStar, NMF, and the County, the lenders
may exercise any or all default remedies against us including, but not limited
to, acceleration of all outstanding unpaid principal amounts.  For
more information on these defaults and the remedies available to AgStar, NMF,
and the County, please see our current report on Form 8-K under Item 2.04 as
filed with the SEC on February 18, 2009 and bankruptcy filing discussion
below.





For the
nine months ended June 30, 2010, cash provided by operating activities was
approximately $7,300,000, cash used in investing activities was approximately
$12,100 and cash used in financing activities was approximately
$4,200,000.





Total
cash flow from the project following operational commencement of the project has
been impacted by many factors including, but not limited to, the final cost of
the project, timing of the commencement of operations, the speed of ethanol
production during the start-up phase, as well as energy and corn
prices.  As of June 30, 2010, we had drawn on our revolving line of
credit with AgStar in the amount of approximately $4,400,000.





Also,
based on our operating plan, we believe our existing working capital will not be
sufficient to meet the cash requirements to fund our planned operating expenses,
capital expenditures, and working capital requirements through the fiscal year
ending September 30, 2010 without additional sources of cash and/or deferral,
reduction, or elimination of significant planned
expenditures.  Assuming no deterioration in margins between corn and
ethanol prices, we estimate that we will require approximately an additional
$12,000,000 to fund our planned operating expenses, capital expenditures, and
working capital requirements through the end of fiscal year 2010.  In
addition, we failed to meet tangible net worth and reporting requirements in
violation of certain financial covenants, but the financing agencies waived the
compliance with these ratios through October 1, 2009.  See Note 3 in
our footnotes to our financial statements for more information on the
sufficiency of existing capital to meet our cash requirements and our ability to
operate as a going concern.  Finally, as provided above, we are
currently in default on our Master Loan Agreement with AgStar, our tax credit
loans with NMF, and our capital lease with the County.





We will
attempt to raise additional capital through an offering of our
units.  In June 2010, we filed a registration statement with the state
of Minnesota for an intrastate offering of our units to existing members who are
residents of Minnesota and other Minnesota residents.  The offering is
for a maximum of 24 million of our units at a per-unit cost of
$0.50.  Each subscriber is required to purchase a minimum of 12,500
units in the offering.  The offering document was declared effective
on June 23, 2010 and will be open for one year from the effectiveness of the
registration statement, or at such other time as determined by our Board of
Govenors.





On
October 30, 2009 (the “Petition Date”), we filed voluntary petitions for relief
under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”)
with the United States Bankruptcy Court for the District of Minnesota, Case
number 09-61250.  Our negotiated Chapter 11 bankruptcy filing, In
re:  Otter Tail Ag Enterprises, LLC, was done with the approval of our
senior lenders.  Under Chapter 11, certain claims in existence prior
to our filing of the petition for relief under the Bankruptcy Code are stayed
while we continue business operations as a debtor-in-possession, or
DIP.





We are
currently operating as DIP under the jurisdiction of the Bankruptcy Court and in
accordance with the applicable provisions of the Bankruptcy Code and orders of
the Bankruptcy Court. In general, as DIP, we are authorized under the Bankruptcy
Code to continue to operate as an ongoing business but may not engage in
transactions outside of the ordinary course of business without the approval of
the Bankruptcy Court.





20


Short-term
Debt Sources





We have a
revolving promissory note with Agstar for up to $6,000,000.  We are
required to pay interest on the principal advances monthly at the LIBOR rate
plus 2.95%, which totaled 3.30% at June 30, 2010 and 3.23% as of September 30,
2009.  The purpose of this loan is for general and operating
expenses.  The maturity of this line of credit is 364 days from
commencement; on the loan maturity date, the principal and any outstanding
accrued interest will be due.  We pay a commitment fee of 0.35% on the
unused portion of the revolving promissory note.  As of June 30, 2010
and September 30, 2009, approximately $4,400,000 and $6,000,000 were advanced
against the line of credit, respectively.





Long-term
Debt Sources





We have
entered into two loan agreements and one capital lease agreement for financing
of the Plant.  The total loan commitment is $60,000,000 and the
capital lease is $26,010,000, and both are described below.  All of
our long term debt described below has been reclassified as current maturities
of long-term debt because we are in default on our Master Loan Agreement with
AgStar for failure to make required principal and interest payments, our tax
credit loans with NMF for failure to make required interest payments, and our
capital lease with the County for failure to make required basic payments equal
to the aggregate amount of principal and interest outstanding on County bonds,
entitling AgStar, NMF, and the County to exercise any and all default remedies
against us including, but not limited to, acceleration of all outstanding unpaid
principal amounts.  For more information on these defaults, and the
remedies available to AgStar, NMF, and the County, please see our current report
on Form 8-K under Item 2.04 as filed with the SEC on February 18,
2009.





We
entered into a senior debt financing agreement for a construction loan of
$35,000,000 from AgStar, which includes a term and revolving loan (collectively,
the “Construction Loan”).  We made interest payments during the
construction phase at the LIBOR rate plus 3.15%.  Interest was paid
quarterly in arrears on the first day of January, April, July, and
October.  At completion of the Plant, the loan converted into the
Construction Term Loan and Construction Term Revolving Note.





The
Construction Loan converted to a term loan (the “Construction Term Loan”) and
term revolving loan on June 1, 2008, totaling $29,000,000.  The
interest rate was reduced to LIBOR plus 2.95% on the Construction Term Loan,
which totaled 3.30% at June 30, 2010, and 3.23% at September 30,
2009.  The agreement includes an option to convert a portion of the
Construction Term Loan to a fixed rate loan.  We are required to make
interest payments only on the first day of each month for the first six months
followed by 114 principal installments of $254,386 plus accrued interest
beginning six months following substantial completion, which was determined to
be June 1, 2008, payable in full in June 2018.  In addition to the
scheduled payments, we will make additional principal payments equal to 65% of
our 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, the premium
above LIBOR may be reduced to 2.65% based on attaining certain financial
ratios.





Commitment
fees of $20,000 were charged at the time of conversion and will be charged
annually thereafter.





The
maximum amount of the Construction Loan that could be converted to the term
revolving loan is $6,000,000 (the “Revolving Loan”).  The amount of
the Construction Loan that did convert to the Revolving Loan was
$6,000,000.  We are required to pay interest on the principal advances
monthly at the LIBOR rate plus 2.95% which totaled 3.30% at June 30, 2010 and
3.23% at September 30, 2009.  The purpose of this loan is for cash and
inventory management.





On March
30, 2007, we entered into a loan arrangement with NMF for the amount of
$19,175,000 (the “NMF Loan”).  The tax 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 sixth day of the first month following
the initial advancement until the 85th
month.  On the sixth day of the 85th month
and continuing for an additional 48 months, we shall pay the amortized unpaid
principal together with the accrued interest.  The interest rate shall
be calculated using the Wall
Street Journal daily money rate (base rate) plus 100 basis points,
totaling 4.25% and 6.00% at March 31, 2010 and September 30, 2009,
respectively.  In addition there is a subordinated loan for $4,694,500
which will carry an interest rate of 2.51%.  On the first day of each
month following the initial advance, which occurred in August 2007, we are
required to make interest-only payments until September 2014 when we are
required to make a principal payment of $400,000.  We are currently in
default under our NMF Loan for failure to make required interest
payments.





21


Capital
Lease





In April
2007, we entered into a long term equipment lease agreement (the “Equipment
Lease Agreement”) with the County in order to finance equipment for the Plant
(the “Capital Lease”).  The Equipment Lease Agreement has a term from
May 1, 2007 through November 2019.  The County financed the purchase
of equipment through 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
2007C totaling $765,000 (collectively, the “Bonds”).





Under the
Equipment Lease Agreement with the County, we started making payments on May 25,
2008 and have and will make payments on the 25th of each
month.  Payments for principal start on November 25, 2009 in an amount
equal to 1/6 principal scheduled to become due on the corresponding Bonds on the
next semi-annual principal payment date.  We also make Capital Lease
payments that correspond to 1/6 the amount of interest payable due on the Bonds
on February 1 or August 1 of each year and principal amounts equaling 1/12 of
the principal due each February 1.  We have guaranteed that if such
assessed lease payments are not sufficient for the required Bond payments, we
should provide such funds as are needed to fund the shortfall.  The
Capital Lease also includes an option to purchase the equipment at fair market
value at the end of the lease term.  We are in default under the
Capital Lease for failure to make required basic payments.





Statement of Cash Flows for the nine
      months ended June 30,
            
            2010
              (unaudited)
            
            
            2009
              (unaudited)Cash
      flows provided by (used in) operating activities
            
            $
            7,294,266
            
            
            $
            (3,764,613
            )Cash
      flows used in investing activities
            
            
            (12,085
            )
            
            
            (26,339
            )Cash
      flows provided by (used in) financing activities
            
            
            (4,168,520
            )
            
            
            3,006,682




Cash
Flow Provided by or Used in Operations





The net
cash flow provided by operating activities for the nine months ended June 30,
2010 increased approximately $11,100,000 over that for the nine months ended
June 30, 2009.  The net cash flow increase was primarily the result of
the spread between ethanol and corn prices which led to an increase in net
income for the first three quarters of fiscal 2010, as compared to
2009.  As disclosed above, we believe our existing working capital
will not be sufficient to meet the cash requirements to fund our planned
operating expenses for the remainder of fiscal 2010.





Cash
Flow Used in Investing Activities





There was
no material change in cash used for investing activities for the nine months
ended June 30, 2010 compared to the nine months ended June 30,
2009.





Cash
Flow Provided By or Used in  Financing Activities





Cash used
in financing activities increased approximately $7,200,000 during the nine-month
period ended June 30, 2010 from the comparable period ended in
2009.  The use of cash flows in financing activities was the result of
the Company making payments to the Company’s senior lender during the nine-month
period ended June 30, 2010 totaling approximately $4,800,000.  This
activity compares to a net borrowing of approximately $3,000,000 and an increase
in restricted cash of approximately $1,300,000 for the nine-month period ended
June 30, 2009. Currently, the Company is only allowed to make payments on loans
outstanding with its senior lender.





22







Chapter
11 Bankruptcy





On
October 30, 2009 (the “Petition Date”), we filed a voluntary petition for relief
(collectively, the “Bankruptcy Filing”) under Chapter 11 of Title 11 of the
United States Code (the “Bankruptcy Code”) with the United States Bankruptcy
Court of the District of Minnesota, Case number 09-61250.  Our
negotiated Chapter 11 bankruptcy filing, In re: Otter Tail AG Enterprises,
LLC, was done with the approval of our senior lenders.  Our
continued operations will be dependent on successfully emerging from bankruptcy
with a court-approved plan of reorganization, which we originally filed with the
Bankruptcy Court on February 25, 2010.   On June 11, 2010, we
filed an Amended Chapter 11 Plan with the Bankruptcy Court, and as of June 14,
2010, the Bankruptcy Court issued an order approving our Chapter 11
Plan.





On
February 1, 2010, we entered into term sheets for exit financing with Agstar and
NMF.  The exit financing term sheet with Agstar modifies the
Construction Term Loan and Construction Term Revolving Note, combining them into
one term note, in the amount of $35,000,000 which will mature on June 1,
2013.  Additionally, the exit financing term sheet modifies the
Revolving Line of Credit loan to a 364 day revolving credit facility in an
amount not to exceed the lesser of 75% of eligible accounts receivable and
inventory or $4,000,000 and will mature 364 days following the effective date of
the Chapter 11 Plan.





Interest
on the term and revolving loans will bear interest at a fixed rate of 6.5%
through May 31, 2013; however, the rate is subject to changes in the three-year
U.S. Treasury bond rate between the date of the term sheet and the effective
date of the Chapter 11 Plan.  The term note will be payable in a
special principal payment of $3,150,000 on the first day of the calendar month
following the effective date of the plan and the balance of the note in equal
monthly installments of principal and interest over a period of ten
years.  All current default interest will be deferred until June 1,
2013.  The loans will be secured by a first priority perfected
security interest in all of our assets.




The exit
term sheets of the NMF loan reaffirm all of the terms of the original
agreements, except for it provides for the deferral of default interest until
the present maturity dates as provided in the original
agreements.  These term sheets are contingent upon certain
requirements, such as a confirmation order confirming the Chapter 11 Plan,
payments of certain accrued regular interest, establishment of a debt reserve
account equivalent to six months interest and obtaining additional equity of
$12,000,000.





Results of Operations for
the Three and Nine Months Ended June 30, 2010 and June 30,
2009





We own
and operate a corn dry-mill ethanol Plant in Fergus Falls, Minnesota.  We
process approximately 20 million bushels of corn into approximately 55 million
gallons of ethanol each year, based on the nameplate capacity of our
Plant.  In addition, we sell distillers grains, a principal co-product of
the ethanol production process, which we will sell as Distillers Grains with
Solubles and Distillers Dried Grains with Solubles.




Revenues




Our
revenues were approximately $22,900,000 and $76,500,000 for the quarter and nine
months ended June 30, 2010.  Our revenues were approximately
$24,000,000 and $72,300,000 for the quarter and nine months ended June 30,
2009.  The decrease in our revenues for the quarter of approximately
$1,100,000, or 4%, was due to a lower price received for our ethanol production.
The increase in our revenues for the nine months ended June 30, 2010 over the
previous year of $4,200,000, or 6%, was due to more ethanol sold at a higher
average price.




23


Cost
of Sales




Our cost
of goods sold were approximately $21,700,000 and $69,200,000 for the quarter and
nine months ended June 30, 2010, compared to approximately $24,800,000 and
$75,100,000 for the quarter and nine months ended June 30, 2009.  Our
cost of goods sold as a percentage of revenues were 94% and 90% for the quarter
and nine months ended June 30, 2010 compared to 155% and 121% for the quarter
and nine months ended June 30, 2009.  Our lower costs of sales for the
quarter and nine months ended June 30, 2010 over the comparable prior year
period of approximately $3,100,000 and approximately $5,900,000 respectively was
due to a lower cost of corn in relation to the lower price of ethanol, our
primary operating cost.





Operating
Expenses




Our
operating expenses were approximately $507,000 and $1,540,000 for the quarter
and nine months ended June 30, 2010.  Compared to the quarter and nine
months period ended June 30, 2009 our operating expenses decreased by $43,000,
or 7%, and $137,000, or 8%, respectively.  The decrease was due
primarily to lower non-reorganization professional fees.  Professional
expenses related to the Company’s bankruptcy proceedings totaled approximately
$827,000 for the nine months ended June 30, 2010.





Other
Income (Expense), Net




Interest
expense was approximately $1,100,000 and $3,400,000 for the quarter and nine
months ended June 30, 2010.  Our interest expense was approximately
$1,100,000 and $3,300,000 for the quarter and nine months ended June 30,
2009.




Interest
income was approximately $9,000 and $22,000 for the quarter and nine months
ended June 30, 2010 compared to $5,800 and $24,000 for the quarter and nine
months ended June 30, 2009.  Interest income decreased primarily due to a
reduction in cash held in interest bearing accounts and reduction in rate
earned.





Net
Loss





Our net
loss was approximately $850,000 and our net income was approximately $1,500,000
for the quarter and nine months ended June 30, 2010.  Our net loss was
approximately $14,800,000 and $22,000,000 for the quarter and nine months ended
June 30, 2009.  The increase in our net income for the nine month
period was primarily the result of impairment taken on the plant of $12,500,000
at June 30, 2009 and the improved margin situation in the ethanol industry
during the second half of fiscal 2009 which continued in the first quarter of
fiscal 2010.  As provided in “Chapter 11 Bankruptcy” in this
Management’s Discussion and Analysis, continued net losses, and our worsening
liquidity situation towards the end of fiscal 2009 caused us to make a voluntary
filing for Chapter 11 protection on October 30, 2009.





Margins
have recently improved across the industry due to a more balanced supply and
demand of product in the marketplace.  This margin improvement has
caused some of the production capacity that was previously slowed down or shut
down to increase production or come back on line.  In the event that
we successfully emerge from bankruptcy and some or all of production capacity
that was previously slowed or shut down comes back on line, we may witness
tighter margins for the remainder of fiscal year 2010 and possibly
beyond.





Off-Balance
Sheet Arrangements





As
of June 30, 2010, we did not have any relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance sheet arrangements
or other contractually narrow or limited purposes.





24


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK





We are
exposed to the impact of market fluctuations associated with commodity prices
and interest rates as discussed below.  We have no exposure to foreign
currency risk as all of our business is conducted in United States
Dollars.  We use derivative financial instruments as part of an
overall strategy to manage market risk.  We use cash, futures, and
option contracts to hedge changes to the commodity prices of corn and
ethanol.  We do not enter into these derivative financial instruments
for trading or speculative purposes, nor do we designate these contracts as
hedges for accounting purposes pursuant to the requirements of Financial
Accounting Standards Board ASC Topic 815, “Derivatives and
Hedging.”





Interest
Rate Risk





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





We used
debt to finance a significant amount of our expenditures in the year ended
September 30, 2009 and in the nine months ended June 30, 2010.  These
agreements will expose us to market risk related to changes in interest
rates.  As of June 30, 2010, we have approximately $81,300,000 in
short-term debt including our line of credit.





Commodity
Price Risk





Effective
April 8, 2009, we closed the majority of all derivative positions.  At
June 30, 2010, we have no derivative instruments that expose us to commodity
price risk.





ITEM 4.  CONTROLS AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures





Under the
supervision and with the participation of our management, including our
principal executive officer/principal financial officer, we have conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities and Exchange Act of 1934, as of the end of the period covered by this
report. Based on this evaluation, our principal executive officer/principal
financial officer concluded as of the evaluation date that our disclosure
controls and procedures are not effective due to management override of controls
and lack of segregation of duties due to our size. However, we did conclude that
the material information required to be included in our Securities and Exchange
Commission reports is accumulated and communicated to our management, including
our principal executive officer and principal financial officer, recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms relating to our Company,
particularly during the period when this report was being prepared.





Changes
in Internal Controls





There has
been no change in our internal control over financial reporting (as defined in
Rules 13a-15(f) or 15d-15(f) of the Exchange Act) during our most recently
completed quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.





PART II – OTHER INFORMATION





ITEM 1.  LEGAL PROCEEDINGS





On
October 30, 2009, we filed a voluntary petition for relief in the United States
Bankruptcy Court, District of Minnesota under Chapter 11 of the
Code.  Our negotiated Chapter 11 bankruptcy filing, In re: Otter Tail AG Enterprises,
LLC, was made with the approval of our senior lenders.





Under
Chapter 11, certain claims in existence prior to our filing of the petition for
relief under the Code are stayed while we continue business operations as a
debtor-in-possession.  We have continued and will continue to operate
our business as debtor-in-possession under the jurisdiction of the Bankruptcy
Court and in accordance with the applicable provisions of the Code.





25


The
Chapter 11 bankruptcy filing described above constitutes an event of default
under the Company’s master loan agreement with AgStar Financial Services, PCA,
its construction and term loan agreement with MMCDC New Markets Fund II, LLC
(collectively, the “Secured Creditors”), and its capital lease with the
County.  Prior to that, on June 3, 2009, all obligations under the
aforementioned agreements became automatically and immediately due and
payable.  However, the ability of the Secured Creditors and County to
seek remedies to enforce their rights under the agreements is automatically
stayed as a result of the filing of the Chapter 11 petition.  The
automatic stay invoked by the filing of the Chapter 11 petition effectively
precludes any actions by the Company’s Secured Creditors and County to collect,
assert, or recover a claim against us, subject to the applicable provisions of
the Code and orders granted by the Bankruptcy Court.





In order
to successfully exit Chapter 11 bankruptcy, we will need to propose, and obtain
confirmation by the Bankruptcy Court of a plan of reorganization (the “Chapter
11 Plan”) that satisfies the requirements of the Bankruptcy Code.  We
originally filed a Chapter 11 Plan on February 25, 2010.  The
interested parties revised the Chapter 11 Plan to incorporate the agreed upon
terms, in order to file with the Bankruptcy Court on or before June 9, 2010. A
Second Amended Chapter 11 Plan was filed on June 11, 2010 and was subsequently
approved by the Bankruptcy Court on June 14, 2010.  On a parallel
track, we revised and updated the equity offering prospectus to include the
terms of the tentative agreement and filed this prospectus with the Minnesota
State Department of Commerce, so that the Company may engage in the equity
raise. The prospectus was declared effective on June 23, 2010 when we commenced
holding investor meetings to solicit investment in new equity.





Although
we have filed a Chapter 11 Plan that provides for emergence from Chapter 11,
there can be no assurance that a Chapter 11 Plan will be confirmed by the
Bankruptcy Court or that any plan will be consummated.  The Bankruptcy
Court has scheduled our Chapter 11 Plan confirmation hearing for August 18,
2010.





ITEM 1A.  RISK FACTORS





In
addition to the other information set forth in this report, including the
important information under the heading “Disclosure Regarding Forward-Looking
Statements,” you should carefully consider the “Risk Factors” discussed in our
Annual Report on Form 10-K for the fiscal year ended September 30,
2009.




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





None.





ITEM 3.  DEFAULTS UPON SENIOR SECURITIES





Please
see Notes 6 and 7 to our condensed unaudited financial statement notes in Part
I, Item 1 of this Quarterly Report on Form 10-Q.




ITEM
4.  (REMOVED AND RESERVED)






ITEM
5.  OTHER INFORMATION




None.




ITEM
6.  EXHIBITS




See
Exhibit Index following the signature page of this
report.




26




SIGNATURES




In
accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.




OTTER
      TAIL AG ENTERPRISES, LLCDate:
      August 16, 2010
              By:
              /s/
      Anthony HicksAnthony
      HicksChief
      Executive Officer and Chief Financial Officer





27




EXHIBIT
INDEX




OTTER
TAIL AG ENTERPRISES, LLC


(Debtor
in Possession)


FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2010





31.1*
            Certification
      by Chief Executive Officer and 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.









*    
Filed herewith.