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 MARCH 31, 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 x
                  Smaller
      Reporting Company  ̈(Do
      not check if a SmallerReporting
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


APPLICABLE
ONLY TO ISSUERS


INVOLVED
IN BANKRUPTCY PROCEEDINGS


DURING
THE PRECEDING FIVE YEARS




Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13, or 15d of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.


Yes  ̈ No  ̈




As of May
20, 2010, the Company has outstanding 23,944,000 Class A Membership
Units.







OTTER
TAIL AG ENTERPRISES, LLC




FORM 10-Q
QUARTERLY REPORT FOR THE THREE AND SIX MONTH PERIODS ENDED


MARCH 31,
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
                  
                  26Item
      1.  Legal Proceedings
                  
                  26Item
      1A.  Risk Factors
                  
                  26Item
      2.  Unregistered Sales of Equity Securities and Use of
      Proceeds
                  
                  26Item
      3.  Defaults Upon Senior Securities
                  
                  27Item
      4.  (Removed and Reserved)
                  
                  27Item
      5.  Other Information
                  
                  27Item
      6.  Exhibits
                  
                  27SIGNATURES
                  
                  28Exhibit
      Index
                  
                  29Section
      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





March 31, 2010
                    
                    
                    September 30, 2009(Unaudited)ASSETSCurrent
      AssetsCash
      and equivalents
                    
                    $
                    10,118,878
                    
                    
                    $
                    4,058,000Restricted
      cash
                    
                    
                    2,150,972
                    
                    
                    
                    2,790,971Accounts
      receivable
                    
                    
                    1,851,574
                    
                    
                    
                    2,829,033Inventory
                    
                    
                    3,714,888
                    
                    
                    
                    3,827,702Prepaid
      expenses and other
                    
                    
                    889,584
                    
                    
                    
                    400,902Total
      current assets
                    
                    
                    18,725,896
                    
                    
                    
                    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
                    
                    
                    
                    96,499,794101,983,436
                    
                    
                    
                    101,971,350Less
      accumulated depreciation
                    
                    
                    (13,937,930
                    )
                    
                    
                    (10,724,936
                    )Net
      property and equipment
                    
                    
                    88,045,506
                    
                    
                    
                    91,246,414Other
      Asset
                    
                    
                    150,459
                    
                    
                    
                    —Total
      Assets
                    
                    $
                    106,921,861
                    
                    
                    $
                    105,153,022LIABILITIES AND MEMBERS’
    EQUITYLiabilities
      Not Subject to Compromise Current Liabilities:Accounts
      payable
                    
                    $
                    278,104
                    
                    
                    $
                    646,809Accrued
      liabilities
                    
                    
                    188,636
                    
                    
                    
                    182,086Current
      liabilities not subject to compromise
                    
                    
                    466,740
                    
                    
                    
                    828,895Liabilities
      Subject to Compromise:Operating
      line of credit
                    
                    $
                    5,346,382
                    
                    
                    $
                    6,000,000Accounts
      payable
                    
                    
                    42,866
                    
                    
                    
                    —Construction
      payable- related party
                    
                    
                    254,564
                    
                    
                    
                    254,564Accrued
      interest
                    
                    
                    3,372,579
                    
                    
                    
                    2,976,949Current
      maturities of long-term debt
                    
                    
                    80,098,163
                    
                    
                    
                    80,113,970Total
      liabilities subject to compromise
                    
                    
                    89,114,554
                    
                    
                    
                    89,345,483Total
      current liabilities
                    
                    
                    89,581,294
                    
                    
                    
                    90,174,378Commitments
      and ContingenciesMembers’
      Equity, 23,944,000 units outstandingMembers’
      equity
                    
                    
                    45,239,341
                    
                    
                    
                    45,237,798Accumulated
      deficit
                    
                    
                    (27,898,773
                    )
                    
                    
                    (30,259,154
                    )Total
      Members’ Equity
                    
                    
                    17,340,568
                    
                    
                    
                    14,978,644Total
      Liabilities and Members’ Equity
                    
                    $
                    106,921,861
                    
                    
                    $
                    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
                      EndedMarch 31, 2010
                    
                    
                    March 31, 2009(Unaudited)
                    
                    
                    (Unaudited)Revenues
                    
                    $
                    24,253,428
                    
                    
                    $
                    22,699,033Cost
      of sales
                    
                    
                    24,646,141
                    
                    
                    
                    24,014,296Lower
      of cost or market adjustment
                    
                    
                    —
                    
                    
                    
                    168,422Gross
      Loss
                    
                    
                    (392,713
                    )
                    
                    
                    (1,483,684
                    )Professional
      fees
                    
                    
                    123,347
                    
                    
                    
                    190,763General
      and administrative
                    
                    
                    379,847
                    
                    
                    
                    389,102Total
      operating expenses
                    
                    
                    503,194
                    
                    
                    
                    579,864Loss
      before reorganization items
                    
                    
                    (895,907
                    )
                    
                    
                    (2,063,549
                    )Reorganization
      itemsProfessional
      fees
                    
                    
                    238,891
                    
                    
                    
                    —Other
      income (expense)Interest
      expense
                    
                    
                    (1,124,522
                    )
                    
                    
                    (1,114,911
                    )Impairment
      on financing costs
                    
                    
                    —
                    
                    
                    
                    (1,496,476
                    )Interest
      income
                    
                    
                    7,176
                    
                    
                    
                    6,376Total
      other expenses, net
                    
                    
                    (1,117,346
                    )
                    
                    
                    (2,605,012
                    )Net
      Loss
                    
                    $
                    (2,252,143
                    )
                    
                    $
                    (4,668,560
                    )Weighted
      Average Units Outstanding – Basic and Diluted
                    
                    
                    23,943,000
                    
                    
                    
                    23,938,500Net
      Loss Per Unit – Basic and Diluted
                    
                    $
                    (0.09
                    )
                    
                    $
                    (0.20
                    )




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




Six Months Ended
                    
                    
                    Six Months EndedMarch 31, 2010
                    
                    
                    March 31, 2009(Unaudited)
                    
                    
                    (Unaudited)Revenues
                    
                    $
                    53,595,794
                    
                    
                    $
                    48,230,321Cost
      of sales
                    
                    
                    47,463,746
                    
                    
                    
                    50,267,002Lower
      of cost or market adjustment
                    
                    
                    —
                    
                    
                    
                    168,422Gross
      Profit (Loss)
                    
                    
                    6,132,048
                    
                    
                    
                    (2,205,103
                    )Professional
      fees
                    
                    
                    241,914
                    
                    
                    
                    365,081General
      and administrative
                    
                    
                    788,148
                    
                    
                    
                    763,964Total
      operating expenses
                    
                    
                    1,030,062
                    
                    
                    
                    1,129,045Earnings
      (Loss) before reorganization items
                    
                    
                    5,101,986
                    
                    
                    
                    (3,334,148
                    )Reorganization
      itemsProfessional
      fees
                    
                    
                    466,443
                    
                    
                    
                    —Other
      income (expense)Interest
      expense
                    
                    
                    (2,288,023
                    )
                    
                    
                    (2,206,664
                    )Impairment
      on financing costs
                    
                    
                    —
                    
                    
                    
                    (1,496,476
                    )Interest
      income
                    
                    
                    12,859
                    
                    
                    
                    17,703Total
      other expenses, net
                    
                    
                    (2,275,164
                    )
                    
                    
                    (3,685,437
                    )Net
      Income (Loss)
                    
                    $
                    2,360,379
                    
                    
                    $
                    (7,019,585
                    )Weighted
      Average Units Outstanding – Basic
                    
                    
                    23,940,738
                    
                    
                    
                    23,933,975Net
      Income (Loss) Per Unit – Basic
                    
                    $
                    0.09
                    
                    
                    $
                    (0.29
                    )Weighted
      Average Units Outstanding – Diluted
                    
                    
                    23,941,738
                    
                    
                    
                    23,933,975Net
      Income (Loss) Per Unit – Diluted
                    
                    $
                    0.09
                    
                    
                    $
                    (0.29
                    )




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




Six Months Ended
                      March 31, 2010
                    
                    
                    Six Months Ended
                      March 31, 2009(Unaudited)
                    
                    
                    (Unaudited)Cash
      Flows from Operating ActivitiesNet
      income (loss)
                    
                    $
                    2,360,379
                    
                    
                    $
                    (7,019,585
                    )Adjustments
      to reconcile net loss to net cash used in operations:Depreciation
                    
                    
                    3,212,994
                    
                    
                    
                    3,637,265Amortization
      of debt financing costs
                    
                    
                    —
                    
                    
                    
                    59,796Impairment
      of debt financing costs
                    
                    
                    —
                    
                    
                    
                    1,496,476Lower
      of cost or market adjustment
                    
                    
                    —
                    
                    
                    
                    168,422Other
      income
                    
                    
                    (150,459
                    )
                    
                    
                    —Unit
      based compensation
                    
                    
                    1,542
                    
                    
                    
                    2,250Change
      in assets and liabilities:Accounts
      receivable
                    
                    
                    977,459
                    
                    
                    
                    404,319Inventory
                    
                    
                    112,814
                    
                    
                    
                    2,383,464Prepaid
      expenses and other
                    
                    
                    (488,682
                    )
                    
                    
                    (1,078,156
                    )Accounts
      payable
                    
                    
                    (325,839
                    )
                    
                    
                    (214,706
                    )Accrued
      purchase commitments
                    
                    
                    —
                    
                    
                    
                    (3,431,576
                    )Accrued
      interest and other
                    
                    
                    402,180
                    
                    
                    
                    667,497Net
      cash provided by (used in) operating activities
                    
                    
                    6,102,388
                    
                    
                    
                    (2,924,534
                    )Cash
      Flows from Investing ActivitiesCapital
      expenditures
                    
                    
                    (12,084
                    )
                    
                    
                    (26,336
                    )Net
      cash used in investing activities
                    
                    
                    (12,084
                    )
                    
                    
                    (26,336
                    )Cash
      Flows from Financing ActivitiesPayments
      for long-term debt
                    
                    
                    (15,807
                    )
                    
                    
                    (208,839
                    )Change
      in restricted cash
                    
                    
                    639,999
                    
                    
                    
                    486,102Proceeds
      from line of credit
                    
                    
                    —
                    
                    
                    
                    1,965,651Prepayments
      on pre-petition secured line of credit
                    
                    
                    (653,618
                    )
                    
                    
                    —Net
      cash provided by (used in) financing activities
                    
                    
                    (29,426
                    )
                    
                    
                    2,242,914Net
      Increase (Decrease) in Cash and Equivalents
                    
                    
                    6,060,878
                    
                    
                    
                    (707,956
                    )Cash
      and Equivalents — Beginning of Period
                    
                    
                    4,058,000
                    
                    
                    
                    1,138,768Cash
      and Equivalents — End of Period
                    
                    $
                    10,118,878
                    
                    
                    $
                    430,812Supplemental
      Disclosure of Cash Flow InformationInterest
      paid
                    
                    $
                    728,893
                    
                    
                    $
                    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


March
31, 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, 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,
the Company has 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 March 31, 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
March 31, 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, 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, the Company’s plan of reorganization
could materially change the amounts and classifications reported in its
condensed financial statements.  The Company’s 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


March
31, 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 as a
reduction of revenue.  Marketing fees were approximately $134,000 for
the three months ended March 31, 2010 and approximately $132,000 for the three
months ended March 31, 2009, respectively.  Marketing fees were
approximately $273,000 for the six months ended March 31, 2010, and $265,000 for
the six months ended March 31, 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 March 31, 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 March 31, 2010 and September
30, 2009, the total restricted cash related to these accounts was approximately
$2,200,000 and $2,800,000, respectively.





Inventories





Inventories
consist of raw materials, work in process, and finished goods.  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


March
31, 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 the Company’s 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 the Company’s 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 September 30, 2009
based on its 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.  No impairment was recorded for the reporting periods ending
March 31, 2010 or 2009. 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 (including certificates
of deposit), receivables, and accounts payable not subject to compromise
approximates their fair value.  Accounts payable and accrued expenses
subject to compromise are at stated original incurred values but are subject to
reduced values due to adjustment by the Bankruptcy Court.





It is not
currently practicable to estimate the fair market value of the debt
financing.  Senior debt consists of a term loan of approximately
$34,806,000 and a revolving line of credit of $5,346,000 that bear a variable
interest rate that fluctuates with the market and therefore approximates fair
value.  Subordinate debt consists of an MMCDC New Markets Fund II, LLC
(“NMF”) New Markets Tax Credit Loan of $19,175,000 and an Otter Tail County (the
“County”) capital lease of $26,010,000 that bear a fixed interest rate (the
“Capital Lease”).  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 March 31, 2010 or March
31, 2009 or considered necessary by management.


8


OTTER
TAIL AG ENTERPRISES, LLC


(Debtor
in Possession)


Condensed
Notes to Unaudited Financial Statements


March
31, 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 per unit is computed by dividing net
income by the weighted average number of members’ units and members’ unit
equivalents outstanding during the period.  For the six months ended
March 31, 2010, the Company had 1,000 unit equivalents outstanding relating to
unvested restricted units.  As of March 31, 2009, the Company had
10,500 unit equivalents outstanding. For the three months ended March 31, 2010
and all reporting periods ended March 31, 2009, the effects of restricted units
were excluded from the computation of diluted units outstanding as their effects
would have been anti-dilutive, due to the Company’s net loss.





NOTE
2. CHAPTER 11 BANKRUPTCY PROCEEDINGS





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




The
Company is 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, 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 its 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 needs to propose, and obtain
confirmation by the Bankruptcy Court of a Disclosure Statement and
Reorganization Plan 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 set forth below, the Company
filed a Chapter 11 Plan on February 25, 2010.


9


OTTER
TAIL AG ENTERPRISES, LLC


(Debtor
in Possession)


Condensed
Notes to Unaudited Financial Statements


March
31, 2010 and 2009





Under the
Bankruptcy Code, the Company may assume, assume and assign, or reject executory
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
executory 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 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 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 is deemed to 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 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.





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 Chapter 11 Plan.  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.





On
February 25, 2010, the Company filed a Chapter 11 Plan that provides for
emergence from Chapter 11 sometime in the future.  There can be no
assurance that the Chapter 11 Plan proposed by the Company will be confirmed by
the Bankruptcy Court or that any such plan will be consummated.  The
plan includes payment to the Company’s senior lender and lenders with respect to
the Company’s NMF loan.  According to the plan, the Company would pay
a settlement totaling approximately $3,251,000 to the holders of the County
Capital Lease.  Unsecured creditors and rejected claims will be paid
at least 12.5% of their claims and unsecured convenience claims will be paid in
full. The plan would cancel all equity interests. 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, as well as seek confirmation from its unsecured
creditors.


10


OTTER
TAIL AG ENTERPRISES, LLC


(Debtor
in Possession)


Condensed
Notes to Unaudited Financial Statements


March
31, 2010 and 2009





Pursuant
to 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.   On April 8, 2010 the Company
submitted a motion to extend the exclusive period.  This motion was
denied at a hearing held on April 22, 2010.  The Company’s exclusivity
period lapsed at the end of April. This means that any party with an interest
may file a competing Chapter 11 Plan for the Company.





At a
hearing held on May 12, 2010, the Bankruptcy Court failed to reach a decision
regarding the Company’s Chapter 11 Plan.  The next hearing is
currently set for May 26, 2010.





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 and 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; (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 obtain
confirmation of and 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.





Although
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.  MEMBER’S EQUITY





In
February 2009, the Company filed a Minnesota registered offering for a maximum
of 36 million Class A 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 expired one year from the effective date of
the offering.  The offering was not declared effective.  The
Company is in the process of updating the registration in conjunction with the
Chapter 11 Plan.





NOTE
5. INVENTORY





Inventories
consist of the following:




March 31, 2010
                    (unaudited)
                  
                  
                  September 30, 2009*Raw
      materials
                  
                  $
                  1,790,707
                  
                  
                  $
                  1,896,519Work
      in progress
                  
                  
                  957,367
                  
                  
                  
                  1,017,363Finished
      goods
                  
                  
                  573,912
                  
                  
                  
                  520,059Spare
      parts
                  
                  
                  392,902
                  
                  
                  
                  393,761Total
                  
                  $
                  3,714,888
                  
                  
                  $
                  3,827,702




11




OTTER
TAIL AG ENTERPRISES, LLC


(Debtor
in Possession)


Condensed
Notes to Unaudited Financial Statements


March
31, 2010 and 2009




* Derived
from audited financial statements





The
Company obtained approximately 100% of its corn purchases from one supplier in
the three month periods ended March 31, 2010 and March 31, 2009.  The
Company has a formal supply agreement, as discussed in Note 8.





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 March 31, 2010, the Company has fixed purchase
contracts to purchase approximately 342,000 bushels costing approximately
$1,160,000.





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 assists in aligning 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 2,200,000 bushels of corn under contract
in this manner at a plus basis rate of ($0.35) per bushel through November
2010.





NOTE
6.  BANK FINANCING





Short-term
debt consists of the following at:


March 31, 2010
                          (unaudited)
                        
                        
                        September 30,
                          2009*Construction
      and Term Loan, see terms below
                        
                        $
                        34,806,137
                        
                        
                        $
                        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
                        
                        
                        107,025
                        
                        
                        
                        122,833Total
      short-term debt
                        
                        $
                        80,098,163
                        
                        
                        $
                        80,113,970Revolving
      line of credit, see terms below
                        
                        $
                        5,346,382
                        
                        
                        $
                        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.





On March
20, 2009, the Company entered into a Forbearance Agreement with Financial
Services, P.C.A. (the “Senior Lender”) which requires 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.


12


OTTER
TAIL AG ENTERPRISES, LLC


(Debtor
in Possession)


Condensed
Notes to Unaudited Financial Statements


March
31, 2010 and 2009





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 cure all defaults 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 NMF for their 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
March 31, 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 3.18% as of March 31,
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


March
31, 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 3.18% at
March 31, 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 3.18% at March 31, 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 March 31, 2010,
approximately $5,346,000 was advanced against the line of credit.  Any
further advances on the line of credit need to be approved by the Senior
Lender.  The Company has made a one time principal payment 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.




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 letters of up to $12,000,000.


14


OTTER
TAIL AG ENTERPRISES, LLC


(Debtor
in Possession)


Condensed
Notes to Unaudited Financial Statements


March
31, 2010 and 2009





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 the Capital Lease a long term equipment lease
agreement with the County in order to finance equipment for the Plant.  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 pays
$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.




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
receives 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 continues until terminated by
either party providing a 90 day advance written notice.





15
 
  OTTER
TAIL AG ENTERPRISES, LLC
 (Debtor
in Possession)
 Condensed
Notes to Unaudited Financial Statements
 March
31, 2010 and 2009


In
February 2007, the Company entered into a procurement agreement with an
unrelated party for the purchase of corn.  The term of this agreement is
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
is 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 are included in cost of goods sold.  The
initial term of the agreement is 12 months beginning the first day of the month
the Company ships ethanol and is 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 then continues 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
certificate of deposit for the benefit of the supplier in the amount of
$975,000.





NOTE
9. 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.  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.  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.





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




16




OTTER
TAIL AG ENTERPRISES, LLC
 (Debtor
in Possession)
 Condensed
Notes to Unaudited Financial Statements
 March
31, 2010 and 2009




March 31, 2010Fair Value Carrying
                      Amount in the Balance
                      Sheet
                    
                    
                    Fair Value Measurement UsingLevel 1
                    
                    
                    Level 2
                    
                    
                    Level 3AssetsMoney
      market funds (included in restricted cash)
                    
                    $
                    1,175,972
                    
                    
                    $
                    1,175,972
                    
                    
                    $
                    -
                    
                    
                    $
                    -Certificates
      of deposit (included in restricted cash)
                    
                    
                    975,000
                    
                    
                    
                    
                    
                    
                    
                    975,000Total
                    
                    $
                    2,150,972
                    
                    
                    $
                    1,175,972
                    
                    
                    $
                    975,000
                    
                    
                    $
                    -




The fair
value of the money market funds is based on quoted market prices in an active
market.  Due to the short term nature of the certificates of deposit, the
recorded value approximates fair value.




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.  As of September 30, 2009 an impairment analysis was performed
determining no further impairment was necessary. 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
$88,000,000 of the facilities at March 31, 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 six month periods ended March 31, 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 1 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;





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





·
            competition in the ethanol
      industry 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
March 31, 2010, we had total assets of approximately $106,900,000 consisting
primarily of cash, accounts receivable, inventory, property, plant, and
equipment.  As of March 31, 2010, we had current liabilities of
approximately $89,600,000 consisting primarily of accounts payable, accrued
interest, line of credit, and outstanding debt.  All of our long-term debt,
consisting of  approximately $80,100,000 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 not made 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 the
six months ended March 31, 2010, cash provided by operating activities was
approximately $6,100,000, cash used in investing activities was approximately
$12,100 and cash used in financing activities was approximately
$29,400.





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 March 31, 2010, we had drawn on our revolving line of credit with AgStar
in the amount of approximately $5,300,000.





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.  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 are working with our lenders to
restructure our loan agreements.





We will
attempt to raise additional capital through an offering of our units.  In
February 2009, 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 qualified Minnesota investors.  The offering was for a
maximum of 36 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 remained open for one year from the effectiveness
of the registration statement. The Company is currently in the process of
updating the registration material as part of its Chapter 11 Plan, it will seek
approval from the State of Minnesota Commerce Department once the Disclosure
Statement is approved by the Courts.





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 (the
“Bankruptcy Court”), 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 3.18% at March 31, 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 March 31, 2010 and
September 30, 2009, approximately $5,300,000 and $6,000,000 were advanced
against the line of credit, respectively.  Any further advances on the line
of credit need to be approved by the senior lender.





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.





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 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 3.18% at March 31, 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 3.18% at March 31, 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 must 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 must pay the amortized unpaid
principal together with the accrued interest.  The interest rate is
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 carries 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.  Any further advances on the line of credit
need to be approved by the senior lender.  We are currently in default
under our NMF Loan for failure to make required interest payments.





21


On
February 1, 2010, we 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 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 plan, payments of certain accrued regular interest,
establishment of a debt reserve account equivalent to six months interest and
obtaining subscription letters of up to $12,000,000.





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 must make payments on the 25th of each
month.  Payments for principal began 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 must 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 six months ended March 31,
                    
                    2010
                      (unaudited)
                    
                    
                    2009
                      (unaudited)Cash
      flows provided by (used in) operating activities
                    
                    $
                    6,102,389
                    
                    
                    $
                    (2,924,534
                    )Cash
      flows used in investing activities
                    
                    
                    (12,084
                    )
                    
                    
                    (26,336
                    )Cash
      flows provided by (used in) financing activities
                    
                    
                    (29,426
                    )
                    
                    
                    2,242,914




22




Cash
Flow Provided By (Used in) Operations





The net
cash flow provided by operating activities for the six months ended March 31,
2010 increased approximately $9,000,000 over that for the six months ended March
31, 2009.  The increase in cash flows provided by operating activities was
the result of the spread between ethanol and corn prices which led to an
increase in net income in the first quarter of fiscal 2010, while this resulted
in a loss for the second quarter of fiscal 2010.  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 six months
ended March 31, 2010 compared to the six months ended March 31,
2009.





Cash
Flow Provided By (Used in) Financing Activities





Since our
inception, we have generated significant cash inflows from bank financing
arrangements and member equity contributions.  Proceeds for the six months
ended March 31, 2010 from our bank financing arrangements decreased by
$2,300,000 compared to the bank proceeds for the six months ended March 31,
2009.  This is primarily due to the proceeds from our construction loan
being fully utilized as of the end of fiscal 2009, net of payments made during
the first quarter of 2010 on our operating line of credit.




Chapter
11 Bankruptcy





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.  Our
continued operations will be dependent on successfully emerging from bankruptcy
with a court-approved plan of reorganization, which we have yet to submit to the
Bankruptcy Court.  Based on our operating plan, our existing working
capital is not sufficient to meet the cash requirements to fund our planned
operating expenses, capital expenditures, and working capital requirements
through September 30, 2010 without additional sources of cash and/or the
deferral, reduction, or elimination of significant planned expenditures. 
Currently, we have no commitments to obtain additional capital, and there can be
no assurance that financing will be available in amounts or on terms acceptable
to us, if at all.  If we cannot obtain sufficient additional funding, we
will be forced to significantly curtail our operations or cease
operations.





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 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 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 plan, payments of certain accrued regular interest,
establishment of a debt reserve account equivalent to six months interest and
obtaining subscription letters of up to $12,000,000.





23


Results of Operations for
the Three and Six Months Ended March 31, 2010 and March 31,
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 $24,300,000 and $53,600,000 for the quarter and six
months ended March 31, 2010.  Our revenues were approximately $22,700,000
and $48,200,000 for the quarter and six months ended March 31, 2009.  The
increase in our revenues of approximately $1,500,000, or 6%, and $5,400,000, or
11% for the quarter and sixth months ended March 31, 2010 over the prior year
periods were due to an increased price received for our ethanol
production.




Cost
of Sales




Our cost
of goods sold were approximately $24,600,000 and $47,500,000 for the quarter and
six months ended March 31, 2010, compared to approximately $24,200,000 and
$50,400,000 for the quarter and six months ended March 31, 2009.  Our cost
of goods sold as a percentage of revenues were 101% and 89% for the quarter and
six months ended March 31, 2010 compared to 106% and 104% for the quarter and
six months ended March 31, 2009.  Our higher costs of sales for the three
months ended March 31, 2010 over the comparable prior year period of
approximately $600,000 was due to higher denaturant and natural gas costs. 
Our lower cost of sales for the six months ended March 31, 2010 over the
comparable prior year period of approximately $2,800,000 was due to a lower cost
of corn, our primary operating cost.





Operating
Expenses




Our
operating expenses, before reorganization expenses, were approximately $490,000
and $1,000,000 for the quarter and six months ended March 31, 2010. 
Compared to the quarter and six months period ended March 31, 2009 our operating
expenses decreased by $90,000, or 16%, and $100,000, or 10%, respectively. 
The decrease was due primarily to lower non-reorganization professional fees.





Other
Income (Expense), Net




Interest
expense was approximately $1,100,000 and $2,300,000 for the quarter and six
months ended March 31, 2010.  Our interest expense was approximately
$1,100,000 and $2,200,000 for the quarter and six months ended March 31,
2009.




Interest
income was approximately $7,000 and $6,000 for the three months ended March 31,
2010 and 2009, respectively, an increase of approximately $1,000 for the three
months ended March 31, 2010 over the comparable prior year period. 
Interest income was approximately $13,000 and $18,000 for the six months ended
March 31, 2010 and 2009, respectively, a decrease of approximately $5,000 for
the six months ended March 31, 2010 over the comparable prior year period. 
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 $2,300,000 for the quarter and our net income was
approximately $2,400,000 for the six months ended March 31, 2010.  Our net
loss was approximately $4,700,000 and $7,000,000 for the quarter and six months
ended March 31, 2009.  The increase in our net income for the six months
ended March 31, 2010 was primarily the result of 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.





24


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 again which has lead to a surplus in the marketplace. 
In the event that we successfully emerge from bankruptcy and some or all of
production capacity that was previously slowed or shut down remains on line, we
may witness tighter margins for the remainder of fiscal year 2010 and possibly
beyond.





Off-Balance
Sheet Arrangements





As
of March 31, 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.





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 six months ended March 31, 2010.  These
agreements will expose us to market risk related to changes in interest
rates.  As of March 31, 2010, we have approximately $85,400,000 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
March 31, 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 noteffective 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.





25


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.





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 parties are 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.





On
February 25, 2010, we filed a Disclosure Statement and Reorganization Plan (the
“Chapter 11 Plan”) that provides for emergence from Chapter 11 sometime in the
future.  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.  Under the Bankruptcy Code, we have 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 from debtors.  On April 8,
2010, we submitted a motion to extend the exclusive period.  This motion
was denied at a hearing held on April 22, 2010.  Therefore, our exclusivity
period lapsed at the end of April.





At a
hearing held on May 12, 2010, the Bankruptcy Court failed to reach a decision
regarding our Chapter 11 Plan.  The next hearing is currently set for May
26, 2010.





We have
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 our results of
operations.





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. 
There have been no material changes in our risk factors from those disclosed in
Part I, Item 1A, of 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.





26


ITEM
3.  DEFAULTS UPON SENIOR SECURITIES





Please
see Notes 6 and 7 to our condensed unaudited financial statement notes in Part
1, 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.




27




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:
      May 21, 2010
            By:
            /s/
      Anthony HicksAnthony
      HicksChief
      Executive Officer and Chief Financial
Officer




28




EXHIBIT
INDEX




OTTER
TAIL AG ENTERPRISES, LLC


FORM 10-Q
FOR THE THREE AND SIX MONTH PERIODS ENDED MARCH 31, 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.




29