UNITED STATES SECURITIES AND EXCHANGE
COMMISSION


WASHINGTON, DC
20549




FORM 10-Q


þ
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934.




FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009




o
            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: 000-52033




RED TRAIL ENERGY,
LLC


(Exact
name of registrant as specified in its charter)




NORTH
    DAKOTA
            
            76-0742311(State
      or other jurisdiction
              of
      incorporation or organization)
            
            (IRS
      Employer
              Identification
      No.)


P.O. Box
11


3682
Highway 8 South


Richardton,
ND 58652


(Address
of principal executive offices)


(701) 974-3308


(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 þ No o


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 (Section 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).


o Yes o 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
definition of “large accelerated filer,” accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act (Check
one):


Large
accelerated filer o
     Accelerated filer o
      Non-accelerated filer þ  Smaller
Reporting Company o





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


o Yes þ No


As of
November 13, 2009, the Company has outstanding 40,193,973 Class A
Membership Units.












RED TRAIL
ENERGY, LLC


FORM 10-Q
QUARTERLY REPORT FOR THE QUARTER ENDED


SEPTEMBER
30, 2009




TABLE OF
CONTENTS





PagePART
      I – FINANCIAL INFORMATION
              
              
              1Item 1.
      Condensed Financial Statements (Unaudited)
              
              
              1Condensed
      Balance Sheets
              
              
              1Condensed
      Statements of Operations
              
              
              2Condensed
      Statements of Cash Flows
              
              
              3Notes
      to Unaudited Condensed Financial Statements
              
              
              4Item 2.
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations
              
              
              16Disclosure
      Regarding Forward-Looking Statements
              
              
              16Item 3.
      Quantitative and Qualitative Disclosures About Market Risk
              
              
              30Item 4.
      Controls and Procedures
              
              
              31PART
      II - OTHER INFORMATION
              
              
              32Item 1.
      Legal Proceedings
              
              
              32Item 1A.
      Risk Factors
              
              
              32Item 2.
      Unregistered Sales of Equity Securities and Use of
Proceeds
              
              
              33Item 3.
      Defaults Upon Senior Securities
              
              
              33Item 4.
      Submission of Matters to a Vote of Security Holders
              
              
              33Item 5.
      Other Information
              
              
              33Item 6.
      Exhibits
              
              
              33SIGNATURES
              
              
              34Exhibit
      Index
              
              
              35










PART
I — FINANCIAL INFORMATION


Item 1.
– Condensed Financial Statements


RED
TRAIL ENERGY, LLC


CONDENSED BALANCE SHEETS




September
      30, 2009(Unaudited)
              
              
              December
      31, 2008ASSETSCurrent
      AssetsCash
      and equivalents
              
              $
              11,139,135
              
              
              $
              4,433,839Restricted
      cash - collateral
              
              
              750,000
              
              
              
              ―Restricted
      cash - margin account
              
              
              1,541,673
              
              
              
              1,498,791Accounts
      receivable
              
              
              3,208,552
              
              
              
              2,697,695Inventory
              
              
              5,414,949
              
              
              
              3,353,592Prepayments
      of corn purchases
              
              
              ―
              
              
              
              4,398,046Prepaid
      expenses
              
              
              298,330
              
              
              
              41,767Total
      current assets
              
              
              22,352,639
              
              
              
              16,423,730Property,
      Plant and EquipmentLand
              
              
              351,280
              
              
              
              351,280Plant
      and equipment
              
              
              79,194,431
              
              
              
              79,898,657Land
      improvements
              
              
              3,947,694
              
              
              
              3,939,294Buildings
              
              
              5,312,995
              
              
              
              5,312,995Construction
      in progress
              
              
              ―
              
              
              
              33,67988,806,400
              
              
              
              89,535,905Less
      accumulated depreciation
              
              
              15,954,170
              
              
              
              11,525,863Net
      property, plant and equipment
              
              
              72,852,230
              
              
              
              78,010,042Other
      AssetsDebt
      issuance costs, net of amortization
              
              
              ―
              
              
              
              567,385Investment
      in RPMG
              
              
              605,000
              
              
              
              605,000Patronage
      equity, at fair value
              
              
              192,207
              
              
              
              116,296Deposits
              
              
              80,000
              
              
              
              80,000Total
      other Assets
              
              
              877,207
              
              
              
              1,368,681Total
      Assets
              
              $
              96,082,076
              
              
              $
              95,802,453LIABILITIES
      AND MEMBERS' EQUITYCurrent
      LiabilitiesCurrent
      maturities of long-term debt
              
              $
              51,339,702
              
              
              $
              49,063,201Accounts
      payable
              
              
              6,005,915
              
              
              
              5,720,764Accrued
      expenses
              
              
              2,842,838
              
              
              
              1,845,101Derivative
      instruments, at fair value
              
              
              768,325
              
              
              
              1,051,052Accrued
      loss on firm purchase commitments
              
              
              218,000
              
              
              
              1,426,800Interest
      rate swaps, at fair value
              
              
              2,598,900
              
              
              
              2,861,530Total
      current liabilities
              
              
              63,773,680
              
              
              
              61,968,448Other
      LiabilitiesContracts
      payable
              
              
              275,000
              
              
              
              275,000Commitments
      and ContingenciesMembers'
      Equity
              
              
              32,033,396
              
              
              
              33,559,005Total
      Liabilities and Members' Equity
              
              $
              96,082,076
              
              
              $
              95,802,453


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




1




RED TRAIL ENERGY,
LLC


CONDENSED STATEMENTS OF OPERATIONS




Quarter
      Ended
                September
      30, 2009 (Unaudited)
              
              
              Quarter
      Ended
                September
      30, 2008 (Unaudited)
              
              
              Nine
      Months Ended
                September
      30, 2009 (Unaudited)
              
              
              Nine
      Months Ended
                September
      30, 2008 (Unaudited)RevenuesEthanol,
      net of derivative fair value changes
              
              $
              21,119,497
              
              
              $
              30,314,248
              
              
              $
              57,486,329
              
              
              $
              89,483,214Distillers
      grains
              
              
              4,127,699
              
              
              
              5,733,213
              
              
              
              12,289,311
              
              
              
              15,676,567Total
      Revenue
              
              
              25,247,196
              
              
              
              36,047,461
              
              
              
              69,775,640
              
              
              
              105,159,781Cost
      of Goods SoldCost
      of goods sold, net ofchanges
      in fair value ofderivative
      instruments
              
              
              20,932,722
              
              
              
              33,554,054
              
              
              
              60,983,797
              
              
              
              88,849,261(Gain)/loss
      on firm purchase commitments
              
              
              (477,000
              )
              
              
              3,140,000
              
              
              
              218,000
              
              
              
              3,140,000Lower
      of cost or market adjustment forinventory
      on hand
              
              
              221,500
              
              
              
              512,000
              
              
              
              1,464,500
              
              
              
              512,000Depreciation
              
              
              1,449,900
              
              
              
              1,438,264
              
              
              
              4,390,783
              
              
              
              4,270,804Total
      Cost of Goods Sold
              
              
              22,127,122
              
              
              
              38,644,318
              
              
              
              67,057,080
              
              
              
              96,772,065Gross
      Margin (Deficit)
              
              
              3,120,074
              
              
              
              (2,596,857
              )
              
              
              2,718,560
              
              
              
              8,387,716General
      and Administrative
              
              
              758,489
              
              
              
              666,866
              
              
              
              2,240,835
              
              
              
              2,332,795Operating
      Income (Loss)
              
              
              2,361,585
              
              
              
              (3,263,723
              )
              
              
              477,725
              
              
              
              6,054,921Interest
      Expense
              
              
              1,211,111
              
              
              
              1,116,343
              
              
              
              3,082,549
              
              
              
              3,493,487Other
      Income, net
              
              
              678,845
              
              
              
              835,179
              
              
              
              1,123,516
              
              
              
              1,693,922Net
      Income (Loss)
              
              $
              1,829,319
              
              
              $
              (3,544,887
              )
              
              $
              (1,481,308
              )
              
              $
              4,255,356Wtd
      Avg Units Outstanding -    Basic
              
              
              40,193,973
              
              
              
              40,187,995
              
              
              
              40,190,676
              
              
              
              40,178,681Net
      Income (Loss) Per Unit -   Basic
              
              $
              0.05
              
              
              $
              (0.09
              )
              
              $
              (0.04
              )
              
              $
              0.11Wtd
      Avg Units Outstanding -   Diluted
              
              
              40,193,973
              
              
              
              40,187,995
              
              
              
              40,190,676
              
              
              
              40,223,681Net
      Income (Loss) Per Unit -   Diluted
              
              $
              0.05
              
              
              $
              (0.09
              )
              
              $
              (0.04
              )
              
              $
              0.11


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




2




RED TRAIL ENERGY,
LLC


CONDENSED STATEMENTS OF CASH FLOWS




Nine
      months ended
                September
      30, 2009
                (Unaudited)
              
              
              Nine
      months ended
                September
      30, 2008
                (Unaudited)Cash
      Flows from Operating ActivitiesNet
      income (loss)
              
              $
              (1,481,308
              )
              
              $
              4,255,356Adjustment
      to reconcile net income (loss) to net cash provided byoperating
      activities:Depreciation
              
              
              4,428,307
              
              
              
              4,311,913Amortization
      and write-off of debt financing costs
              
              
              567,385
              
              
              
              150,768Change
      in fair value of derivative instruments
              
              
              (282,727
              )
              
              
              188,967Change
      in fair value of interest rate swap
              
              
              377,058
              
              
              
              9,703Equity-based
      compensation
              
              
              3,334
              
              
              
              15,000Equity-based
      compensation non-cash write-off
              
              
              (52,635
              )
              
              
              ―Noncash
      patronage equity
              
              
              (75,911
              )
              
              
              (116,296
              )Grant
      income applied to long-term debt
              
              
              ―
              
              
              
              (59,874
              )Loss
      on lower of cost or market adjustment
              
              
              1,464,500
              
              
              
              512,000Unrealized
      loss on firm purchase commitments
              
              
              (1,208,800
              )
              
              
              3,140,000Changes
      in assets and liabilitiesRestricted
      cash - margin account
              
              
              (42,882
              )
              
              
              2,954,220Accounts
      receivable
              
              
              (510,857
              )
              
              
              3,402,900Inventory
              
              
              (3,525,857
              )
              
              
              1,618,836Prepaid
      expenses
              
              
              4,141,483
              
              
              
              (25,722
              )Accounts
      payable
              
              
              454,261
              
              
              
              (975,575
              )Accrued
      expenses
              
              
              997,737
              
              
              
              (436,732
              )Cash
      settlements on interest rate swap
              
              
              (639,688
              )
              
              
              265,845Net
      cash provided by operating activities
              
              
              4,613,400
              
              
              
              19,211,309Cash
      Flows from Investing ActivitiesInvestment
      in RPMG
              
              
              (169,110
              )
              
              
              (354,087
              )Refund
      of sales tax on fixed assets
              
              
              763,630
              
              
              
              ―Capital
      expenditures
              
              
              (34,125
              )
              
              
              (1,967,019
              )Net
      cash provided by (used in) investing activities
              
              
              560,395
              
              
              
              (2,321,106
              )Cash
      Flows from Financing ActivitiesDebt
      repayments
              
              
              (1,297,007
              )
              
              
              (17,873,214
              )Restricted
      cash - collateral
              
              
              (750,000
              )
              
              
              ―Treasury
      units issued
              
              
              5,000
              
              
              
              ―Proceeds
      from long-term debt
              
              
              3,573,508
              
              
              
              3,160,500Net
      cash provided by (used in) financing activities
              
              
              1,531,501
              
              
              
              (14,712,714
              )Net
      Increase in Cash and Equivalents
              
              
              6,705,296
              
              
              
              2,177,489Cash
      and Equivalents - Beginning of Period
              
              
              4,433,839
              
              
              
              8,231,709Cash
      and Equivalents - End of Period
              
              $
              11,139,135
              
              
              $
              10,409,198Supplemental
      Disclosure of Cash Flow InformationInterest
      paid
              
              $
              2,216,077
              
              
              $
              3,252,713SUPPLEMENTAL
      DISCLOSURE OF NON-CASHINVESTING
      AND FINANCING ACTIVITIESCapital
      expenditures included in accounts payable
              
              $
              ―
              
              
              $
              230,000Write-off
      of debt issuance costs
              
              $
              517,823
              
              
              $
              ―Investment
      in RPMG included in accounts payable
              
              $
              169,110
              
              
              $
              250,913


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




3




RED TRAIL
ENERGY, LLC
 NOTES TO
CONDENSED FINANCIAL STATEMENTS
 FOR THE
PERIODS ENDED SEPTEMBER 30, 2009 AND DECEMBER 31, 2008


The
accompanying condensed unaudited financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(“SEC”). 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 December 31, 2008, contained in the Company’s Annual Report on
Form 10-K.




In the
opinion of management, the interim condensed financial statements reflect all
adjustments considered necessary for fair presentation. The adjustments made to
these statements consist only of normal recurring
adjustments.  Operating results for the periods presented are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2009.




1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES




Nature
of Business




Red Trail
Energy, LLC, a North Dakota limited liability company (the “Company”), owns and
operates a 50 million gallon annual name-plate production ethanol plant
near Richardton, North Dakota (the “Plant”).




Accounting
Estimates




Management
uses estimates and assumptions in preparing these financial statements in
accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities and the reported revenues and
expenses. Significant items subject to such estimates and assumptions include
the useful lives of property, plant and equipment; valuation of derivatives,
inventory, patronage equity and purchase commitments; analysis of intangibles
impairment, the analysis of long-lived assets impairment and other
contingencies.  Actual results could differ from those
estimates.





Reclassifications




The
presentation of certain items in the financial statements for the three and nine
months ended September 30, 2008 has been changed to conform to the
classifications used in 2009.  These reclassifications had no effect
on members’ equity, net income (loss) or operating cash flows as previously
reported.




Restricted
Cash




During
June 2009, the Company was required to restrict cash for use as collateral on
two letters of credit issued in relation to its distilled spirits and grain
warehouse bonds.  As of September 30, 2009 and December 31, 2008, the
total amount of restricted cash related to these bonds was $750,000 and $0,
respectively.  The Company also had cash restricted to meet its hedge
account requirements.  The total amount of cash restricted in its
hedge account was approximately $1.5 million as of both September 30, 2009 and
December 31, 2008.




Debt Issuance
Costs




Debt
issuance costs were amortized over the term of the related debt by use of the
effective interest method. Amortization commenced June 2006 when the
Company began drawing on the related bank loan. Due to the uncertainties with
our loan agreements described in Note 2 and Note 5, the Company wrote off the
remaining balance (approximately $517,000) of its debt issuance costs during the
first quarter of 2009.  Amortization and impairment expense totaled $0
and $567,000 (including the write-off of $517,000) for the three and nine months
ended September 30, 2009, respectively, and $50,000 and $151,000 for the three
and nine months ended September 30, 2008, respectively.  The
amortization and debt issuance cost impairment expense is included in interest
expense.




Net Income (Loss) Per
Unit




Net
Income (Loss) per unit are calculated on a basic and fully diluted basis using
the weighted average units outstanding during the period.  Diluted
units outstanding include 0 and 45,000 units as of September 30, 2009 and 2008,
respectively, for the vested equivalents of restricted member units issued to
management.  For the nine months ended September 30, 2009 and the
three months ended September 30, 2008, these equivalent units are not included
in fully diluted earnings per units as their effects would be
anti-dilutive.




4




RED TRAIL
ENERGY, LLC
 NOTES TO
CONDENSED FINANCIAL STATEMENTS
 FOR THE
PERIODS ENDED SEPTEMBER 30, 2009 AND DECEMBER 31, 2008


Subsequent
Events




The
Company has evaluated subsequent events through November 13, 2009, the date
which the financial statements were available to be issued.




Fair Value of Financial
Instruments




The fair
value of the Company’s cash and cash equivalents, accounts receivable, accounts
payable, and derivative instruments approximate their carrying value. It is not
currently practicable to estimate the fair value of the Company’s long-term debt
and contracts payable since the terms are uncertain as of September 30,
2009.  As such, there are no readily determinable similar instruments
on which to base an estimate of fair value of each item.




Recently Adopted Accounting
Principles




In June
2009, the FASB issued the FASB Accounting Standards Codification
(“Codification”). The Codification became the single source for all
authoritative GAAP recognized by the FASB and has been applied to financial
statements issued for periods ending after September 15, 2009. The
Codification does not change GAAP and will not have an effect on our financial
position, results of operations or liquidity.




Going
Concern and Management’s Plans




The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of
business.  The Company has determined that the following factors raise
substantial doubt about its ability to continue as a going concern:




1.
            The
      Company was profitable and had positive cash flows during the third
      quarter of 2009.  Prior to this quarter, however, poor market
      conditions in the ethanol industry led the Company to incur operating
      losses and negative operating cash flow since August
  2008.




2.
            The
      Company first violated certain of its loan covenants at December 31, 2008
      and was granted a waiver of the violations, as of that date, by its senior
      lender, First National Bank of Omaha (the “Bank” or
      “FNBO”).  The Company was also found to be in violation of the
      same loan covenants at March 31, 2009, June 30, 2009 and September 30,
      2009 and has not been granted a waiver of those violations by the
      Bank.




3.
            With
      the improvement in market conditions, the Company projects that it may
      come back in compliance with some, but not all of its loan covenants as
      early as December 31, 2009.  However, it cannot be certain that
      it will regain compliance and has not been granted a waiver of any future
      projected covenant violations.  Please see the following
      paragraphs for a discussion of these
factors.




1.  Market
Conditions




Prior to
the current quarter, the Company had incurred operating losses and negative
operating cash flow since August 2008.  As of September 30, 2009,
market conditions in the ethanol industry, and for the Company, have improved
relative to the market conditions in place earlier this year and during the last
quarter of 2008, to the point where operating cash flows are positive and the
Company recorded a profit for the third quarter of 2009.  The Company
projects that, if current market conditions continue through the fourth quarter
of 2009, it will also be profitable in the fourth quarter and will be around
break even for the year.  The Company anticipates that some of the
production capacity that was shutdown or slowed down earlier this year, due to
the poor market conditions, will come back on line in order to take advantage of
the improved margins.  The Company cannot predict when, or if, this
will happen but the Company believes that the ethanol industry could return to
the oversupply situation that, in part, helped create the poor margin conditions
during late 2008 and early 2009.




While the
cost saving and revenue enhancing measures implemented by the Company earlier
this year have been effective, the financial results of the Company are highly
dependent on the spread between ethanol and corn prices.  The spread
between ethanol and corn prices has improved which is largely why the Company
recorded a profit in the third quarter of 2009.  In an effort to
better insulate the Company from potential future downturns in the ethanol
industry, the Company is still in the process of developing a corn procurement
program that would essentially allow it to purchase corn in exchange for cash,
equity, a deferred payable and an incentive to be paid in the future based on
the Company’s financial performance.  The Company believes that such a
program would have a positive impact on the long-term viability of its
operations.




5




RED TRAIL
ENERGY, LLC
 NOTES TO
CONDENSED FINANCIAL STATEMENTS
 FOR THE
PERIODS ENDED SEPTEMBER 30, 2009 AND DECEMBER 31, 2008


2.  Long-Term
Debt




The
Company received a waiver for violations of its loan covenants for the period
ended December 31, 2008.  The Company has been notified by the Bank
that it is in violation of certain of the covenants in its loan agreements at
March 31, 2009, June 30, 2009 and September 30, 2009.  The Company has
not been granted a waiver of those violations.  While the Bank has
reserved its rights to declare the Company in default of its loan agreements, as
of November 13, 2009 the Bank has not declared the Company to be in default of
its loan agreements and considers the Company to be in good standing with its
loan agreements.  The Company is currently projecting that, with the
current improved margins, it may regain compliance with some, but not all, of
its loan covenants as early as December 31, 2009.  Due to the current
and projected covenant violations, the Bank has the ability to call the
Company’s debt due and payable during 2009 which has resulted in the
reclassification of the Company’s long-term debt to a current
liability.




The
Company has maintained a good working relationship with the Bank and continues
to have conversations with the Bank about potentially restructuring its debt
load and recasting its loan covenants to match the current economics in the
ethanol industry.  The sixth amendment to the Company’s construction
loan agreement (the “Sixth Amendment”) allowed the Company to forgo its April
16, 2009 and July 16, 2009 principal payments.  The Company did make
its regularly scheduled principal and interest payment on October 16,
2009.




The
Company’s line of credit with the Bank (the “Line of Credit”) expired on July
16, 2009 and was not renewed.  The Company continues to work with the
Bank to restore this line of credit currently does not have any options for
borrowing short term capital.  The Company believes that the potential
restructuring mentioned above would include reinstatement of its Line of
Credit.  The Company projects that it will not need any short term
borrowings to meet is obligations through December 31, 2009.




3.  Going
Concern




While the
Company was profitable during the third quarter of 2009 and projects that, under
current market conditions, it will also be profitable in the fourth quarter,
there is uncertainty surrounding how long margins will remain
positive.  Those uncertainties in market conditions along with the
status of the Company’s long-term debt and weakened balance sheet condition, due
to losses sustained, raise substantial doubt about the Company’s ability to
continue as a going concern.  Realization of assets is dependent upon
continued operations of the Company, which in turn is dependent upon
management’s plans to meet its financing requirements and the Bank’s
participation in working through the Company’s difficult economic situation and
the success of its future operations.  The ability of the Company to
continue as a going concern is dependent on improving the Company’s
profitability and cash flow, possibly securing additional financing or raising
additional equity, and working with the Bank to structure debt payment terms
that are reasonably achievable given current and applicable operating
conditions.  While the Company believes in the viability of its
strategies to maintain a positive cash flow and remain profitable, there can be
no assurances to that effect.  These financial statements do not
include any adjustments related to the recoverability and classification of
asset amounts or the amounts and classification of liabilities that might be
necessary if the Company is unable to continue as a going concern.




Please
see Note 2 for further detail on these items along with management’s plans to
mitigate the effect of these items.




2.  NATURE
OF CURRENT OPERATIONS




Market
Conditions




During
the third quarter of 2009, corn and ethanol prices continued to trade within a
relatively narrow range compared to the extremes experienced during the year
ended December 31, 2008.  For example, the September corn contract
closing prices for the third quarter of 2009 traded within a range that included
a high of approximately $3.60 per bushel and a low of approximately $3.00 per
bushel.  In comparison, corn prices during 2008 ranged from a low of
approximately $4.00 per bushel to a high near $8.00 per
bushel.  Industry margins improved significantly during the third
quarter relative to margins through June 2009.  The Company’s margins
also improved significantly during the third quarter and the Company realized a
net income of approximately $1.8 million.  Ethanol prices strengthened
relative to corn prices during the quarter due to an increase in demand for
ethanol related to new blending markets opening up and winter blending
requirements.




6




RED TRAIL
ENERGY, LLC
 NOTES TO
CONDENSED FINANCIAL STATEMENTS
 FOR THE
PERIODS ENDED SEPTEMBER 30, 2009 AND DECEMBER 31, 2008


During
the third quarter of 2009, the Company operated with near market corn prices –
the result of decreased volatility in the corn markets and the Company’s efforts
to implement a strategy to limit the number of bushels under fixed price
contracts and in inventory on hand.  Having corn under firm purchase
commitments which had a cost very near market prices allowed the Company to
record a recovery of a portion of the previously accrued unrealized loss on firm
purchase commitments related to its fixed price corn contracts of $477,000 as
the contracted prices were much closer to market prices.  The Company
did not record any lower of cost or market write downs on its corn inventory
during the third quarter of 2009 as its average cost of corn on hand was lower
than market prices.  The Company did record a lower of cost or market
adjustment write down related to its ethanol inventory on hand at September 30,
2009 of $221,500.  The Company had approximately 1.4 million bushels
under fixed price contract at September 30, 2009.




While the
Company has worked to limit its exposure to market fluctuations, it cannot
completely eliminate its exposure to those fluctuations.  Due to the
location of the Plant along with the logistics of corn movement in its region,
the Company believes it will always have to procure a certain amount of corn
under fixed price contracts to ensure an adequate supply of corn to efficiently
operate the Plant.




Banking
Update




·
            The
      Company continues to maintain a good working relationship with its Bank
      and also continues to converse with the Bank about possibly restructuring
      its current long-term debt and loan covenants to match the current and
      projected market conditions in the ethanol
  industry.




·
            The
      Company was notified by the Bank that it was in violation of its loan
      covenants at September 30, 2009 and that it had not received a waiver of
      those covenant violations.  While the Bank has reserved its
      rights to declare the Company in default of its loan agreements, as of
      November 13, 2009, the Bank has not declared the Company in default of its
      loan agreements and considers the Company to be in good
      standing.




·
            The
      Sixth Amendment allowed the Company to forgo its April 16, 2009 and July
      16, 2009 principal payments.  The Company did make its next
      scheduled note payment on October 16,
2009.




·
            Based
      on current industry margins and a projection of near breakeven for 2009,
      the Company projects that it will regain compliance with certain (not all)
      of its loan covenants as early as December 31,
  2009.




Company
Initiatives




·
            In
      an effort to mitigate the effect of potential future negative (or very
      small positive) cash flow and secure a supply of corn from local farmers,
      the Company is in the process of developing a corn purchasing strategy
      that would allow it to purchase corn for a combination of cash, equity and
      a deferred payable in exchange for repayment of such deferred amounts and
      payment of future incentives, to those that participate in the program, if
      the Plant is able to operate with positive cash flows sufficient enough to
      support the payments along with applicable debt service.  The
      Company views this strategy as a way of partnering with its corn supply
      chain to enhance its prospects to remain a viable company.  The
      program has taken longer than anticipated to develop and the Company now
      anticipates that, if successfully implemented, it will be in place during
      the first quarter of 2010.




·
            The
      Company captured an increased yield during the second quarter of 2009 vs.
      the first quarter of 2009 and was able to maintain that higher yield
      during the third quarter of 2009.  If maintained for a
      consecutive twelve month period, this higher yield would result in using
      approximately 600,000 fewer bushels of corn over that time which would
      result in an approximately $2.4 million savings if corn averaged $4 per
      bushel during that time.




·
            The
      Company maintained its production rate at approximately 110% of nameplate
      capacity during the third quarter of 2009 as margins continued to
      improve.  The Company continues to evaluate, on an on-going
      basis, the capacity at which to operate the Plant, including possibly
      shutting down.  The rate is being monitored in conjunction with
      industry margins to determine the best rate at which to operate the
      Plant.




7




RED TRAIL
ENERGY, LLC
 NOTES TO
CONDENSED FINANCIAL STATEMENTS
 FOR THE
PERIODS ENDED SEPTEMBER 30, 2009 AND DECEMBER 31, 2008


·
            The
      Company continues to evaluate other cost cutting/revenue enhancing
      measures including the installation of corn oil extraction
      equipment.




·
            The
      Company had to extend its normal fall maintenance outage by approximately
      13 days during October to repair some previously unnoticed damage in one
      area of the Plant.  The Plant was back operating at full
      capacity as of October 22.  While the Company believes this
      additional downtime will have a negative impact on its earnings for the
      fourth quarter of 2009, the Company anticipates that it will still be
      profitable for the quarter.




3. DERIVATIVE
INSTRUMENTS




From time
to time the Company enters into derivative transactions to hedge its exposures
to interest rate and commodity price fluctuations. The Company does not enter
into derivative transactions for trading purposes.




The
Company provides qualitative disclosures about objectives and strategies for
using derivatives, quantitative disclosures about fair value amounts of gains
and losses from derivative instruments, and disclosures about
credit-risk-related contingent features in derivative
agreements.





As of
September 30, 2009, the Company had entered into interest rate swap agreements
along with corn and ethanol derivative instruments.  The Company
records its derivative financial instruments as either assets or
liabilities at fair value in the statement of financial
position.  Derivatives qualify for treatment as hedges when there is a
high correlation between the change in fair value of the derivative instrument
and the related change in value of the underlying hedged item. Based upon the
exposure being hedged, the Company designates its hedging instruments as a fair
value hedge, a cash flow hedge or a hedge against foreign currency
exposure.  The Company formally documents, designates, and assesses
the effectiveness of transactions that receive hedge accounting initially and on
an on-going basis.  The Company does not currently have any derivative
instruments that are designated as effective hedging instruments for accounting
purposes.




Commodity
Contracts




As part
of its hedging strategy, the Company may enter into ethanol and corn
commodity-based derivatives in order to protect cash flows from fluctuations
caused by volatility in commodity prices in order to protect gross profit
margins from potentially adverse effects of market and price volatility on
ethanol sales and corn purchase commitments where the prices are set at a future
date.  These derivatives are not designated as effective hedges for
accounting purposes. For derivative instruments that are not accounted for as
hedges, or for the ineffective portions of qualifying hedges, the change in fair
value is recorded through earnings in the period of change. Ethanol derivative
fair market value gains or losses are included in the results of operations and
are classified as revenue and corn derivative changes in fair market value are
included in cost of goods sold.




As
      of September 30, 2009Contract
      Type
              
              #
      of Contracts
              
              
              Notional
      Amount (Qty)
              
              Fair
      ValueCorn
      futures
              
              394
              
              
              
              1,970,000
              
              bushels
              
              $
              376,000Ethanol
      swap contracts
              
              250
              
              
              
              3,600,000
              
              gallons
              
              
              392,000Total
      fair value (classified as a liability)
              
              
              
              
              
              
              
              $
              768,000


None of
the commodity contracts in place at September 30, 2009 were designated as
effective hedges for accounting purposes.  As such, the change in fair
value of the commodity contracts in place at September 30, 2009 has been
recorded in the results of operations and classified as stated
above.




Interest
Rate Contracts




The
Company manages its floating rate debt using interest rate swaps. The Company
has entered into fixed rate swaps to alter its exposure to the impact of
changing interest rates on its results of operations and future cash outflows
for interest. Fixed rate swaps are used to reduce the Company’s risk of the
possibility of increased interest costs. Interest rate swap contracts are
therefore used by the Company to separate interest rate risk management from the
debt funding decision.




8




RED TRAIL
ENERGY, LLC
 NOTES TO
CONDENSED FINANCIAL STATEMENTS
 FOR THE
PERIODS ENDED SEPTEMBER 30, 2009 AND DECEMBER 31, 2008


At
September 30, 2009, the Company had approximately $32 million of notional amount
outstanding in swap agreements that exchange variable interest rates (one-month
LIBOR and three-month LIBOR) for fixed interest rates over the terms of the
agreements. At September 30, 2009, the fair value of the interest rate
swaps totaled approximately $2.6 million and is included in current
liabilities.  These agreements are not designated as an effective
hedge for accounting purposes and the change in fair market value and associated
net settlements are recorded in interest expense.  The swaps mature in
April 2012.




The
Company recorded net settlements of approximately $306,000 and $640,000 for the
three and nine months ended September 30, 2009, respectively, and $192,000 and
$266,000 for the three and nine months ended September 30, 2008,
respectively.  See Note 5 for a description of these
agreements.





The
following tables provide details regarding the Company’s derivative financial
instruments at September 30, 2009:





Derivatives
      not designated as hedging instruments for accounting
    purposesBalance
      Sheet - as of September 30, 2009
              Asset
              
              LiabilityDerivative
      instruments, at fair value
              
              $
              ―
              
              
              $
              768,325Interest
      rate swaps, at fair value
              
              
              ―
              
              
              
              2,598,900Total
      derivatives not desingated as hedging instruments for accounting
      purposes
              
              $
              0
              
              
              $
              3,367,225
  Statement
      of Operations(Income)/expense
                Location
      of change in fair value recognized in income
                
                Change
      in fair value recognized in income during three months ended September 30,
      2009
                
                
                Change
      in fair value recognized in income during three months ended September 30,
      2008
                
                
                Change
      in fair value recognized in income during nine months ended September 30,
      2009
                
                
                Change
      in fair value recognized in income during nine months ended September 30,
      2008Corn
      derivative instruments
                Cost
      of Goods Sold
                
                $
                110,185
                
                
                $
                (1,653,852
                )
                
                $
                (603,934
                )
                
                $
                (6,783,307
                )Ethanol
      derivative instruments
                Revenues
                
                
                360,325
                
                
                
                (891,661
                )
                
                
                360,325
                
                
                
                2,340,621Interest
      rate swaps
                Interest
      Expense
                
                
                86,895
                
                
                
                168,636
                
                
                
                (262,630
                )
                
                
                275,548Total
                
                
                $
                557,405
                
                
                $
                (2,376,877
                )
                
                $
                (506,239
                )
                
                $
                (4,167,138
                )
 
 4.
INVENTORY




Inventory
is valued at lower of cost or market.  Inventory values and associated
lower of cost or market adjustments as of September 30, 2009 and December 31,
2008 were as follows:




Inventory
      values as of:
              
              September
      30, 2009
              
              
              December
      31, 2008Raw
      materials, including corn, chemicals and supplies
              
              $
              3,819,001
              
              
              $
              1,636,631Work
      in process
              
              
              596,823
              
              
              
              681,187Finished
      goods, including ethanol and distillers grains
              
              
              999,125
              
              
              
              1,035,774Total
      inventory
              
              $
              5,414,949
              
              
              $
              3,353,592
 Lower
      of cost or market adjustments for the periods ended:
                  
                  For
      the three months ended September 30, 2009
                  
                  
                  For
      the three months ended September 30, 2008
                  
                  
                  For
      the nine months ended September 30, 2009
                  
                  
                  For
      the nine months ended September 30, 2008Loss
      on firm purchase commitments
                  
                  $
                  (477,000
                  )
                  
                  $
                  3,140,000
                  
                  
                  $
                  218,000
                  
                  
                  $
                  3,140,000Lower
      of cost or market adjustment for inventory on hand
                  
                  
                  221,500
                  
                  
                  
                  512,000
                  
                  
                  
                  1,464,500
                  
                  
                  
                  512,000Total
      lower of cost or market adjustments
                  
                  $
                  (255,500
                  )
                  
                  $
                  3,652,000
                  
                  
                  $
                  1,682,500
                  
                  
                  $
                  3,652,000
  9




RED TRAIL
ENERGY, LLC
 NOTES TO
CONDENSED FINANCIAL STATEMENTS
 FOR THE
PERIODS ENDED SEPTEMBER 30, 2009 AND DECEMBER 31, 2008


The
Company has entered into forward corn purchase contracts under which it is
required to take delivery at the contract price.  At the time the
contracts were created, the price of the contract price approximated market
price.  Subsequent changes in market conditions could cause the
contract prices to become higher or lower than market prices.  As of
September 30, 2009, the average price of corn purchased under fixed price
contracts, that had not yet been delivered, was above market price but closer to
market prices than at June 30, 2009.  Based on this information, the
Company recorded a recovery of $477,000 of the previously accrued estimated loss
during the three months ended September 30, 2009.  The Company
recorded losses on these purchase commitments of approximately $218,000 for the
nine months ended September 30, 2009 and the Company also recorded a loss on
these purchase commitments of approximately $3.1 million for both the three and
nine month periods ended September 30, 2008.  The loss is recorded in
“Loss on firm purchase commitments” on the statement of
operations.  The amount of the loss was determined by applying a
methodology similar to that used in the impairment valuation with respect to
inventory.  Given the uncertainty of future ethanol prices, this loss
may or may not be recovered, and further losses on the outstanding purchase
commitments could be recorded in future periods.




The
Company recorded inventory valuation impairments of $221,500 and $1,464,500 for
the three and nine months ended September 30, 2009, respectively and $512,000
for both the three and nine month periods ended September 30, 2008,
respectively.  The impairments were attributable primarily to
decreases in market prices of corn and ethanol.  The inventory
valuation impairment was recorded in “Lower of cost or market adjustment for
inventory on hand” on the statement of operations.




5.
BANK FINANCING




Long-term
debt consists of the following:




As
      of
              
              September
      30, 2009
              
              
              December
      31, 2008Notes
      under loan agreement payable to bank, see details below
              
              $
              45,746,936
              
              
              $
              43,436,721Subordinated
      notes payable, see details below
              
              
              5,525,000
              
              
              
              5,525,000Capital
      lease obligations (Note 7)
              
              
              67,766
              
              
              
              101,480Total
      Long-Term Debt
              
              
              51,339,702
              
              
              
              49,063,201Less
      amounts due within one year*
              
              
              51,339,702
              
              
              
              49,063,201Total
      Long-Term Debt Less Amounts Due Within One Year
              
              $
              0
              
              
              $
              0


* - The
Company is out of compliance with certain of its bank covenants as of September
30, 2009.  Based on current market conditions, the Company projects
that it may regain compliance with some (but not all) of its loan covenants as
early as December 2009, but it has not been able to secure a waiver from the
bank for violations as of September 30, 2009 or the projected future
violations.  While the Bank has reserved its rights under the
Construction Loan Agreement as of November 13, 2009, the Bank has not declared
the Company in default of the Construction Loan Agreement and considers the
Company in good standing.  Due to the current and projected future
covenant violations, however, the Company is required to show all of its debt
subject to those covenant violations as a current liability.  The
Company has shown the scheduled debt maturities below, absent any effects of
possibly being declared in default of the Construction Loan Agreement, taking
into account the terms of the Sixth Amendment and under the assumption that it
will resume its scheduled note payments under the original terms of the
Construction Loan Agreement in October 2009.  The Company did make its
scheduled note payment in October 2009.




Scheduled
      maturities for the twelve months ended September 30,2010
              
              $
              4,930,8142011
              
              
              10,776,3652012
              
              
              35,596,7042013
              
              
              33,6552014
              
              
              2,164Thereafter
              
              
              ―Total
              
              $
              51,339,702




10




RED TRAIL
ENERGY, LLC
 NOTES TO
CONDENSED FINANCIAL STATEMENTS
 FOR THE
PERIODS ENDED SEPTEMBER 30, 2009 AND DECEMBER 31, 2008


The
Company is subject to a number of covenants and restrictions in connection with
its credit facilities, including:





•
            
            Providing
      the Bank with current and accurate financial
statements;•
            
            Maintaining
      certain financial ratios, minimum net worth, and working
      capital;•
            
            Maintaining
      adequate insurance;•
            
            Not
      making, or allowing to be made, any significant change in the Company’s
      business or tax structure;•
            
            Needing
      Bank approval for capital expenditures in excess of $500,000;
      and•
            
            Limiting
      the Company’s ability to make distributions to
  members.




The
Construction Loan Agreement with the Bank also contains a number of events of
default (including violation of our loan covenants) which, if any of them were
to occur, would give the Bank certain rights, including but not limited
to:





•
            
            Declaring
      all the debt owed to the Bank immediately due and payable;
    and•
            
            Taking
      possession of all of the Company’s assets, including any contract
      rights.




The Bank
could then sell all of the Company’s assets or business and apply any proceeds
to repay their loans. The Company would continue to be liable to repay any loan
amounts still outstanding.




The
Company has been notified by FNBO that it is in violation of certain of the
covenants at September 30, 2009 and that it has not been granted a waiver of
those violations.  These include the covenants requiring a minimum
working capital balance, minimum net worth and a minimum fixed charge coverage
ratio.  Please see Note 2 for further discussion of the covenant
violations and future projected waiver requests.




Credit
Agreement




In
December 2005, the Company entered into a credit agreement with the Bank
providing for a total credit facility of approximately $59,712,000 for the
purpose of funding the construction of the Plant. The Construction Loan
Agreement requires the Company to maintain certain financial ratios and meet
certain non-financial covenants.  The Construction Loan Agreement is
secured by substantially all of the assets of the Company and includes the terms
as described below.  Interest expense as shown on the statement of
operations is composed of the following:




Interest
      Expense
              
              For
      the three months ended September 30, 2009
              
              
              For
      the three months ended September 30, 2008
              
              
              For
      the nine months ended September 30, 2009
              
              
              For
      the nine months ended September 30, 2008Interest
      expense on long-term debt
              
              $
              817,829
              
              
              $
              705,321
              
              
              $
              2,138,105
              
              
              $
              2,801,327Amortization/write-off
      of deferred financing costs
              
              
              ―
              
              
              
              50,256
              
              
              
              567,386
              
              
              
              150,768Change
      in fair value of interest rate swaps
              
              
              86,895
              
              
              
              168,636
              
              
              
              (262,630
              )
              
              
              275,548Net
      settlements on interest rate swaps
              
              
              306,387
              
              
              
              192,130
              
              
              
              639,688
              
              
              
              265,844Total
      interest expense
              
              $
              1,211,111
              
              
              $
              1,116,343
              
              
              $
              3,082,549
              
              
              $
              3,493,487
  11




RED
TRAIL ENERGY, LLC
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE PERIODS ENDED SEPTEMBER 30, 2009 AND DECEMBER 31, 2008


Construction
Loan




The
Company had four long-term notes (collectively the “Term Notes” or each a “Term
Note”) in place as of September 30, 2009.  Three of the Term Notes
were established in conjunction with the termination of the original
Construction Loan Agreement on April 16, 2007.  The fourth Term Note
was entered into during December 2007 (the “December 2007 Fixed Rate Note”) when
the Company entered into a second interest rate swap agreement which effectively
fixed the interest rate on an additional $10 million of debt.  The
Construction Loan Agreement requires the Company to maintain certain financial
ratios and meet certain non-financial covenants.  Each Term Note has
specific interest rates and terms as described below.  The estimated
principal payments along with the interest rates shown below reflect the terms
of the Sixth Amendment.


Term
Notes - Construction Loan


Outstanding
      Balance (Millions)
                  
                  
                  Interest
      RateTerm
      Note
                  
                  September
      30, 2009
                  
                  
                  December
      31, 2008
                  
                  
                  September
      30, 2009
                  
                  
                  December
      31, 2008
                  
                  
                  Range
      of Estimated Quarterly Principal Payment Amounts
                  
                  
                  Estimated
      Final Payment (millions)
                  
                  
                  NotesFixed
      Rate Note
                  
                  $
                  24.10
                  
                  
                  $
                  24.70
                  
                  
                  
                  6.00
                  %
                  
                  
                  5.79
                  %
                  
                  $
                  530,000
      -
                  
                  
                  $
                  650,000
                  
                  
                  $
                  18.30
                  
                  
                  
                  1,
      2, 4Variable
      Rate Note
                  
                  
                  2.50
                  
                  
                  
                  3.00
                  
                  
                  
                  6.00
                  %
                  
                  
                  6.04
                  %
                  
                  $
                  447,000
      -
                  
                  
                  $
                  475,000
                  
                  
                  
                  0.21
                  
                  
                  
                  1,
      2, 3, 5Long-Term
      Revolving Note
                  
                  
                  10.00
                  
                  
                  
                  6.40
                  
                  
                  
                  6.00
                  %
                  
                  
                  5.74
                  %
                  
                  $
                  297,000
      -
                  
                  
                  $
                  511,000
                  
                  
                  
                  7.70
                  
                  
                  
                  1,
      2, 6, 72007
      Fixed Rate Note
                  
                  
                  9.00
                  
                  
                  
                  9.20
                  
                  
                  
                  6.00
                  %
                  
                  
                  6.19
                  %
                  
                  $
                  196,000
      -
                  
                  
                  $
                  233,000
                  
                  
                  
                  6.80
                  
                  
                  
                  1,
      2, 5
 1
      -   The scheduled maturity date is April 20122
      -   Range of estimated quarterly principal payments is based on
      principal balances and interest rates as of September 30,
    20093
      -   Quarterly payments of $634,700 are applied first to interest
      on the Long-Term Revolving Note, next to accrued interest on theVariable
      Rate Note and finally to principal on the Variable Rate
      Note.  Variable Rate Note is estimated to be paid off in January
      2011.4
      -   Interest rate based on 3.0% over three-month LIBOR with a 6%
      minimum, reset quarterly5
      -   Interest rate based on 3.4% over three-month LIBOR with a 6%
      minimum, reset quarterly6
      -   Interest rate based on 3.4% over one-month LIBOR with a 6%
      minimum, reset monthly7
      -   Principal payments would be made on the Long-Term Revolving
      Note once the Variable Rate Note is paid in
  full.
 Revolving Line of
Credit




The
Company’s $3.5 million line of credit was not renewed as of July 16,
2009.  Interest is payable quarterly and charged on all borrowings at
a rate of 3.4% over the one-month LIBOR rate with a minimum rate of
6%.  As of September 30, 2008, the rate charged was 5.73813%. The
Company had no outstanding borrowings on this note at December 31,
2008.




Interest Rate Swap
Agreements




In
December 2005, the Company entered into an interest rate swap transaction
that effectively fixed the interest rate at 8.08% on the outstanding principal
of the Fixed Rate Note.  In December 2007, the Company entered into a
second interest rate swap transaction that effectively fixed the interest rate
at 7.695% on the outstanding principal of the December 2007 Fixed Rate
Note.




The
interest rate swaps were not designated as either a cash flow or fair value
hedge. Fair value adjustments and net settlements are recorded in interest
expense.




Letters of
Credit




The
Construction Loan Agreement provides for up to $137,000 in letters of credit
with the Bank to be used for any future line of credit requested by a supplier
to the Plant. The letter of credit expires on December 1, 2009.  The
Construction Loan Agreement requires the Company to pay a quarterly commitment
fee of 2.25% of all outstanding letters of credit. The balance outstanding on
this letter of credit was $137,000 as of September 30, 2009 and December 31,
2008, respectively.




The
Company also issued two new letters of credit during the second quarter of 2009
in conjunction with the issuance of its grain warehouse and distilled spirits
bonds.  The letters of credit were issued in the amount of $500,000
and $250,000, respectively.




Subordinated
Debt




As part
of the Construction Loan Agreement, the Company entered into three separate
subordinated debt agreements totaling approximately $5,525,000 and received
funds from these debt agreements during 2006. Interest is charged at a rate of
2.0% over the Variable Rate Note interest rate (a total of 8% and 8.04063% at
September 30, 2009 and 2008, respectively) and is due and payable subject to
approval by the senior lender, the Bank. Interest is compounding with any unpaid
interest converted to principal. Amounts will be due and payable in full in
March 2011.  The balance outstanding on these loans was $5,525,000 as
of September 30, 2009 and December 31, 2008, respectively.




12




RED
TRAIL ENERGY, LLC
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE PERIODS ENDED SEPTEMBER 30, 2009 AND DECEMBER 31, 2008




6.
FAIR VALUE MEASUREMENTS





Fair
value is defined as the price that would be received to sell an asset or paid 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.




Fair
      Value Measurement UsingCarrying
      Amount as of
                September
      30, 2009
              
              
              Fair
      Value as ofSeptember
      30,2009
              
              
              Level
      1
              
              
              Level
      2
              
              
              Level
      3AssetsMoney
      market funds
              
              $
              5,001,898
              
              
              $
              5,001,898
              
              
              $
              5,001,898
              
              
              $
              ―
              
              
              $
              ―Total
              
              $
              5,001,898
              
              
              $
              5,001,898
              
              
              $
              5,001,898
              
              
              $
              ―
              
              
              $
              ―LiabilitiesInterest
      rate swaps
              
              $
              2,598,900
              
              
              $
              2,598,900
              
              
              $
              ―
              
              
              $
              2,598,900
              
              
              $
              ―Derivative
      instruments
              
              
              768,325
              
              
              
              768,325
              
              
              
              768,325
              
              
              
              ―
              
              
              
              ―Total
              
              $
              3,367,225
              
              
              $
              3,367,225
              
              
              $
              768,325
              
              
              $
              2,598,900
              
              
              $
              ―




The fair
value of the money market funds and corn and ethanol derivative instruments is
based on quoted market prices in an active market.  The fair value of
the interest rate swap instruments are determined by using widely accepted
valuation techniques including discounted cash flow analysis on the expected
cash flows of each instrument. The analysis of the interest rate swap reflects
the contractual terms of the derivatives, including the period to maturity and
uses observable market-based inputs and uses the market standard methodology of
netting the discounted future fixed cash receipts and the discounted expected
variable cash payments. The variable cash payments are based on an expectation
of future interest rates derived from observable market interest rate
curves.





7. LEASES




The
Company leases equipment under operating and capital leases through 2013. The
Company is generally responsible for maintenance, taxes, and utilities for
leased equipment.  Equipment under operating lease includes a
locomotive and rail cars.  Rent expense for operating leases was
approximately $122,000 and $358,000 for the three and nine months ended
September 30, 2009, respectively and $122,000 and $214,000 for the three and
nine months ended September 30, 2008, respectively.  Equipment under
capital leases consists of office equipment and plant equipment.





Equipment
under capital leases is as follows at:




September
      30, 2009
              
              
              December
      31, 2008Equipment
              
              $
              219,476
              
              
              $
              216,745Accumulated
      amortization
              
              
              57,436
              
              
              
              45,996Net
      equipment under capital lease
              
              $
              162,040
              
              
              $
              170,749




13




RED
TRAIL ENERGY, LLC
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE PERIODS ENDED SEPTEMBER 30, 2009 AND DECEMBER 31, 2008


At
September 30, 2009, the Company had the following minimum commitments, which at
inception had non-cancelable terms of more than one year.  Amounts
shown below are for the 12 months period ending September 30:




Operating
      Leases
              
              
              Capital
      Leases2010
              
              $
              489,660
              
              
              $
              60,3052011
              
              
              489,660
              
              
              
              3,3542012
              
              
              415,360
              
              
              
              3,3542013
              
              
              138,800
              
              
              
              3,3542014
              
              
              ―
              
              
              
              2,236Total
      minimum lease commitments
              
              $
              1,533,480
              
              
              
              72,603Less
      amount representing interest
              
              
              
              
              
              
              4,837Present
      value of minimum lease commitments included in the preceding current
      liabilities
              
              
              
              
              
              $
              67,766




8. MEMBERS’
EQUITY




The
Company has one class of membership units, Class A Membership Units (the
“Units”), with each Unit representing a pro rata ownership interest in the
Company’s capital, profits, losses and distributions.  There were
40,193,973 and 40,188,973 Units outstanding as of September 30, 2009 and
December 31, 2008, respectively.





9.
EQUITY-BASED COMPENSATION




2006 Equity-Based Incentive
Plan





During
2006, the Company implemented an equity-based incentive plan (the “Plan”) which
provided for the issuance of restricted Units to the Company’s key management
personnel, for the purpose of compensating services rendered. As of June 30,
2009, the personnel covered by the Plan had either left employment or given
notice that they were going to leave employment.  Due to these
circumstances, prior recognized equity-based compensation expense related to
these grants was written off through compensation expense during the three
months ended June 30, 2009.  5,000 units were issued under the terms
of the Plan during June 2009.  During 2007, the Company exercised an
option to repurchase 200,000 Units in association with this
Plan.  185,000 Units are still held in treasury and will not be issued
under the Plan.  While the Company does not have any other
equity-based compensation plans currently in place, these Units could be used
for that purpose in the future.  Equity-based compensation expense was
$0 and $-53,334 (approximately $700 of this was shown in interest expense) for
the three and nine months ended September 30, 2009, respectively and $5,000 and
$15,000 for the three and nine months ended September 30, 2008,
respectively.  As of September 30, 2009, the total equity-based
compensation expense related to nonvested awards not yet recognized was
$0.




10. COMMITMENTS AND
CONTINGENCIES




Design-Build
Agreement




The
Company signed a design-build agreement (the “Design-Build Agreement”) with
Fagen, Inc. (“Fagen”) in September 2005 to design and build the Plant at a total
contract price of approximately $77 million.  The Company has
remaining payments under the Design-Build Agreement of approximately $3.9
million.  This payment has been withheld pending satisfactory
resolution of a punch list of items, including a major issue with the coal
combustor experienced during start up.  The Plant was originally
designed to be able to run on lignite coal.  During the first four
months of operation, however, the Plant experienced numerous shut downs related
to running on lignite coal.  In April 2007, the Company switched to
using Powder River Basin (“PRB”) coal as its fuel source and has not experienced
a single shut down related to coal quality.  The Company continues to
work with Fagen to find a solution to these issues.  An amount
approximately equal to the final payment has been set aside in a separate money
market account.  Any amounts remaining in this account after
satisfactory resolution of this issue could be used to pay down the Company’s
long-term debt, make necessary upgrades to its Plant or be used for operations
pending bank approval.




Firm Purchase Commitments
for Corn




To ensure
an adequate supply of corn to operate the Plant, the Company enters into
contracts to purchase corn from local farmers and elevators.  At
September 30, 2009, the Company had various fixed and basis contracts for
approximately 1.4 million bushels of corn.  Of the 1.4 million bushels
under contract, only approximately 12,000 bushels were under basis contract and
did not have a fixed price.  Using the stated contract price for the
fixed contracts and using market prices, as of September 30, 2009, to price the
basis contracts the Company had commitments of approximately $5.2 million
related to all 1.4 million bushels under contract.




14




RED
TRAIL ENERGY, LLC
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 FOR
THE PERIODS ENDED SEPTEMBER 30, 2009 AND DECEMBER 31, 2008


11. RELATED-PARTY
TRANSACTIONS




The
Company has balances and transactions in the normal course of business with
various related parties for the purchase of corn, sale of distillers grains and
sale of ethanol.  The related parties include Unit holders, members of
the board of governors of the Company, Greenway Consulting, LLC (“Greenway”) and
RPMG, Inc. (“RPMG”).  RPMG has been considered a related party since
January 1, 2008 when the Company became a partial owner in RPMG.  The
Company also has a note payable to Greenway, and pays Greenway for plant
management and other consulting fees (recorded in general and administrative
expense).  The Chief Manager of Greenway is the Company’s interim CEO
and also a member of the Company.  Significant related party activity
affecting the financial statements are as follows:




September
      30, 2009
              
              December
      31, 2008Balance
      SheetAccounts
      receivable
              
              
              
              
              $
              2,595,055
              
              
              $
              2,198,277Accounts
      payable
              
              
              
              
              
              812,820
              
              
              
              788,149Notes
      payable
              
              1,525,000
              
              
              
              1,525,000For
      the three months ended September 30, 2009
              
              For
      the three months ended September 30, 2008
              
              For
      the nine months ended September 30, 2009
              
              For
      the nine months ended September 30, 2008Statement
      of OperationsRevenues
              $
              22,037,498
              
              $
              28,310,003
              
              $
              59,737,463
              
              
              $
              93,056,622Cost
      of goods sold
              
              706,369
              
              
              708,659
              
              
              2,060,175
              
              
              
              2,057,626General
      and administrative
              
              139,973
              
              
              170,988
              
              
              423,656
              
              
              
              948,728Inventory
      Purchases
              $
              1,481,245
              
              $
              5,958,496
              
              $
              4,173,738
              
              
              $
              8,652,958


15




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




We
prepared the following discussion and analysis to help you better understand our
financial condition, changes in our financial condition, and results of
operations for the three and nine months ended September 30, 2009, 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 contained in Item 8 and
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” contained in Item 7 of our Annual Report on Form 10-K for the fiscal
year ended December 31, 2008.




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 this
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. Forward-looking statements
in this Quarterly Report include, but are not limited to, our expectations
regarding future revenues and expenses, the effect of state and federal low
carbon fuel or ethanol blending regulations on our operations and revenues,
Plant downtime, capital expenditures, our compliance with loan covenants,
reinstatement of our line of credit, interest costs, interest income, receipt of
grant income, receipt of state incentive plan payments, linkage of ethanol and
corn prices in the future, ethanol and distillers grain prices,  corn
costs, increased yields from production, the implementation of our corn
procurement program, the possible installation of corn oil extraction equipment,
hedging strategies, corn usage and ethanol production, general and
administrative costs, chemical and denaturant costs, expected savings from our
coal unloading facility, our profit projections for the rest of
2009,  and our ability to fund our operations and capital expenditures
from our existing cash flows.  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 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 year ended December 31, 2008, and include:





•
            
            Our
      ability to secure a waiver for future possible violations of our loan
      covenants or other events of default or renegotiate the terms of our loan
      agreements with our lenders;•
            
            Our
      possible future violations of loan covenants under existing loan
      agreements with our lenders;•
            
            Our
      ability to successfully implement our proposed corn procurement
      program;•
            
            Our
      ability to raise additional capital whether through debt financing, an
      equity raise or other means of raising
capital;




16




•
            
            Our
      ability to secure replacement debt financing in the event our Bank calls
      our loan amounts and requires payment in full.•
            
            Projected
      growth, overcapacity or contraction in the ethanol market in which we
      operate;





•
            
            Fluctuations
      in the price and market for ethanol and distillers
  grains;





•
            
            Changes
      in Plant production capacity, variations in actual ethanol and distillers
      grains production from expectations or technical difficulties in operating
      the Plant;





•
            
            Availability
      and costs of products and raw materials, particularly corn and
      coal;





•
            
            Changes
      in our business strategy, capital improvements or development plans for
      expanding, maintaining or contracting our presence in the market in which
      we operate;





•
            
            Costs
      of equipment;





•
            
            Changes
      in interest rates and the availability of credit to support capital
      improvements, development, expansion and
  operations;





•
            
            Our
      ability to market and our reliance on third parties to market our
      products;





•
            
            Our
      ability to distinguish ourselves from our current and future
      competition;





•
            
            Changes
      to infrastructure, including:





-
            
            expansion
      of rail capacity;-
            
            possible
      future use of ethanol dedicated pipelines for
    transportation;-
            
            increases
      in truck fleets capable of transporting ethanol within localized
      markets;-
            
            additional
      storage facilities for ethanol, expansion of refining and blending
      facilities to handle ethanol;-
            
            growth
      in service stations equipped to handle ethanol fuels;
  and-
            
            growth
      in the fleet of flexible fuel vehicles capable of using E85
      fuel;





•
            
            Changes
      in or elimination of governmental laws, tariffs, trade or other controls
      or enforcement practices such as:





-
            
            national,
      state or local energy policy;-
            
            federal
      ethanol tax incentives;-
            
            legislation
      mandating the use of ethanol or other oxygenate
  additives;-
            
            state
      and federal regulation restricting or banning the use of
    MTBE;-
            
            environmental
      laws and regulations, specifically carbon regulation, that apply to our
      plant operations and their enforcement; or-
            
            reduction
      or elimination of tariffs on foreign
ethanol.





•
            
            Increased
      competition in the ethanol and oil
industries;





•
            
            Fluctuations
      in U.S. oil consumption and petroleum
prices;





•
            
            Changes
      in general economic conditions or the occurrence of certain events causing
      an economic impact in the agriculture, oil or automobile
      industries;





•
            
            Anticipated
      trends in our financial condition and results of
    operations;




17




•
            
            The
      availability and adequacy of our cash flow to meet our requirements,
      including the repayment of debt and the observance of our loan
      covenants;





•
            
            Our
      liability resulting from
litigation;





•
            
            Our
      ability to retain key employees and maintain labor
    relations;





•
            
            Changes
      and advances in ethanol production
technology;





•
            
            Gains
      or losses from derivative activities, including hedging corn, ethanol and
      other commodities;•
            
            Possible
      conflicts of interest involving our governors and/or officers;
      and•
            
            Competition
      from alternative fuels and alternative fuel
  additives.





Summary




Red Trail
Energy, LLC, a North Dakota limited liability company (the “Company,” “Red
Trail,” or “we,” “our,” or “us”), owns and operates a 50 million gallon
annual name-plate production ethanol plant near Richardton, North Dakota (the
“Plant”).




Results of
Operations




The
following table shows the results of our operations and the percentages of
revenues, cost of goods sold, general and administrative expenses and other
items to total sales and revenues in our statements of operations for the three
and nine months ended September 30, 2009 and 2008.




Three
      months ended
                September
      30, 2009
                (Unaudited)
              
              
              Three
      months ended
                September
      30, 2008
                (Unaudited)
              
              
              Nine
      months ended
                September
      30, 2009
                (Unaudited)
              
              
              Nine
      months ended
                September
      30, 2008
                (Unaudited)Amount
              
              
              Percent
              
              
              Amount
              
              
              Percent
              
              
              Amount
              
              
              Percent
              
              
              Amount
              
              
              PercentRevenuesEthanol,
      net of derivative fair value changes
              
              $
              21,119,497
              
              
              
              83.65
              %
              
              $
              30,314,248
              
              
              
              84.10
              %
              
              $
              57,486,329
              
              
              
              82.39
              %
              
              $
              89,483,214
              
              
              
              85.09
              %Distillers
      grains
              
              
              4,127,699
              
              
              
              16.35
              %
              
              
              5,733,213
              
              
              
              15.90
              %
              
              
              12,289,311
              
              
              
              17.61
              %
              
              
              15,676,567
              
              
              
              14.91
              %Total
      Revenue
              
              
              25,247,196
              
              
              
              100.00
              %
              
              
              36,047,461
              
              
              
              100.00
              %
              
              
              69,775,640
              
              
              
              100.00
              %
              
              
              105,159,781
              
              
              
              100.00
              %Cost
      of Goods SoldCost
      of goods sold, net of derivative fair value changes
              
              
              20,932,722
              
              
              
              82.91
              %
              
              
              33,554,054
              
              
              
              93.08
              %
              
              
              60,983,797
              
              
              
              87.40
              %
              
              
              88,849,261
              
              
              
              84.49
              %(Gain)
      loss on firm purchase commitments
              
              
              (477,000
              )
              
              
              -1.89
              %
              
              
              3,140,000
              
              
              
              0.00
              %
              
              
              218,000
              
              
              
              0.31
              %
              
              
              3,140,000
              
              
              
              2.99
              %Lower
      of cost or market adjustment for inventory on hand
              
              
              221,500
              
              
              
              0.88
              %
              
              
              512,000
              
              
              
              0.00
              %
              
              
              1,464,500
              
              
              
              2.10
              %
              
              
              512,000
              
              
              
              0.49
              %Depreciation
              
              
              1,449,900
              
              
              
              5.74
              %
              
              
              1,438,264
              
              
              
              3.99
              %
              
              
              4,390,783
              
              
              
              6.29
              %
              
              
              4,270,804
              
              
              
              4.06
              %Total
      Cost of Goods Sold
              
              
              22,127,122
              
              
              
              87.64
              %
              
              
              38,644,318
              
              
              
              97.07
              %
              
              
              67,057,080
              
              
              
              96.10
              %
              
              
              96,772,065
              
              
              
              92.02
              %Gross
      Margin (Deficit)
              
              
              3,120,074
              
              
              
              12.36
              %
              
              
              (2,596,857
              )
              
              
              2.93
              %
              
              
              2,718,560
              
              
              
              3.90
              %
              
              
              8,387,716
              
              
              
              7.98
              %General
      and Administrative
              
              
              758,489
              
              
              
              3.00
              %
              
              
              666,866
              
              
              
              1.85
              %
              
              
              2,240,835
              
              
              
              3.21
              %
              
              
              2,332,795
              
              
              
              2.22
              %Operating
      Income (Loss)
              
              
              2,361,585
              
              
              
              9.35
              %
              
              
              (3,263,723
              )
              
              
              1.08
              %
              
              
              477,725
              
              
              
              0.68
              %
              
              
              6,054,921
              
              
              
              5.76
              %Interest
      Expense
              
              
              1,211,111
              
              
              
              4.80
              %
              
              
              1,116,343
              
              
              
              3.10
              %
              
              
              3,082,549
              
              
              
              4.42
              %
              
              
              3,493,487
              
              
              
              3.32
              %Other
      Income, net
              
              
              678,845
              
              
              
              2.69
              %
              
              
              835,179
              
              
              
              2.32
              %
              
              
              1,123,516
              
              
              
              1.61
              %
              
              
              1,693,922
              
              
              
              1.61
              %Net
      Income (Loss)
              
              $
              1,829,319
              
              
              
              7.25
              %
              
              $
              (3,544,887
              )
              
              
              0.30
              %
              
              $
              (1,481,308
              )
              
              
              -2.12
              %
              
              $
              4,255,356
              
              
              
              4.05
              %


18




Additional
      Data
              
              Three
      Months ended
                September
      30, 2009
              
              
              Three
      Months ended
                September
      30, 2008
              
              
              Nine
      Months ended September 30, 2009
              
              
              Nine
      Months ended September 30, 2008Ethanol
      sold (thousands of gallons)
              
              
              14,086
              
              
              
              13,392
              
              
              
              38,567
              
              
              
              41,515Dried
      distillers grains sold (tons)
              
              
              39,305
              
              
              
              29,706
              
              
              
              78,813
              
              
              
              77,934Modified
      distillers grains sold (tons)
              
              
              8,439
              
              
              
              23,067
              
              
              
              65,127
              
              
              
              87,330Ethanol
      avg price/gallon (net of hedging activity)
              
              $
              1.50
              
              
              $
              2.26
              
              
              $
              1.49
              
              
              $
              2.16Dried
      distillers grains avg price/ton
              
              $
              93.93
              
              
              $
              139.25
              
              
              $
              112.20
              
              
              $
              136.65Modified
      distillers grains avg price/ton
              
              $
              51.59
              
              
              $
              68.90
              
              
              $
              52.84
              
              
              $
              57.29Corn
      costs per bushel (net of hedging activity)
              
              $
              3.40
              
              
              $
              5.89
              
              
              $
              3.77
              
              
              $
              4.93
 Results
of Operations for the Three and Nine Months Ended September 30, 2009 as Compared
to the Three and Nine Months Ended September 30, 2008




Summary




Our main
revenue sources (ethanol and distillers grains) and our main cost component
(corn) are commodities that are subject to a high degree of price volatility but
also have, historically, maintained a high degree of
correlation.  Because of this volatility, we may experience large
variances in our revenue and cost of goods sold from period to period and year
to year.  While we do monitor increases and decreases in the price of
ethanol and corn and we also monitor our other costs of goods sold very closely,
we tend to focus our attention on the spread between ethanol and corn prices as
that has the biggest impact on our profitability.  While we have seen
a decrease in our ethanol and corn prices compared to the three and nine months
ended September 2008, the spread between ethanol and corn prices remained fairly
constant until the third quarter of 2009 when the spread increased due to
relative strengthening of ethanol prices in comparison to corn
prices.





Our
operations were profitable during the third quarter of 2009 with a net income of
approximately $1.8 million compared to a net loss of approximately $3.5 million
during the third quarter of 2008.  For the nine months ended September
30, 2009, we recognized a loss of approximately $1.5 million compared to a net
income of approximately $4.3 million for the nine months ended September 30,
2008.





Margins
improved significantly during the third quarter of 2009 as ethanol prices
strengthened relative to corn prices and our corn costs reflected corn purchases
at or below market levels.  This positive trend in the spread between
ethanol and corn prices has continued into the fourth quarter and we believe
that, if current margins hold throughout the fourth quarter of 2009, the Company
should also be profitable in the fourth quarter of 2009 and come very close to
breaking even for fiscal year 2009.





Ethanol
prices strengthened during the third quarter of 2009 mainly due a more balanced
supply and demand in the ethanol markets.  Many plants that had been
idle earlier in the year have started producing again as margins have
increased.  Current estimates are that approximately 1 billion gallons
of production capacity is either shutdown or operating at less than 100%
capacity compared to over 2 billion gallons earlier this year.  It
remains to be seen whether this will again create an oversupply situation that
causes prices to decrease and plants to shut down.





Operationally
we had a very strong third quarter, producing approximately 14.2 million gallons
of ethanol.  We continue to monitor our plant efficiency and have seen
continued improvement in our yield (gallons of ethanol produced per bushel of
corn).  While our operations are highly dependent on the spread
between ethanol and corn prices, the cost cutting measures that we implemented
earlier this year have also had a positive impact on our net
income.





We
continue to evaluate various corn oil extraction systems in an effort to add
another revenue stream to our operation but have not yet signed a definitive
agreement for the installation of the equipment or sale of
product.  If we continue to pursue this option, we believe it may be
possible to have a system implemented during the second quarter of
2010.




19





As
previously reported in our Quarterly Report on Form 10-Q for the Period ended
June 30, 2009, we executed the Sixth Amendment which allowed us to forgo to two
principal payments (April 16, 2009 and July 16, 2009) under the Construction
Loan Agreement with our Bank.  We did make our regularly scheduled
principal and interest payment on October 16, 2009 and continue to have
conversations with our Bank regarding a possible restructuring of our loan
agreements.





Revenues




Three
Months Ended September 30, 2009 and 2008


Revenues
decreased approximately $10.8 million during the quarter ended September 30,
2009 as compared to the quarter ended September 30, 2008.  Ethanol
revenue decreased approximately $9.2 million and distillers grains revenue
decreased approximately $1.6 million.  The decrease was primarily due
to lower prices received for ethanol and distillers grains during the third
quarter of 2009.





Ethanol
revenue


We
operated the Plant at normal production rates (approximately 110% of name plate
capacity) during the third quarter of 2009 and produced just over 14 million
gallons of ethanol.  We sold approximately 700,000 more gallons of
ethanol during the third quarter of 2009 compared to the third quarter of
2008.  The price we received during the third quarter of 2009,
including the effects of our hedging activity, was an average of $0.76 per
gallon lower than the price received during the third quarter of 2008 ($1.50 per
gallon vs. $2.26 per gallon).  Ethanol prices traded within a fairly
narrow range during the third quarter of 2009 with forward month Chicago Ethanol
Swap closing prices trading between a low of approximately $1.54 and a high of
approximately $1.79.  Gains and losses related to our ethanol hedging
activities are recorded in revenue.  We recorded a loss of
approximately $360,000 and a gain of approximately $892,000 related to our
ethanol hedging activities for the three months ended September 30, 2009 and
September 30, 2008, respectively.  Ethanol is a commodity that has
maintained a fairly high correlation to corn futures prices.  Corn
futures prices were much lower during the third quarter of 2009 as compared to
the third quarter of 2008 and ethanol prices were correspondingly lower as
well.





Distillers
grains revenue


Our
overall distillers grain revenue decreased primarily due to lower prices
received during the third quarter of 2009 as compared to the third quarter of
2008.  The price of distillers grains typically increases or decreases
with the price of corn which is reflected in the prices we received during the
third quarter of 2009 vs. the third quarter of 2008.  The average
price we received for our dried distillers grains with solubles (“DDGS”) product
during the third quarter of 2009 was approximately $45.00 per ton lower than the
price we received during the third quarter of 2008 ($93.93 per ton vs. $139.25
per ton).  The average price we received for modified distillers
grains (“DMWG”) during the third quarter of 2009 was approximately $17.00 per
ton lower than the average price we received during the third quarter of 2008
($51.59 per ton vs. $68.90 per ton).





We sold
approximately 14,600 fewer tons of DMWG and we sold approximately 9,600 tons
more of DDGS during the three months ended September 30, 2009 as compared to the
three months ended September 30, 2008.  The change in product mix is
primarily related to a new price index we implemented for the sale of our
DMWG.  Our DMWG price is indexed to the price of corn and we adjusted
the index for our new contract period (June 2009 – May 2010) in an effort to
price our DMWG product at a level more comparable to our DDGS product (when
adjusted for moisture content).  The downturn in the cattle market and
availability of other cheaper feed sources, in conjunction with the change in
our price index, caused our customers to contract fewer tons of DMWG over the
summer months (third quarter of 2009) than the comparable period of
2008.




Nine
Months Ended September 30, 2009 and 2008


Revenues
decreased approximately $35.4 million during the nine months ended September 30,
2009 as compared to the nine months ended September 30, 2008.  Ethanol
revenue decreased approximately $32.0 million and distillers grains revenue
decreased approximately $3.4 million.  The decrease was primarily due
to lower prices received for ethanol and distillers grains during 2009 along
with lower volumes of ethanol and distillers grains produced and sold as we
operated the Plant at a lower capacity at various times for different reasons,
including weather related corn supply disruptions and the current economic
environment in the industry.





Ethanol
revenue


As
mentioned above, at various times we operated the Plant at a reduced rate during
the nine months ended September 30, 2009 as compared to the nine months ended
September 30, 2008.  We sold approximately 2.9 million fewer gallons
of ethanol during this period in 2009 as compared to the same period for 2008
and we received an average net price (including the effects of changes in
ethanol related derivative instruments) that was $0.67 per gallon lower ($1.49
per gallon vs. $2.16 per gallon).  Gains and losses related to our
ethanol hedging activities are recorded in revenue.  We recorded
losses related to our ethanol hedging activities of approximately $360,000 and
$2.3 million during the nine month period ended September 30, 2009 and September
30, 2008, respectively.  Ethanol is a commodity that has maintained a
fairly high correlation to corn futures prices.  Corn futures prices
were much lower during the nine months ended September 30, 2009 as compared to
same period in 2008 and ethanol prices were correspondingly lower as
well.




20





Distillers
grains revenue


We sold
approximately 22,200 fewer tons of DMWG and approximately the same number of
tons of DDGS during the nine months ended September 30, 2009 as compared to the
nine months ended September 30, 2008.  The overall decrease in sales
of distillers grains is due to the decrease in production rates during 2009 vs.
2008.   The change in product mix is primarily related to a new
price index we implemented for the sale of our DMWG.  Our DMWG price
is indexed to the price of corn and we adjusted the index for our new contract
period (June 2009 – May 2010) in an effort to price our DMWG product at a level
more comparable to our DDGS product (when adjusted for moisture
content).  The downturn in the cattle market and availability of other
cheaper feed sources, in conjunction with the change in our price index, caused
our customers to contract fewer tons of DMWG over the summer months (third
quarter of 2009) than the comparable period of 2008.





The price
of distillers grains typically increases or decreases with the price of corn
which is reflected in the prices we received during the nine months ended
September 30, 2009 vs. the same period in 2008.  The price we received
for our DDGS product was, on average, approximately $24.00 per ton lower during
the nine months ended September 30, 2009 vs. the nine months ended September 30,
2008 ($112.20 per ton vs. $136.65 per ton).  The average price we
received for DMWG was, on average approximately $4.00 per ton lower during the
nine months ended September 30, 2009 vs. the nine months ended September 30,
2008 ($52.84 per ton vs. $57.29 per ton).





Revenues
– Prospective Information





Ethanol
revenue – because ethanol is a market driven commodity, ethanol prices are very
hard to predict.  Based on recent trends, we anticipate the price of
ethanol to generally follow the price of corn but we also expect that there will
be periods when the price of these two commodities diverge.  However,
this is only a prediction on our part based on the knowledge and resources we
have available today.  During the third quarter of 2009 and through
October 2009, ethanol prices strengthened relative to the price of corn and the
spread between ethanol and corn prices increased.  Ethanol prices have
increased primarily due to more balanced supply and demand in the ethanol
markets along with lower than expected imports.  Imports are lower
because less ethanol is being produced in Brazil, as an increase in sugar prices
has diverted some sugar previously used in ethanol production to other
markets.  We cannot predict how long the market will maintain these
higher prices.





There is
a great amount of uncertainty in the marketplace regarding whether any of the
production capacity that is currently shut down will come back on-line, the
impact of negative public perception of the ethanol industry, the possible
repeal and/or reduction of federal ethanol supports and the possible enactment
at the state or federal level of low carbon fuel standards that may negatively
impact ethanol.  We could face additional negative impacts from low
carbon fuel standards since our Plant uses coal as its main fuel
source.  Based on the low carbon fuel standard regulation proposed and
approved by the California Air Resources Board, we believe that ethanol produced
at our Plant would not be allowed to be sold in that state.  The
regulation approved in California is not mandated to go into effect until
2011.  We cannot predict whether other states, or the federal
government, may try to enact legislation similar to the regulation approved by
the California Air Resources Board.  One potential government action
that we believe could have a positive impact on ethanol prices is a request
being considered by the United States Environmental Protection Agency to allow
blends of up to 15% ethanol in gasoline.  We believe this would help
balance the supply and demand in the industry as a whole more quickly and
potentially have a positive impact on ethanol prices.  Please see
“Item 1A – Risk Factors” in our Annual Report on Form 10-K for the year ended
December 31, 2008 for more information on risk factors that may affect our
ethanol revenues.





Distillers
grains revenue – distillers grains are also a market driven commodity which
makes the price very hard to predict.  The price of distillers grains,
both DDGS and DMWG, tends to follow the price of corn.  We expect the
average price we receive for our DDGS product to increase by approximately $15 -
$20 per ton (from our third quarter 2009 average price of approximately $94 per
ton) during the fourth quarter of 2009 based on anticipated increased demand for
this product as cattle move out of pastures and into feedlots.  We
expect the average price we receive during the fourth quarter of 2009 for our
DMWG product to increase approximately $3 - $5 per ton compared to our third
quarter 2009 average price of approximately $52.00 assuming corn prices stay
comparable to the third quarter of 2009.




21





Cost
of Sales


The price
we paid for our main input, corn, was significantly lower during the nine months
ended September 30, 2009 compared to the nine months ended September 30, 2008,
which led to an improvement in the margin between our revenue and corn cost of
approximately $0.04 per gallon ($0.59 per gallon vs. $0.55 per
gallon).  Margins have improved across the industry due to a more
balanced supply and demand of product in the market place.  This
margin improvement has caused some of the production capacity that was
previously slowed down or shut down to increase production or come back on
line.  Some of the other key components of our costs of goods sold
(chemicals, denaturant and coal) also decreased during the first nine months of
2009 vs. the same period in 2008.  These decreases were due, in part
to lower prices as well as the successful implementation of our coal unloading
facility along with cost cutting measures put in place earlier this
year.





Three
Months Ended September 30, 2009 and 2008


Our
overall cost of goods sold decreased by approximately $16.5 million during the
three months ended September 30, 2009 as compared to the three months ended
September 30, 2008.


·
            Corn
      costs - our corn costs were lower in the third quarter of 2009 compared to
      the third quarter of 2008 as market prices for corn were
      lower.  Our average cost per bushel, net of hedging activities,
      was approximately $3.40 per bushel and $5.89 per bushel for the three
      months ended September 30, 2009 and 2008, respectively.  Similar
      to ethanol prices, corn prices during the third quarter of 2009 remained
      relatively constant when compared to the volatility experienced during
      2008.


·
            Loss
      on firm purchase commitments - the corn that we had under contract at
      September 30, 2009, while very near market prices, was still approximately
      $0.17 per bushel higher than market, on average.  Because the
      average cost of the corn under contract was nearer to market prices than
      at June 30, 2009, this resulted in a recovery of some of our previously
      accrued unrealized loss on firm purchase commitments of
      $477,000.  During the third quarter of 2008, the average price
      of corn we had under firm purchase commitments became significantly higher
      than market as commodity prices dropped in response to the global economic
      crisis and we accrued a loss on firm purchase commitments of approximately
      $3.1 million.


·
            Lower
      of cost or market adjustments related to inventory on hand - we recorded
      lower of cost or market adjustments related to inventory on hand of
      $221,500 and $512,000 for the three months ended September 30, 2009 and
      2008, respectively.


·
            Denaturant
      costs – while we did use approximately 19,000 more gallons due to our
      slightly higher production, we also experienced a price decrease of
      approximately $1.36 per gallon during the third quarter of 2009 as
      compared to 2008 ($1.72 per gallon vs. $3.08 per gallon).  Most
      of the decrease was related to lower gasoline prices but a portion of the
      decrease is also related to negotiating a price index that resulted in a
      lower price to our Plant.  The decrease in denaturant prices and
      usage resulted in an approximate savings of $378,000 during the third
      quarter of 2009 as compared to the third quarter of
  2008.


·
            Coal
      costs - the successful start up of our coal unloading facility in October
      2008 has improved our cost structure as we experienced a decrease in our
      coal costs of approximately $13.00 per ton in the third quarter of 2009
      compared to the third quarter of 2008 ($39.20 per ton vs. $52.14 per
      ton).  We used approximately 25,000 tons of coal during the
      second quarter of 2009 which amounts to a savings of approximately
      $325,000.


·
            Chemical
      costs – our chemical costs were approximately $549,000 lower during the
      third quarter of 2009 vs. the comparable period in 2008.  The
      lower costs were primarily due to lower chemical prices as many of the
      items we buy are commodities and have decreased in price with most other
      commodities.  Decreased usage of some of the chemicals has also
      contributed to the lower costs as we have been able procure coal with a
      chemical composition that has the effect of lowering certain of the
      emissions from our process which, in turn, decreases the amount of
      chemicals needed to control those emissions and we have also lowered the
      usage of some chemicals through monitoring our process and trying to
      optimize our usage.


·
            Repair
      and maintenance costs – our repair and maintenance costs were
      approximately $188,000 lower during the third quarter of 2009 vs. the
      comparable period in 2008.  The decrease is primarily the result
      the timing of our normal fall maintenance outage – the outage took place
      during September of 2008 while the 2009 outage took place in October
      2009.




22




Our other
cost of goods sold items remained fairly constant between the third quarter of
2009 and the third quarter of 2008.





Nine
Months Ended September 30, 2009 and 2008


Our
overall cost of goods sold decreased by approximately $29.7 million during the
nine months ended September 30, 2009 as compared to the nine months ended
September 30, 2008.


·
            Corn
      costs - our corn costs were lower in the nine months ended September 30,
      2009 compared to the nine months ended September 30, 2008 as market prices
      for corn were lower.  Our average cost per bushel, net of
      hedging activities, was approximately $3.77 per bushel and $4.93 per
      bushel for the nine months ended September 30, 2009 and 2008,
      respectively.  Similar to ethanol prices, corn prices during the
      first nine months of 2009 remained relatively constant when compared to
      the volatility experienced during
2008.


·
            Loss
      on firm purchase commitments - we recorded a lower of cost or market
      adjustment related to the corn we had under firm purchase commitments of
      $218,000 and approximately $3.1 million for the nine months ended
      September 30, 2009 and 2008, respectively.  The average price of
      corn we have under firm purchase commitments has remained much closer to
      market prices during 2009 due, in part, to the decrease in volatility in
      the commodity markets and also due to our efforts to limit the number of
      bushels we have purchased under firm purchase
      commitments.  During the third quarter of 2008, commodity prices
      collapsed in response to the global economic crisis and caused the corn we
      had under firm purchase commitments to become priced significantly higher
      than market prices.  We had approximately 1.4 million bushels
      under firm purchase commitments as of September 30, 2009 compared to
      approximately 3.5 million bushels at September 30,
  2008.


·
            Lower
      of cost or market adjustments related to inventory on hand - we recorded a
      lower of cost or market adjustment related to inventory on hand of
      approximately $1.5 million and $512,000 for the nine months ended
      September 30, 2009 and 2008,
respectively.


·
            Denaturant
      costs - while we did use approximately 84,000 fewer gallons due to our
      reduced production rates and new regulations that limit the amount of
      denaturant we can blend with ethanol, we also experienced a price decrease
      of approximately $1.37 per gallon during the nine months ended September
      30, 2009 as compared to 2008 ($1.52 per gallon vs. $2.89 per
      gallon).  Most of the decrease is related to falling gasoline
      prices but a portion of the decrease is also related to negotiating a
      price index that resulted in a lower price to our Plant.  The
      decrease in denaturant prices and usage resulted in an approximate savings
      of $1.4 million during the nine months ended September 30, 2009 as
      compared to the nine months ended September 30,
  2008.


·
            Coal
      costs - the successful start up of our coal unloading facility in October
      2008 has improved our cost structure as we experienced a decrease in our
      coal costs of approximately $11.75 per ton for the nine months ended
      September 30, 2009 as compared to the nine months ended September 30, 2008
      ($40.33 per ton vs. $52.08 per ton).  We used approximately
      68,000 tons of coal during the nine months ended September 30, 2009 which
      amounted to a savings of approximately
$799,000.


·
            Chemical
      costs – our chemical costs were approximately $1 million lower for the
      nine months ended September 30, 2009 vs. the comparable period in
      2008.  The lower costs were primarily due to lower chemical
      prices as many of the items we buy are commodities and have decreased in
      price with most other commodities.  Decreased usage of some of
      the chemicals has also contributed to the lower costs as we have been able
      procure coal with a chemical composition that has the effect of lowering
      certain of the emissions from our process which, in turn, decreases the
      amount of chemicals needed to control those emissions and we have also
      lowered the usage of some chemicals through monitoring our process and
      trying to optimize our usage.





Our other
cost of goods sold items remained fairly constant between the nine months ended
September 30, 2009 and the nine months ended September 30, 2008.





Cost
of Sales and Gross Margin – Prospective Information




Because
ethanol is a commodity, we cannot necessarily pass along increases in our cost
of goods sold to our customers.  For that reason our gross margin is
very sensitive to changes in costs and we anticipate any increase in cost of
goods sold to have a negative impact on our gross margin.  Major
components of costs of goods sold are discussed below.




23





Corn
cost


Because
corn is a market driven commodity, corn prices are very hard to
predict.  While we have recently seen an improvement in margins as
ethanol prices have strengthened relative to corn prices and the spread between
ethanol prices and corn prices has increased, we cannot accurately predict how
long the improvement will last.  We anticipate that some of the
production capacity that has been slowed down or shutdown will come back on line
to take advantage of the improved margins which could create an oversupply
situation and cause ethanol prices to decrease relative to corn
prices.  Based on our corn procurement strategies we anticipate that
our corn costs will remain near market prices.  We expect that our
corn prices will tend to be slightly higher than market prices in a declining
corn market and slightly under market prices in a rising corn market as we do
have to enter into fixed price contracts for at least a portion of our
production needs to ensure an adequate supply of corn to our Plant.





In an
effort to increase the long-term viability of our Plant we are exploring ways of
partnering with our corn suppliers to purchase corn for a combination of cash,
equity and a deferred payable in exchange for repayment of such deferred amounts
and payment of future incentives, to those that participate in the program, if
the Plant is able to operate with positive cash flows sufficient enough to
support the payments along with applicable debt service.  We have
received some positive initial feedback to this concept from our corn suppliers
and are working through the details of how the program would work.  If
successful, we anticipate that the program could be in place during the first
quarter of 2010.





Energy
and chemical needs


While we
do have contracts in place for our main energy inputs in an effort to mitigate
future price increases for coal, water, electricity, natural gas and chemicals,
we have experienced an increase in our electric rates and our chemical supply
contract is subject to market pricing.





Coal
cost


We have a
contract in place for our coal needs in an effort to mitigate potential price
increases.  Our current contract runs through December 31,
2009.  We have negotiated a new coal supply contract to that we
believe should cover our coal needs through 2011.  The pricing in the
contract is slightly higher that our current price structure.  We
anticipate that the lower coal costs we experienced during the first nine months
of 2009, due to the implementation of our coal unloading facility, will continue
throughout 2009.





Chemical
and Denaturant costs


We have
recently experienced a decrease in the prices of some of the chemicals we use in
our production.  Chemical prices increased during the first half of
2008 as commodity prices increased and then also decreased during the last half
of 2008 and early 2009 as commodity prices decreased.  We do not
anticipate any significant price increases for chemicals during the fourth
quarter of 2009 but anticipate that we may see some price increases in commodity
prices such as oil, gasoline and natural gas which could have a negative impact
on our chemical costs.




General
and Administrative




Three
Months Ended September 30, 2009 and 2008


General
and administrative costs for the three months ended September 30, 2009 were
approximately $92,000 higher than the comparable period in 2008.  The
increase is primarily related to higher professional fees in relation to the
corn procurement program we are developing.





Nine
Months Ended September 30, 2009 and 2008


General
and administrative costs for the nine months ended September 30, 2009 were
approximately $92,000 lower than the comparable period in 2008.  The
decrease is primarily due to a decrease in the variable portion of our
management fees, which is based on our net income, of approximately $345,000
along with other decreases in our costs resulting from our cost cutting measures
including lower accounting and consulting fees ($97,000 decrease), lower meeting
and travel expenses ($63,000 decrease) and lower office supply expenses ($38,000
decrease).  The lower costs were offset, in part by higher bank fees
related to the Sixth Amendment ($167,000 increase), higher legal costs –
primarily associated with our corn procurement program ($153,000 increase) and
higher real estate taxes ($115,000 increase) due to the phase out of our tax
exemption and higher permitting costs of $63,000.  There were many
other small variances within our general and administrative costs but none were
significant.





General
and Administrative - Prospective


For the
rest of 2009, we anticipate our general and administrative costs to remain
consistent with the first nine months of 2009 in that we expect those areas
where we have seen a cost savings to remain lower and we anticipate those areas
where we have seen higher costs to continue to be higher.  Overall, we
anticipate our general and administrative costs for the year 2009 to be
comparable or slightly higher than 2008.




24




Interest
Expense





Our
interest expense is made up of the following components:




Interest
      Expense
              
              For
      the three months ended September 30, 2009
              
              
              For
      the three months ended September 30, 2008
              
              
              For
      the nine months ended September 30, 2009
              
              
              For
      the nine months ended September 30, 2008Interest
      expense on long-term debt
              
              $
              817,829
              
              
              $
              705,321
              
              
              $
              2,138,105
              
              
              $
              2,801,327Amortization/write-off
      of deferred financing costs
              
              
              ―
              
              
              
              50,256
              
              
              
              567,386
              
              
              
              150,768Change
      in fair value of interest rate swaps
              
              
              86,895
              
              
              
              168,636
              
              
              
              (262,630
              )
              
              
              275,548Net
      settlements on interest rate swaps
              
              
              306,387
              
              
              
              192,130
              
              
              
              639,688
              
              
              
              265,844Total
      interest expense
              
              $
              1,211,111
              
              
              $
              1,116,343
              
              
              $
              3,082,549
              
              
              $
              3,493,487


Three
Months Ended September 30, 2009 and 2008


·
            Interest
      expense on long-term debt - approximately $113,000 higher due to higher
      interest rates and higher debt balances.  Our weighted average
      interest rate for the three months ended September 30, 2009 was slightly
      higher than the comparable period in 2008 and our average outstanding debt
      balance was approximately $5 million higher in 2009 as we paid part of
      Long-Term Revolving Note paid down during the third quarter of 2008 but
      the full amount was outstanding during the third quarter of
      2009.  The Sixth Amendment to our loan agreements implemented a
      minimum interest rate of 6% which is slightly higher than rates in effect
      last year.


·
            Net
      settlements on interest rate swaps – the replacement rates on our interest
      rate swaps were lower during the third quarter of 2009 than the comparable
      period in 2008 causing us to have to make up a larger difference in rates
      through our net settlements.




Nine
Months Ended September 30, 2009 and 2008


·
            Interest
      expense on long-term debt – approximately $660,000 lower due to lower
      interest rates and lower average debt balances outstanding.  Our
      weighted average interest rate for the nine months ended September 30,
      2009 was approximately 1% lower than the comparable period for
      2008.  Our average outstanding debt balance was also
      approximately $2 million lower during the nine months ended September 30,
      2009 than the comparable period in 2008 due to regularly scheduled debt
      service payments offset in part by advances on our Long-Term Revolving
      Note.


·
            Amortization/write-off
      of deferred financing costs – we wrote off the remaining unamortized
      amount of our deferred financing costs during the first quarter of 2009
      (approximately $516,000).


·
            Change
      in fair value of interest rate swaps – we recorded a gain of approximately
      $263,000 and a loss of approximately $276,000 on our interest rate swap
      during the nine months ended September 30, 2009 and 2008,
      respectively.  The gain recorded this year is primarily related
      to the passage of time as the termination value of our swap decreases as
      the maturity date of the swap draws closer.  The loss recorded
      during the comparable period in 2008 was primarily due to a decrease in
      the replacement rates on the swaps.


·
            Net
      settlements on interest rate swaps – the replacement rates on our interest
      rate swaps were lower during the nine months ended September 30, 2009 than
      the comparable period in 2008 causing us to have to make up a larger
      difference in rates through our net
settlements.





Interest
Expense - Prospective


We
anticipate that our interest costs will increase during the rest of 2009 as a
result of the interest rate floor of 6% agreed to in the Sixth
Amendment.  The higher interest costs will be offset, in part, by
lower amortization costs due to the write-off of the remaining balance of our
deferred financing costs in the first quarter of 2009.  Interest rates
are difficult to predict, especially in the current economic
climate.  We would anticipate that an increase in the interest rate
used to calculate the value of our interest rate swaps to have a positive impact
on our net income while a decrease in those rates would have a negative impact
on our net income.  We also anticipate that the passage of time will
decrease the termination value of our interest rate swap.




25





Other
Income (Expense), Net




We
recognized other income of approximately $679,000 and $835,000 during the three
months ended September 30, 2009 and 2008, respectively.  During 2009,
we received approximately $650,000 from the North Dakota ethanol incentive
program along with other miscellaneous income of approximately
$29,000.  During 2008, we received approximately $722,000 from the
North Dakota ethanol incentive program and also had interest income of
approximately $130,000 due to higher cash balances on hand.





We
recognized other income of approximately $1.1 million and $1.7 million during
the nine months ended September 30, 2009 and 2008,
respectively.  During 2009, our other income included approximately
$679,000 from the North Dakota ethanol incentive program and approximately
$446,000 of interest income earned on a sales tax refund related to Plant
construction.  During 2008, our other income was primarily due to the
receipt of a North Dakota ethanol producer incentive payment of approximately
$1.4 million along with approximately $219,000 of interest income earned on cash
balances.





We do not
anticipate receiving any significant interest income during the last three
months of 2009 as our sales tax refund has been completed and the interest rates
paid on cash we have on deposit are very low.  We also do not
anticipate receiving any funds from the North Dakota Ethanol Incentive program
during the rest of 2009 as the fund has been depleted and will not have cash to
disburse until July 2010.




Liquidity
and Capital Resources





Statement
      of Cash Flows
              For
      the three months ended September 30, 2009
              
              
              For
      the three months ended September 30, 2008
              
              
              For
      the nine months ended September 30, 2009
              
              
              For
      the nine months ended September 30, 2008Cash
      flows provided by operating activities
              $
              2,177,837
              
              
              $
              6,504,415
              
              
              $
              4,613,400
              
              
              $
              19,211,309Cash
      flows provided by (used in) investing activities
              
              (52,271
              )
              
              
              (1,333,305
              )
              
              
              560,395
              
              
              
              (2,321,106
              )Cash
      flows provided by (used in) financing activities
              
              (13,294
              )
              
              
              (1,541,641
              )
              
              
              1,531,501
              
              
              
              (14,712,714
              )
 Cash
Flows





During
the three and nine months ended September 30, 2009 and 2008, respectively, the
net income before depreciation and amortization was a significant contributor to
cash flows from operating activities.  The changes in cash flows from
operating activities generally follow the results of operations as discussed in
“Results of Operations for the Three and Nine Months Ended September 30, 2009 as
Compared to the Three and Nine Months Ended September 30, 2008” and also are
affected by changes in working capital.




Three
Months Ended September 30, 2009 and 2008




Operating
activities




Cash
flows provided by operating activities decreased by approximately $4.3 million
during the three months ended September 30, 2009 from the comparable period in
2008.  A net positive change in net income of approximately $5.4
million was offset by a net negative change in working capital items during the
period of $6.1 million related to normal working capital changes along with a
significant decrease in our accrued unrealized loss on firm purchase commitments
of approximately $3.6 million as our corn under firm purchase commitments was
priced much closer to market prices at September 30, 2009 as compared to
September 30, 2008.




Investing
activities




Cash
flows used in investing activities decreased by approximately $1.3 million
during the three months ended September 30, 2009 as compared to
2008.  The decrease was primarily related to expending funds to build
our coal unloading facility during 2008 and having very minimal capital
expenditures in 2009.




Financing
activities




Cash
flows used in financing activities decreased by approximately $1.5 million
during the three months ended September 30, 2009 from the comparable period in
2008.  The Company had a net pay down of debt of approximately $1.5
million during the third quarter of 2008 and did not make any note payments
during the third quarter of 2009 in conjunction with the Sixth
Amendment.




26




Nine
Months Ended September 30, 2009 and 2008




Operating
activities




Cash
flows provided by operating activities decreased by approximately $14.6 million
during the nine months ended September 30, 2009 from the comparable period in
2008, primarily as a result of a net decrease in our net income of approximately
$5.7 million along with a net negative change in our accrued unrealized loss on
firm purchase commitments of approximately $4.3 million and a net negative
change in working capital items of approximately $4.6 million.  The
decrease in unrealized loss on firm purchase commitments occurred due to the
corn we had purchased under firm purchase commitments being priced much closer
to market prices at September 30, 2009 when compared to September 30, 2008 and
the working capital fluctuations are just related to timing of cash flows
related to those items.




Investing
activities




Cash
flows provided by investing activities increased by approximately $2.9 million
during the nine months ended September 30, 2009 from the comparable period in
2008.  The increase was primarily related to receiving approximately
$1.5 million (50% of which went to offset the cost of our Plant while the other
50% has been accrued as a payable to Fagen pursuant to the terms of the Design
Build Contract) from a sales tax refund related to our Plant construction during
2009 while we were expending funds to build our coal unloading facility and make
a down payment of $105,000 on an investment during the nine months ended
September 30, 2008.  We do not anticipate receiving any more funds
from the sales tax refund during 2009 as the refund is now
complete.




Financing
activities




Cash
flows provided by financing activities increased approximately $16.2 million
from the comparable period in 2008.  The increase is primarily related
to borrowing the remaining $3.6 million of capacity on our Long-Term Revolving
Note and forgoing our quarterly principal payments, due April 16, 2009 and July
16, 2009, in accord with the terms of the Sixth Amendment during the nine months
ended September 30, 2009 while we used excess cash to pay down $9 million on our
Long-Term Revolving Note and made all of our scheduled quarterly principal
payments during the nine months ended September 30, 2008.  Partially
offsetting the increase was an increase in restricted cash set aside as
collateral for our bonding requirements of $750,000.




Capital
Expenditures




We do not
anticipate any significant capital expenditures during 2009, although we may
seek to finance the installation of corn oil extraction equipment at our Plant
site if we can structure the project such that it is acceptable to the
Bank.




Capital
Resources




We are
subject to a number of covenants and restrictions in connection with our credit
facilities, including:





•
            
            Providing
      the Bank with current and accurate financial
statements;•
            
            Maintaining
      certain financial ratios including minimum net worth, working capital and
      fixed charge coverage ratio;•
            
            Maintaining
      adequate insurance;•
            
            Making,
      or allowing to be made, any significant change in our business or tax
      structure; and•
            
            Limiting
      our ability to make distributions to
members.




We have
been notified by FNBO that we were in violation of certain of the covenants in
our loan agreements at September 30, 2009.  These include the
covenants requiring a minimum working capital balance, minimum net worth and a
minimum fixed charge coverage ratio.  The Company has not been granted
a waiver of these violations by the Bank.  While the Bank has reserved
its rights to declare us in default of our loan agreements, as of November 13,
2009, the Company has not been declared in default of its loan agreements and is
still considered in good standing by the Bank.  As previously
mentioned, the Company executed the Sixth Amendment which allowed it to forgo
two scheduled quarterly principal payments (April 16, 2009 and July 16,
2009).  The Company did make its regularly scheduled principal and
interest payment on October 16, 2009.




27




The
Construction Loan Agreement also contains a number of events of default
(including violation of our loan covenants) which, if any of them were to occur,
would give the Bank certain rights, including but not limited to:





•
            
            declaring
      all the debt owed to the Bank immediately due and payable;
    and•
            
            taking
      possession of all of our assets, including any contract
      rights.




The Bank
could then sell all of our assets or business and apply any proceeds to repay
their loans. We would continue to be liable to repay any loan amounts still
outstanding.




As of
November 13, 2009, we had available capital (cash plus borrowing capacity) of
approximately $5 million.  Our available capital does not include
amounts that have been aside in conjunction with construction retainage withheld
from Fagen, Inc. of $3.9 million as described in Note 10 to our Financial
Statements in this Quarterly Report,   $750,000 set aside as cash
collateral related to two letters of credit issued in relation to our grain
warehouse and distilled spirits bonds or approximately $1.5 million that is part
of our hedging account. Based on our most recent projections which assume
current market conditions prevail through the end of 2009 and that we break even
during 2010, we anticipate that we will have enough available capital to operate
our business through 2010.  As of July 16, 2009, our short term line
of credit was not renewed.  We had never advanced funds under the line
of credit and believe that we would not need to borrow against it through
December 31, 2009 based on current market conditions.





If market
conditions worsen, we may not be able to fund our operations from existing cash
flows and existing lines of credit during 2010.  We are currently in
violation of our loan covenants and are projecting that we will be in violation
of certain of our loan covenants for the rest of 2009 and into
2010.  While the Bank has not yet declared us in default, they could
do so at any time.  Due to these uncertainties, we are exploring
whether we can obtain additional debt financing or renegotiate the amortization
of our existing long-term notes.




Short-Term
Debt Sources




As of
July 16, 2009, our $3.5 million line of credit was not renewed by the
Bank.  As mentioned above, we had never advanced funds on the line of
credit and do not anticipate that we would have needed to advance funds on the
line of credit through December 31, 2009, based on current market
conditions.




Please
see Note 5 to our Financial Statements in this Quarterly Report for further
information on our Short-Term Debt Sources.




Long-Term
Debt Sources




Please
see Note 5 to our Financial Statements in this Quarterly Report for a
comprehensive discussion of our Long-Term Debt Sources.




Contractual Obligations and Commercial
Commitments




We have
the following contractual obligations as of November 13, 2009:




Contractual
      Obligations
              Total
              
              
              Less
      than 1 Yr
              
              
              1-3
      Years
              
              
              3-5
      Years
              
              
              More
      than 5 YrsLong-term
      debt obligations *
              
              $
              60,107,987
              
              
              $
              8,422,092
              
              
              $
              51,673,215
              
              
              $
              12,680
              
              
              $
              ―Capital
      leases
              
              
              72,603
              
              
              
              60,305
              
              
              
              6,708
              
              
              
              5,590
              
              
              
              ―Operating
      lease obligations
              
              
              1,533,480
              
              
              
              489,660
              
              
              
              905,020
              
              
              
              138,800
              
              
              
              ―Corn
      Purchases **
              
              
              5,164,500
              
              
              
              5,164,500
              
              
              
              ―
              
              
              
              ―
              
              
              
              ―Coal
      purchases
              
              
              3,217,500
              
              
              
              1,375,650
              
              
              
              1,841,850
              
              
              
              ―
              
              
              
              ―Management
      Agreement
              
              
              386,100
              
              
              
              171,600
              
              
              
              214,500
              
              
              
              ―
              
              
              
              ―Water
      purchases
              
              
              2,988,000
              
              
              
              398,400
              
              
              
              796,800
              
              
              
              796,800
              
              
              
              996,000Total
              
              $
              73,470,170
              
              
              $
              16,082,207
              
              
              $
              55,438,093
              
              
              $
              953,870
              
              
              $
              996,000
 * -
Long-term debt obligations shown in this table are based on the scheduled
payments contained in the Term Notes including the effects of the waiver of
principal and interest rate floor provided for in the Sixth
Amendment.  We used the rates fixed in the interest rate swap
agreements (see “Interest Rate
Swap Agreements” in Note 5 to our unaudited condensed financial
statements in this Quarterly Report.) for the Fixed Rate Note and December 2007
Fixed Rate Note, respectively which should account for possible net cash
settlements on the interest rate swaps.  These amounts do not take
into account any effect of possibly being declared in default of our
Construction Loan Agreement.


** -
Amounts determined assuming prices, including freight costs, at which corn had
been contracted for cash corn contracts and current market prices as of
September 30, 2009 for basis contracts that had not yet been fixed.




28




Grants




There has
been no change in the repayment status of our grant from the North Dakota State
Industrial Commission (totaling $275,000) during the third quarter of
2009.  We did receive $8,000 and $59,000 during the three months ended
September 30, 2009 and 2008, respectively from the Job Service North Dakota
grant related to employee training.  We do anticipate receiving funds
from this grant during 2010.  We cannot accurately estimate the amount
but anticipate it will be less than $50,000.




North
Dakota Ethanol Incentive Program




Under the
program, each fiscal quarter, eligible ethanol plants may receive a production
incentive based on the average North Dakota price per bushel of corn received by
farmers during the quarter, as established by the North Dakota agricultural
statistics service, and the average North Dakota rack price per gallon of
ethanol during the quarter, as compiled by AXXIS Petroleum.  The
amount is capped at $1.6 million per plant per year up to a lifetime maximum of
$10 million per plant.  We did receive approximately $650,000 and $1.4
million during the nine months ended September 30, 2009 and 2008,
respectively.  We do anticipate receiving any additional funds from
this program until the third quarter of 2010 as there are currently no funds
available and the next round of funding will not occur until July
2010.  The incentive received is calculated by using the sum arrived
at for the corn price average and for the ethanol price average as calculated
below:




Corn
Price




·
            For
      every cent that the average quarterly price per bushel of corn exceeds
      $1.80, the state shall add to the amounts payable under the program $.001
      multiplied by the number of gallons of ethanol produced by the facility
      during the quarter.




·
            If
      the average quarterly price per bushel of corn is exactly $1.80, the state
      shall not add anything to the amount payable under the
    program




·
            For
      every cent that the average price per bushel of corn is below $1.80, the
      state shall subtract from the amounts payable under the program $.001
      multiplied by the number of gallons produced by the facility during the
      quarter.




Ethanol
Price




·
            For
      every cent that the average quarterly rack price per gallon of ethanol is
      above $1.30, the state shall subtract from the amounts payable under the
      program $.002 multiplied by the number of gallons of ethanol produced by
      the facility during the quarter.




·
            If
      the average quarterly price per gallon of ethanol is exactly $1.30, the
      state shall not add anything to the amount payable under the
      program.




·
            For
      every cent that the average quarterly rack price per gallon of ethanol is
      below $1.30, the state shall add to the amounts payable under the program
      $.002 multiplied by the number of gallons of ethanol produced by the
      facility during the quarter.




If corn
prices are low compared to historical averages and ethanol prices are high
compared to historical averages, we will receive little or no funds from this
program.





Critical Accounting
Estimates




Our most
critical accounting policies, which are those that require significant judgment,
include policies related to the carrying amount of property, plant and
equipment; valuation of derivatives, inventory and purchase commitments of
inventory; and analysis of intangibles impairment.  An in-depth
description of these can be found in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2008.  For valuation allowances
related to firm purchase commitments of inventory, please refer to the
disclosures in Note 2 and Note 4 of the Notes to the unaudited condensed
financial statements in this Quarterly Report.  Management has not
changed the method of calculating and using estimates and assumptions in
preparing our condensed financial statements in accordance with generally
accepted accounting principles.  There have been no changes in the
policies for our accounting estimates for the quarter ended September 30,
2009.




29





Off-Balance Sheet
Arrangements




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




ITEM 3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




We are exposed to the impact of market fluctuations associated with
interest rates and commodity prices as discussed below. We have no exposure to
foreign currency risk as all of our business is conducted in 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 we use ethanol swaps to hedge
changes in the commodity price of ethanol.  We do not enter into these
derivativefinancial instruments for trading or
speculative purposes, nor do we designate these contracts as hedges for
accounting purposes pursuant to the requirements Generally Accepted Accounting
Principals.




Interest
Rate Risk




We are
exposed to market risk from changes in interest rates. Exposure to interest rate
risk results primarily from holding a revolving promissory note and construction
term notes which bear variable interest rates. Approximately $17 million of our
outstanding long-term debt is not covered under an interest rate swap and is at
a variable rate as of September 30, 2009.  We anticipate that a
hypothetical 1% change in interest rates, from those in effect on September 30,
2009, would change our interest expense by approximately $170,000 on an annual
basis.  In order to achieve a fixed interest rate on the construction
loan and reduce our risk to fluctuating interest rates, we entered into an
interest rate swap contract that effectively fixed the interest rate at 8.08% on
approximately $27.6 million of the outstanding principal of the
construction loan.  We entered into a second interest rate swap in
December 2007 and effectively fixed the interest rate at 7.695% on an additional
$10 million of our outstanding long-term debt.  The interest rate
swaps are not designated as either a cash flow or fair value
hedge.  Market value adjustments and net settlements are recorded in
interest expense.  We anticipate that a hypothetical 1% change in
interest rates, from those in effect on September 30, 2009, would change the
fair value of our interest rate swaps by approximately $725,000.




Commodity
Price Risk




We expect
to be exposed to market risk from changes in commodity
prices.  Exposure to commodity price risk results from our dependence
on corn in the ethanol production process and the sale of
ethanol.  Based on management’s analysis, a trend has developed where
ethanol and corn prices appear to be “linked,” meaning that as corn prices move
up or down, ethanol prices also move up or down accordingly.




We did
use corn futures and options and ethanol swap contracts on a limited basis
during the third quarter of 2009 in an effort to offset a portion of our long
corn position.  We have implemented procurement procedures to try and
limit our long corn position as much as possible and still efficiently operate
our Plant and ensure that we have a sufficient supply of corn to operate the
Plant.




As of
September 30, 2009 we had approximately 1.4 million bushels of corn under fixed
price contracts.  We had accrued a loss on firm purchase commitments
of approximately $218,000 related to these bushels as average fixed price of
these contracts was approximately $0.16 above market value.  We would
expect a sustained $0.10 change in the price of corn to have an approximate
$140,000 impact on our net income.




We
entered into some ethanol swap contracts to lock in a price for a small portion
of our ethanol production.  We exited this position early in October
2009 in conjunction with our normal fall maintenance outage.  It is
the position of RPMG (our ethanol marketing company) that, under current market
conditions, selling ethanol in the spot market will yield the best price for our
ethanol.  RPMG will, from time to time, contract a portion of the
gallons they market with fixed price contracts.  We had no fixed price
contracts for the sale of physical ethanol outstanding at September 30, 2009 or
2008.




The
immediate recognition of hedging gains and losses under fair value accounting
can cause net income to be volatile from quarter to quarter due to the timing of
the change in value of the derivative instruments relative to the cost and use
of the commodity being hedged. As of September 30, 2009 and December 31, 2008,
the value of our futures, options and ethanol swap positions was approximately
$768,000 and $1,051,500, respectively.  There are several variables
that could affect the extent to which our derivative instruments are impacted by
price fluctuations in the cost of corn or ethanol.  However, it is
likely that commodity cash prices will have the greatest impact on the
derivatives instruments with delivery dates nearest the current cash
price.




30




We
estimate that our expected corn usage will be between 18 million and 20
million bushels per year for the production of approximately 50 million to 54
million gallons of ethanol.  As corn prices move in reaction to market
trends and information, our income statements will be affected depending on the
impact such market movements have on the value of our derivative instruments.




To manage
our coal price risk, we entered into a coal purchase agreement with our supplier
to supply us with coal, fixing the price at which we purchase coal. If we are
unable to continue buying coal under this agreement, we may have to buy coal in
the open market.





ITEM 4. CONTROLS AND
PROCEDURES




Evaluation of
Disclosure Controls and Procedures





We
conducted an evaluation under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer of
the effectiveness of the design and operation of our disclosure controls and
procedures.  The term “disclosure controls and procedures,” as defined
in Rules 13a-15(e) and 15d – 15(e) under the Securities Exchange Act of
1934 (“Exchange Act”), as amended, means controls and other procedures of a
company that are designed to ensure that information required to be disclosed by
the company in the reports it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission’s (“SEC”) rules and
forms.  Disclosure controls and procedures also include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by a company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the company’s management,
including its principal executive and principal financial officers, or persons
performing similar functions, as appropriate, to allow timely decisions
regarding required disclosure.





Our Chief
Executive Officer and Chief Financial Officer, after evaluating the
effectiveness of our disclosure controls and procedures as of September 30,
2009, have concluded that our disclosure controls and procedures are effective
in ensuring that material information required to be disclosed is included in
the reports that we file with the SEC.





Changes in Internal
Controls





There
have been no changes in our internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the
fiscal quarter ended September 30, 2009, that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.





Inherent
Limitations on the Effectiveness of Controls





Management
does not expect that our disclosure controls and procedures or our internal
control over financial reporting will prevent or detect all errors and all
fraud.  A control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that objectives of the
control systems are met.  Further, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs.  Because of the
inherent limitations in a cost-effective control system, no evaluation of
internal controls over financial reporting can provide absolute assurance that
misstatements due to error or fraud will not occur or that all control issues
and instances of fraud, if any, have been detected or will be
detected.





These
inherent limitations include the realities that judgments in decision-making can
be faulty and that breakdowns can occur because of a simple error or
mistake.  Controls can also be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of
the controls.  The design of any system of controls is based in part
on certain assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions.  Projections of any evaluation of
controls effectiveness to future periods are subject to risks.  Over
time, controls may become inadequate because of changes in conditions or
deterioration in the degree of compliance with policies and
procedures.




31




PART II — OTHER
INFORMATION




ITEM 1. LEGAL
PROCEEDINGS




None.




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 year ended December 31, 2008. “Risk
Factors” are conditions that may cause investment in our Company to be
speculative or risky. In light of developments during the third quarter of
fiscal 2009, we have decided to update our Risk Factors as set forth below.
Other than these updates, we are not currently aware of factors other than those
set forth in our Annual Report on Form 10-K that would have a foreseeable effect
on the level of risk associated with investment in our Company; however,
additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial might materially adversely affect our actual
business, financial condition and/or operating results.




The Company has
withheld $3.9 million from its Plant design-builder, Fagen, Inc., related
to the coal combustor.




The
Company has withheld $3.9 million from its Plant design-builder, Fagen,
Inc. (“Fagen”), due to punch list items which are not complete as of November
13, 2009 and problems with the coal combustor. The punch list is an item that
must be complete under the terms of the Design-Build Agreement in order for the
Company to sign off on final completion and authorize payment of the
$3.9 million.  In addition to a number of other punch list items,
the Design-Build Agreement specified that the coal combustor would operate on
lignite coal; however, the coal combustor did not run consistently on lignite
and the Company has suffered plant shut-downs as a result. The Company continues
to work with Fagen and its subcontractors on these issues; however, there is no
assurance that any potentially agreed upon solution would solve the problems for
$3.9 million or less, if at all. There is also no assurance that Fagen and
its subcontractors will agree on any solution or even agree that the problem is
their responsibility to correct. If Fagen disputes the withholding of the $3.9
million and demands payment, the Company may be forced to pay the
$3.9 million and there would be no assurance that the punch list items
would be completed or that the coal combustor would be able to use lignite
coal.




Our level of
indebtedness may adversely affect our ability to react to changes in our
business, and we may be limited in our ability to refinance our existing debt or
use debt to fund future capital needs.We have a substantial
amount of indebtedness.  As a result of our substantial debt, demands on
our cash resources are higher than they otherwise would be which could
negatively impact our business, results of operations and financial
condition.  As a result of our substantial indebtedness, we may be
more vulnerable to general adverse economic and industry conditions. We may find
it more difficult to obtain additional financing to fund future working capital,
capital expenditures and other general operating requirements. We will be
required to dedicate a substantial portion of our cash flow from operations to
the payment of principal and interest on our debt, reducing the available cash
flow to manage our corn and ethanol price risk, fund operations or make capital
expenditures. We may have a competitive disadvantage relative to other companies
in our industry with less debt.  We may also experience decreases in our
regular trade credit from vendors which could adversely impact our cash flow if
we need to start prepaying for items we have been able to purchase on trade
credit in the past.  In early 2007, a crisis began in the sub prime
mortgage sector, as a result of rising delinquencies and credit quality
deterioration, and has subsequently spread throughout the credit market. There
can be no assurances that this credit crisis will not worsen or impact our
availability and cost of debt financing including with respect to any
refinancings.




We have not been
granted a waiver of loan covenant violations that occurred as of March 31, 2009,
June 30, 2009 or September 30, 2009 which gives the Bank the ability to exercise
their rights under the terms of our Construction Loan
Agreement.  We have been notified that we were in violation of
certain of our loan covenants as of March 31, 2009, June 30, 2009 and September
30, 2009.  The Bank has not granted a waiver of those covenant
violations.  As of November 13, 2009, we have not been declared in
default of our loan agreements and the Bank considers us in good
standing.  Because of our covenant violations, however, the Bank could
call our notes due and payable at any time and could sell all the assets of the
Company to satisfy our outstanding loan obligations.




32




Approval of a Low
Carbon Fuel Standard (“LCFS”) by the California Air Resources Board (“CARB”) may
have a negative impact on our ability to market our ethanol in
California.  The CARB recently passed a LCFS, which sets
standards for the carbon intensity of fuels used in the state starting in
2011.  Certain provisions of the LCFS, which are not yet final, have
the potential to ban ethanol produced at our Plant from being sold in
California.  While we believe there may be some negative impact to our
sales from the approval of the LCFS in California, we believe we will still be
able to market all the ethanol produced by our Plant.  If more states,
or the federal government, adopt similar provisions it could have a severe
negative impact on our ability to sell all of the ethanol produced at our
Plant.




We are in the
process of implementing a corn procurement program and there can be no guarantee
that this will be successful.We are in the process of
implementing a corn procurement program available to members and non-members of
the Company.  In general terms, the program would allow us to procure
corn in exchange for a combination of cash, equity and deferred payables along
with the opportunity, for those that participate in the program, to receive a
future incentive based on our financial performance.  There is no
assurance that the program will be successfully implemented, will be successful
once implemented, or that we will maintain our cash flow even with the
discounted corn under the program.




We may have
conflicting interests with Greenway that could cause Greenway to put its
interests ahead of ours.  Greenway Consulting, LLC (“Greenway”)
serves as our management consultant.  Greenway has and continues to
advise our governors and has been, and is expected to be, involved in
substantially all material aspects of our operations.  In addition,
Gerald Bachmeier, who was named as our interim Chief Executive Officer on June
15, 2009, serves as Chief Manager of Greenway and is also a member of the
Company.  Consequently, the terms and conditions of any future
agreements and understandings with Greenway may not be as favorable to us as
they could be if they were to be obtained from third parties.  In
addition, because of the extensive role that Greenway had in the construction of
the Plant and has in its operations, it may be difficult or impossible for us to
enforce claims that we may have against Greenway.  Such conflicts of
interest may impact our operations and financial performance.




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




None.




ITEM 3. DEFAULTS UPON
SENIOR SECURITIES




While we
have not been declared in default of our Construction Loan Agreement by FNBO, we
have been notified that we are in violation of certain loan covenants as of
September 30, 2009.  Please see Note 2 and Note 5 to our unaudited
condensed financial statements in this Quarterly Report.




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




None.




ITEM 5. OTHER
INFORMATION




None.





ITEM 6. EXHIBITS




See
Exhibit Index following the signature page of this report.




33




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.


RED
      TRAIL ENERGY, LLCDate:
      November 16, 2009
            
            By:
            
            /s/
      Gerald BachmeierGerald
      BachmeierChief
      Executive OfficerDate:
      November 16, 2009
            
            By:
            
            /s/
      Mark E. KlimpelMark
      E. KlimpelChief
      Financial Officer




34





EXHIBIT INDEX




RED
TRAIL ENERGY, LLC


FORM 10-Q FOR THE QUARTER ENDED
SEPTEMBER 30, 2009


10.1*+
            
            Coal
      Sales Order by and between Red Trail Energy, LLC and Westmoreland Coal
      Sales Company dated November 5, 2009.10.2*
            
            Amended
      and Restated Management Agreement by and between Red Trail Energy, LLC and
      Greenway Consulting, dated September 10, 2009.31.1*
            
            Certification
      by Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Securities
      Exchange Act of 1934).31.2*
            
            Certification
      by Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Securities
      Exchange Act of 1934).32.1*
            
            Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002.32.2*
            
            Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
      Section 906 of the Sarbanes-Oxley Act of
  2002.




*
            
            Filed
      herewith.+
            
            Confidential
      treatment requested for portions of this
  exhibit.




35