ti


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 MARCH 31, 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 checkmark 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, or a non-accelerated filter. See definition of “accelerated
filer and larger accelerated filer” 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 May
14, 2009, the Company has outstanding 40,188,973 Class A Membership
Units.












RED TRAIL
ENERGY, LLC


FORM 10-Q
QUARTERLY REPORT FOR THE QUARTER ENDED


MARCH 31,
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
              
              18Disclosure
      Regarding Forward-Looking Statements
              
              18Item 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
              
              34Item 4.
      Submission of Matters to a Vote of Security Holders
              
              34Item 5.
      Other Information
              
              34Item
      6. Exhibits
              
              34SIGNATURES
              
              35Exhibit
      Index
              
              36










PART
I — FINANCIAL INFORMATION


Item 1.
– Condensed Financial Statements


RED
TRAIL ENERGY, LLC


CONDENSED
BALANCE SHEETS




March 31, 2009(Unaudited)
                        
                        
                        December 31, 2008ASSETSCurrent
      AssetsCash
      and equivalents
                        
                        $
                        6,995,528
                        
                        
                        $
                        4,433,839Accounts
      receivable
                        
                        
                        2,812,501
                        
                        
                        
                        2,697,695Corn
      derivative instruments, at fair value
                        
                        
                        314,671
                        
                        
                        
                        447,739Inventory
                        
                        
                        4,921,554
                        
                        
                        
                        3,353,592Prepayments
      of corn purchases
                        
                        
                        ―
                        
                        
                        
                        4,398,046Prepaid
      expenses
                        
                        
                        109,865
                        
                        
                        
                        41,767Total
      current assets
                        
                        
                        15,154,119
                        
                        
                        
                        15,372,678Property,
      Plant and EquipmentLand
                        
                        
                        351,280
                        
                        
                        
                        351,280Plant
      and equipment
                        
                        
                        79,844,979
                        
                        
                        
                        79,898,657Land
      improvements
                        
                        
                        3,939,294
                        
                        
                        
                        3,939,294Buildings
                        
                        
                        5,312,995
                        
                        
                        
                        5,312,995Construction
      in progress
                        
                        
                        33,679
                        
                        
                        
                        33,67989,482,227
                        
                        
                        
                        89,535,905Less
      accumulated depreciation
                        
                        
                        13,010,427
                        
                        
                        
                        11,525,863Net
      property, plant and equipment
                        
                        
                        76,471,800
                        
                        
                        
                        78,010,042Other
      AssetsDebt
      issuance costs, net of amortization
                        
                        
                        ―
                        
                        
                        
                        567,385Investment
      in RPMG
                        
                        
                        605,000
                        
                        
                        
                        605,000Patronage
      equity
                        
                        
                        116,296
                        
                        
                        
                        116,296Deposits
                        
                        
                        80,000
                        
                        
                        
                        80,000Total
      other Assets
                        
                        
                        801,296
                        
                        
                        
                        1,368,681Total
      Assets
                        
                        $
                        92,427,215
                        
                        
                        $
                        94,751,401LIABILITIES
      AND MEMBERS' EQUITYCurrent
      LiabilitiesCurrent
      maturities of long-term debt
                        
                        $
                        50,314,194
                        
                        
                        $
                        49,063,201Accounts
      payable
                        
                        
                        5,919,218
                        
                        
                        
                        5,720,764Accrued
      expenses
                        
                        
                        1,124,653
                        
                        
                        
                        1,845,101Accrued
      loss on firm purchase commitments
                        
                        
                        274,000
                        
                        
                        
                        1,426,800Interest
      rate swaps, at fair value
                        
                        
                        3,007,119
                        
                        
                        
                        2,861,530Total
      current liabilities
                        
                        
                        60,639,184
                        
                        
                        
                        60,917,396Other
      LiabilitiesContracts
      payable
                        
                        
                        275,000
                        
                        
                        
                        275,000Commitments
      and ContingenciesMembers'
      Equity
                        
                        
                        31,513,031
                        
                        
                        
                        33,559,005Total
      Liabilities and Members' Equity
                        
                        $
                        92,427,215
                        
                        
                        $
                        94,751,401




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




1




RED TRAIL ENERGY,
LLC


CONDENSED
STATEMENTS OF OPERATIONS




Quarter Ended
                    March 31, 2009
                    (Unaudited)
                  
                  
                  Quarter Ended
                    March 31, 2008
                    (Unaudited)RevenuesEthanol,
      net of derivative fair value changes
                  
                  $
                  16,904,002
                  
                  
                  $
                  28,496,987Distillers
      grains
                  
                  
                  3,991,611
                  
                  
                  
                  4,923,018Total
      Revenue
                  
                  
                  20,895,613
                  
                  
                  
                  33,420,005Cost
      of Goods SoldCost
      of goods sold, net of changes in fair value of derivative
      instruments
                  
                  
                  18,391,358
                  
                  
                  
                  26,251,476Loss
      on firm purchase commitments
                  
                  
                  274,000
                  
                  
                  
                  ―Lower
      of cost or market adjustment for inventory on hand
                  
                  
                  767,000
                  
                  
                  
                  ―Depreciation
                  
                  
                  1,470,219
                  
                  
                  
                  1,415,746Total
      Cost of Goods Sold
                  
                  
                  20,902,577
                  
                  
                  
                  27,667,222Gross
      Margin (Deficit)
                  
                  
                  (6,964
                  )
                  
                  
                  5,752,783General
      and Administrative
                  
                  
                  781,009
                  
                  
                  
                  746,596Operating
      Income (Loss)
                  
                  
                  (787,973
                  )
                  
                  
                  5,006,187Interest
      Expense
                  
                  
                  1,305,222
                  
                  
                  
                  2,439,805Other
      income, net
                  
                  
                  42,221
                  
                  
                  
                  169,817Net
      Income (Loss)
                  
                  $
                  (2,050,974
                  )
                  
                  $
                  2,736,199Wtd
      Avg Units Outstanding - Basic
                  
                  
                  40,188,973
                  
                  
                  
                  40,173,973Net
      Income (Loss) Per Unit - Basic
                  
                  $
                  (0.05
                  )
                  
                  $
                  0.07Wtd
      Avg Units Outstanding - Diluted
                  
                  
                  40,188,973
                  
                  
                  
                  40,223,973Net
      Income (Loss) Per Unit - Diluted
                  
                  $
                  (0.05
                  )
                  
                  $
                  0.07




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





2




RED TRAIL ENERGY,
LLC


CONDENSED
STATEMENTS OF CASH FLOWS




Quarter ended
                          March 31, 2009
                          (Unaudited)
                        
                        
                        Quarter ended
                          March 31, 2008
                          (Unaudited)Cash
      Flows from Operating ActivitiesNet
      income (loss)
                        
                        $
                        (2,050,974
                        )
                        
                        $
                        2,736,199Adjustment
      to reconcile net income (loss) to net cash provided by operating
      activities:Depreciation
                        
                        
                        1,484,564
                        
                        
                        
                        1,429,293Amortization
      and write-off of debt financing costs
                        
                        
                        567,385
                        
                        
                        
                        50,256Unrealized
      gain on derivatives
                        
                        
                        (393,338
                        )
                        
                        
                        (108,845
                        )Change
      in fair value of interest rate swap
                        
                        
                        125,504
                        
                        
                        
                        1,237,494Equity-based
      compensation
                        
                        
                        5,000
                        
                        
                        
                        5,000Unrealized
      loss on firm purchase commitments
                        
                        
                        (1,152,800
                        )
                        
                        
                        ―Changes
      in assets and liabilitiesAccounts
      receivable
                        
                        
                        (114,806
                        )
                        
                        
                        84,826Derivative
      Instruments
                        
                        
                        526,406
                        
                        
                        
                        268,394Inventory
                        
                        
                        (1,567,962
                        )
                        
                        
                        (1,135,282
                        )Prepaid
      expenses
                        
                        
                        4,329,948
                        
                        
                        
                        20,658Accounts
      payable
                        
                        
                        256,635
                        
                        
                        
                        (1,225,991
                        )Accrued
      expenses
                        
                        
                        (720,448
                        )
                        
                        
                        2,056,137Cash
      settlements on interest rate swap
                        
                        
                        20,085
                        
                        
                        
                        ―Net
      cash provided by operating activities
                        
                        
                        1,315,199
                        
                        
                        
                        5,418,139Cash
      Flows from Investing ActivitiesInvestment
      in RPMG
                        
                        
                        (58,181
                        )
                        
                        
                        (192,208
                        )Refund
      of sales tax on fixed assets
                        
                        
                        55,260
                        
                        
                        
                        ―Capital
      expenditures
                        
                        
                        (1,582
                        )
                        
                        
                        (15,255
                        )Net
      cash used in investing activities
                        
                        
                        (4,503
                        )
                        
                        
                        (207,463
                        )Cash
      Flows from Financing ActivitiesDebt
      repayments
                        
                        
                        (1,249,007
                        )
                        
                        
                        (880,939
                        )Proceeds
      from long-term debt
                        
                        
                        2,500,000
                        
                        
                        
                        ―Net
      cash provided by (used in) financing activities
                        
                        
                        1,250,993
                        
                        
                        
                        (880,939
                        )Net
      Increase in Cash and Equivalents
                        
                        
                        2,561,689
                        
                        
                        
                        4,329,737Cash
      and Equivalents - Beginning of Period
                        
                        
                        4,433,839
                        
                        
                        
                        8,231,709Cash
      and Equivalents - End of Period
                        
                        $
                        6,995,528
                        
                        
                        $
                        12,561,446Supplemental
      Disclosure of Cash Flow InformationInterest
      paid
                        
                        $
                        3,252,713
                        
                        
                        $
                        1,365,285SUPPLEMENTAL
      DISCLOSURE OF NON-CASHINVESTING
      AND FINANCING ACTIVITIESWrite-off
      of debt issuance costs
                        
                        $
                        517,823
                        
                        
                        $
                        ―Investment
      in RPMG included in accounts payable
                        
                        $
                        58,181
                        
                        
                        $
                        412,792





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 MARCH 31, 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 and equity-based compensation 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 months
ended March 31, 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.




Firm Purchase
Commitments




Beginning
in December 2008, in connection with the execution of forward purchase
commitments, the Company had elected to create an undesignated hedging
relationship by selling exchanged traded futures or options as an offsetting
position.  In this situation, the forward purchase contract is valued
at market price until delivery was made against the contract.  The
Company followed this hedge strategy until April 2009 when, in connection with a
proposed agreement for waiver of principal (the “Agreement”) (previously termed
a forbearance agreement in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2008), the Company was notified by its senior lender, First
National Bank of Omaha (“FNBO” or the “Bank”), that they would no longer support
the Company in this hedging strategy.  As such, the Company liquidated
its economic corn hedge positions in April 2009.  The Company will
still enter into forward purchase commitments to ensure an adequate supply of
corn but is currently evaluating its strategy related to the forward purchase of
corn and is considering the implementation of certain measures to keep the
number of bushels under fixed priced contracts as low as possible while still
maintaining efficient Plant operations.




Debt Issuance
Costs




Debt
issuance costs will be 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 above, the Company wrote off the remaining balance
(approximately $517,000) of its debt issuance costs during the first quarter of
2009.  Amortization expense, for both the three months ended March 31,
2009 and 2008 totaled approximately $567,000 (including the $517,000 write-off)
and $50,000, respectively.  The amortization expense is included in
interest expense.




4




RED TRAIL
ENERGY, LLC


NOTES TO
CONDENSED FINANCIAL STATEMENTS


FOR THE
PERIODS ENDED MARCH 31, 2009 AND DECEMBER 31, 2008




Earnings (Loss) Per
Unit




Earnings
(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 70,000 and 50,000 units as of March 31, 2009 and 2008,
respectively, for the vested equivalents of restricted member units issued to
management.  For the three months ended March 31, 2009, these
equivalent units are not included in fully diluted earnings per units as their
effects would be anti-dilutive.




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 incurred operating losses and negative
operating cash flow since August 2008.  The Company anticipates
continuing to incur losses and negative cash flow, based on current market
conditions in the ethanol industry.  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.  The Company has not been granted a waiver of those
violations.  As of May 14, 2009, the Company is in the final stages of
negotiating the Agreement for waiver of principal payments with the
Bank.  The Agreement would allow the Company to forgo two principal
payments (April 16, 2009 and July 16, 2009).  Although the Agreement
has not yet been finalized, the Bank has allowed the Company to forgo the April
16 payment under the assumption the agreement will be finalized.  If,
for any reason, the Agreement were to fall through, the Company would be
required to make its April 16 note payment.  The terms of the proposed
Agreement are discussed in more detail in Note 3.  The Company is
currently projecting that it will be in violation of certain of its loan
covenants through 2009 and into 2010.  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 Bank has
also indicated that they may reduce the amount available to borrow under the
Company’s Line of Credit and/or place restrictions on the advance of funds from
the Company’s Line of Credit when it is up for renewal in July
2009.




In
addition, the Company is also starting to see a tightening of credit policies
from its vendors, including reduced credit limits and requests for
prepayment.  Also, in April 2009, the Company received a 90 day
cancellation notice from the surety company that underwrites its distilled
spirits bond and grain warehouse bond.  The Company needs both of
these bonds in order to continue operating and is pursuing other surety
companies.




These
factors (see Note 3 for additional details) 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, the Banks
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 return to a positive cash flow and, ultimately, profitability,
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 3 for further detail on these items along with management’s plans to
mitigate the effect of these items.




2.  CONCENTRATIONS




Coal




Coal is
an important input in the Company’s manufacturing process. During the fiscal
year ended December 31, 2008, the Company used approximately 97,600 tons of
coal.  The Company has entered into a two year agreement with
Westmoreland Coal Sales Company (“Westmoreland”) to supply PRB coal through
2009.  Whether the Plant runs long-term on lignite or powder river
basin (“PRB”) coal, there can be no assurance that the coal received by the
Plant will always be delivered as needed, will be of the proper size or quality
or that the coal combustor will always work properly with lignite or PRB coal.
Any disruption could either force the Company to reduce its operations or shut
down the Plant, both of which would reduce its revenues.




5




RED TRAIL
ENERGY, LLC


NOTES TO
CONDENSED FINANCIAL STATEMENTS


FOR THE
PERIODS ENDED MARCH 31, 2009 AND DECEMBER 31, 2008




The
Company believes it could obtain alternative sources of PRB or lignite coal if
necessary, though it could suffer delays in delivery and higher prices that
could hurt its business and reduce its revenues and profits. The Company
believes there is a sufficient supply of coal from the PRB coal regions in
Wyoming and Montana to meet its demand for PRB coal.  The Company also
believes there is a sufficient supply of lignite coal in North Dakota to meet
its demand for lignite coal.




If there
is an interruption in the supply or quality of coal for any reason, the Company
may be required to halt production. If production is halted for an extended
period of time, it may have a material adverse effect on the Company’s
operations, cash flows and financial performance.




In
addition to coal, the Plant could use natural gas as a fuel source if its coal
supply is significantly interrupted. There is a natural gas line within three
miles of the Plant.  The Company believes it could contract for the
delivery of enough natural gas to operate the Plant at full capacity. Natural
gas tends to be significantly more expensive than coal and the Company would
also incur significant costs to adapt its power systems to natural gas. Because
the Company is already operating on coal, it does not expect to need natural gas
unless coal interruptions impact its operations.




3.  NATURE
OF CURRENT OPERATIONS




During
the first quarter of 2009, corn and ethanol prices traded within a relatively
narrow range compared to the extremes experienced during the year ended December
31, 2008.  For example, the May corn contract closing prices for the
first quarter of 2009 traded within a range that included a high of
approximately $4.17 per bushel  and a low of approximately $3.50 per
bushel.  In comparison, corn prices during 2008 ranged from a low of
roughly $4.00 per bushel to a high near $8.00 per bushel.  While the
difficult margin conditions experienced during the last quarter of 2008
continued during the first quarter of 2009, the Company’s margins did improve
somewhat (when compared to the fourth quarter of 2008) due to processing corn
that was valued much closer to market prices.




During
the first quarter of 2009, the Company worked through most of the remaining corn
that was purchased under fixed priced contracts during the year ended December
31, 2008 which, due to market fluctuations, became priced significantly higher
than what market prices were during the last quarter of 2008 and first quarter
of 2009.  Decreased volatility in the corn markets has meant that corn
delivered under contract is now more closely aligned with market
values.  This is evidenced by the amount of the write down the Company
recorded on corn purchased under fixed price contracts that were not yet
delivered at March 31, 2009.  The Company had approximately 1.4
million bushels of corn under fixed price contracts at March 31, 2009 and
recognized a write down of approximately $274,000, or $.20 per
bushel.  This is in comparison to the write down of approximately $3.1
million, or $.90 per bushel, experienced during the quarter ended September 30,
2008.  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.  The Company is
evaluating its corn procurement strategy to minimize the number of bushels under
fixed priced contracts to decrease potential exposure to fluctuations in corn
and ethanol prices.




Based on
the broad market trend that developed during 2008 where ethanol prices generally
increased or decreased as corn futures prices increased or decreased, the
Company’s Risk Management Committee had adjusted its hedging strategy in an
effort to minimize the effect of decreases in corn prices (and, based on the
trend noted, decreases in ethanol prices) on the bushels purchased under fixed
price contracts.  As bushels were procured under fixed price
contracts, the committee used various hedging instruments (futures and options)
to offset these bushels in an effort to maintain a net even
position.  The Company had communicated this strategy to its senior
lender, FNBO.  In connection with the negotiation of the Agreement,
the Bank notified the Company that it would no longer support this hedging
strategy due to the potential for margin exposure.  In reaction to
this information, the Company eliminated its futures and options position as of
April 16, 2009.  Due to this change, the Company is evaluating ways to
purchase as few bushels as possible under fixed price contracts and still
operate the plant efficiently.  One option being considered is the
exclusive use of basis contracts for procuring corn that is more than two months
in advance of the current month.




6




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




Throughout
the first quarter of 2009 and as of April 30, 2009, the Company has experienced
losses and negative cash flow.  As mentioned above, the Company is in
the final stages of negotiating an Agreement for the waiver of two principal
payments (April 16, 2009 and July 16, 2009) in order to gain additional time to
implement certain strategies the Company believes will help return the Company
to a positive cash flow.  The Company has accrued an estimate of the
fee related to the proposed Agreement in the amount of $150,000.




Excluding
the effect of changes in working capital items and advances taken on the
Company’s Long-Term Revolving Note, the Company had a negative cash flow of
approximately $0.25 per bushel of corn processed during the first quarter of
2009.  The Company regularly calculates an estimate of the Plant’s
cash flow, excluding changes in working capital and borrowing activity, using
what it considers “market” prices for corn and ethanol along with the actual
corn and ethanol prices experienced by the Plant.  The trend of this
information shows that during the last quarter of 2008 and first quarter of
2009, the Company would generally have experienced a negative cash flow of
approximately $0.25 per bushel if it had been able to procure corn at “market”
prices and sell ethanol at “market” prices.  There were times during
this period where ethanol prices didn’t track very closely with corn prices and
the cash flow was significantly worse but those periods were followed by what
appear to be corrections in the market and a return to the general trend noted
above.  The Company believes this trend of negative cash flow may
continue as long as the current imbalance in supply and demand continues in the
ethanol industry.  As of April 30, 2009, it was estimated (by the
Company’s ethanol marketing partner) that approximately 20% of the available
ethanol production capacity in the United States was shut down.  This
has helped temporarily balance the supply and demand of ethanol available today
but has not yet had a significant positive impact on the price the Company
receives for ethanol nor its margin structure.




In an
effort to mitigate the effect of this anticipated negative cash flow, the
Company is in the process of developing a corn procurement strategy that would
allow it to purchase corn at a $0.25 per bushel discount to current market
prices in exchange for future incentives, to those that participate, if the
Plant is able to operate with positive cash flows sufficient enough to support
the incentive 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 strategy is in
the very early stages of development and it cannot predict whether it will be
successful in its implementation.




The
Company has a limited capacity to borrow additional funds due to the collateral
position of FNBO.  The Company also has a limited ability to raise
additional capital through an equity offering due to language in its Member
Control Agreement that limits issuing additional units without written consent
of all members.  The Company’s Board of Governors has proposed to its
membership that they adopt an Amended and Restated Member Control Agreement
which would eliminate the restriction on issuing additional units contained in
the current Member Control Agreement.  This matter will be voted upon
by the Company’s members at its Annual Meeting which is scheduled for May 28,
2009.  The Company is also continuing to work with FNBO to seek
options for additional financing, possible debt restructuring and/or a
continuation of the current Agreement.




The
Company anticipates that, if margins do not improve, it will more than likely
need to raise additional capital to meet its operating cash flows during
2009.  As of May 14, 2009, the Company had available capital (cash
plus borrowing capacity) of approximately $9.1 million.  This included
approximately $5.6 million of cash on hand and $3.5 million of capacity under
its Line of Credit.  The Company’s available capital does not include
$4.2 million that has been aside in conjunction with amounts withheld from
Fagen, Inc. as described in Note 11.  Taking into account the relief
from two quarterly principal payments provided by the proposed Agreement with
FNBO, along with current market conditions, the Company anticipates that it will
have available capital to operate the business through the end of 2009 but that,
depending on timing of working capital changes, the level of available capital
may be insufficient to sustain operations through the end of
2009.  Adding to this uncertainty is the fact that the Company’s Line
of Credit is due to be renewed in July 2009 and the Bank has indicated that it
may not be renewed or that it may be renewed at a lower amount.  The
proposed Agreement also contains language that restricts advances on the line of
credit based on bank approval.  The Company believes that any further
decrease in its available capital, whether through restricting advances on the
Line of Credit, reducing the amount available under the Line of Credit or
nonrenewal of the Line of Credit, will have a negative impact on the Company’s
ability to continue as a going concern.




7




RED TRAIL
ENERGY, LLC


NOTES TO
CONDENSED FINANCIAL STATEMENTS


FOR THE
PERIODS ENDED MARCH 31, 2009 AND DECEMBER 31, 2008




The
Company’s loan agreements, as described in Note 6, require the Company to
maintain certain financial ratios and meet certain non-financial
covenants.  The Company was in violation of certain loan covenants for
the period ended December 31, 2008 and was granted a waiver of those violations
by FNBO.  The Bank has given notice that the Company was in violation
of certain of the covenants in its loan agreements at March 31,
2009.  The Company has not been granted a waiver of those
violations.  Under the terms of the proposed Agreement, the Bank would
reserve its rights to declare the Company in default under the terms of the loan
agreements.  The Company’s projections show that it will continue to
be in violation of certain of its loan covenants during 2009 and into
2010.  As a result of these projected covenant violations, which make
it reasonably likely that the Bank may call the Company’s long-term debt due and
payable during 2009, the Company has reclassified all of its long-term debt to a
current liability on the balance sheet.




Due to
the nature of these uncertainties, the possibility of FNBO decreasing or
restricting the amount available to borrow on the Company’s Line of Credit and
the current negative margin structure in the market place, the Company’s ability
to continue as a going concern is uncertain.  As such, the Company may
be forced to cease operations, declare bankruptcy and/or surrender its assets to
the Bank.




To offset
the current poor market conditions, the Company is working on developing the
corn procurement strategy mentioned above and has implemented or is in the
process of implementing the following items:




1.  The
Company has suspended employee bonuses and eliminated management bonuses for the
year ended December 31, 2008.  These bonuses are suspended until
further notice.




2.  Beginning
March 1, 2009, the Company’s Chief Executive Officer and Chief Financial Officer
took voluntary pay cuts totaling $45,000 annually.




3.  The
Company’s board of governors has opted out of the compensation they receive for
attending board and committee meetings.




4.  The
Company has reduced its production rate to approximately 100% of name-plate
capacity (the Plant operated at 110% of name-plate capacity during the year
ended December 31, 2008).  The Company is evaluating, on an on-going
basis, the capacity at which to operate the Plant, including possibly shutting
down until margins improve.  At this time, the Company believes that
operating the Plant, even at a reduced rate, is a more favorable option than
shutting down.  The rate is being monitored on an on-going basis in
conjunction with industry margins to determine the best rate at which to operate
the Plant.




5.  The
Company has undertaken various measures to improve efficiency in the Plant in an
effort to get the most ethanol out of each bushel of corn.  This is an
on-going process.




6.  The
Company has reorganized its corn procurement practices in an effort to procure
more corn from North Dakota farmers and less via rail, resulting in lower
transportation costs.




7.  The
Company is also evaluating other potential cost cutting/revenue enhancing
measures.




4. 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.




During
the first quarter of 2008, the FASB issued FASB Statement No. 161 – “Disclosures
about Derivative Instruments and Hedging Activities” (“SFAS
161”).  This statement requires holders of derivative instruments to
provide 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.  The Company adopted
this statement effective with the first quarter of 2009.





As of
March 31, 2009, the Company had entered into corn derivative instruments and
interest rate swap agreements. In the past, the Company has also used ethanol
derivative instruments but did not have any in place as of March 31,
2009.  SFAS No. 133 requires that companies record 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. Furthermore, the Company must designate the hedging instruments based upon
the exposure being hedged 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.




8




RED TRAIL
ENERGY, LLC


NOTES TO
CONDENSED FINANCIAL STATEMENTS


FOR THE
PERIODS ENDED MARCH 31, 2009 AND DECEMBER 31, 2008




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.  In addition, the Company hedges anticipated sales of ethanol to
minimize its exposure to the potentially adverse effect of price
volatility.  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
March 31, 2009, the Company did not have any outstanding contracts for the
forward sale of ethanol.  The net notional amount of the Company’s
outstanding corn futures and options that were entered into hedge forecasted
corn purchases of 1.5 million bushels was approximately $315,000.  The
Company exited all of its corn futures and options positions in April 2009 at
the request of the Bank in conjunction with the Agreement.  All
commodity contracts in place at March 31, 2009 do not qualify for hedge
accounting under SFAS 133.




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.




At
March 31, 2009, the Company had approximately $33 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 March 31, 2009, the value of the interest rate swaps
totaled approximately $3 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 is recorded in
interest expense.  The swaps mature in April 2012.




The
Company recorded net settlements of approximately $20,000 and $0 for the three
months ended March 31, 2009 and 2008, respectively.  See Note 6 for a
description of these agreements.





The
Company does not have any derivative instruments designated as effective hedges
for accounting purposes under SFAS 133.  The following tables provide
details regarding the Company’s derivative financial instruments at
March 31, 2009:




9


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


As
      of and for the three months ended March 31, 2009Derivatives
      not designated as hedging instruments under SFAS 133Balance
      Sheet
                                                
                                                Asset
                                                
                                                
                                                LiabilityCorn
      derivative instruments, at fair value
                                                
                                                $
                                                314,671
                                                
                                                
                                                $
                                                ―Interest
      rate swaps, at fair value
                                                
                                                
                                                ―
                                                
                                                
                                                
                                                3,007,119Total
      derivatives not desingated as hedging instruments under SFAS
      133
                                                
                                                $
                                                314,671
                                                
                                                
                                                $
                                                3,007,119




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
                            March 31, 2009Corn
      derivative instruments
                          
                          Cost
      of goods sold
                          
                          
                          $
                          133,068Interest
      rate swaps
                          
                          Interest
      expense
                          
                          
                          
                          145,589Total
                          
                          
                          
                          
                          $
                          278,657




5.
INVENTORY




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




Inventory
      values as of:
                          
                          March
      31, 2009
                          
                          December
      31, 2008Raw
      materials, including corn, chemicals and supplies
                          
                          
                          $
                          2,805,017
                          
                          
                          $
                          1,636,631Work
      in process
                          
                          
                          
                          661,216
                          
                          
                          
                          681,187Finished
      goods, including ethanol and distillers grains
                          
                          
                          
                          1,455,321
                          
                          
                          
                          1,035,774Total
      inventory
                          
                          
                          $
                          4,921,554
                          
                          
                          $
                          3,353,592Lower
      of cost or market adjustments for the periods ended:
                          
                          March
      31, 2009
                          
                          March
      31, 2008Loss
      on firm purchase commitments
                          
                          
                          $
                          274,000
                          
                          
                          $
                          ―Lower
      of cost or market adjustment for inventory on hand
                          
                          
                          
                          767,000
                          
                          
                          
                          ―Total
      lower of cost or market adjustments
                          
                          
                          $
                          1,041,000
                          
                          
                          $
                          ―




The
Company has entered into forward corn purchase contracts under which it is
required to take delivery at the contract price.  Currently, some of
these contract prices are above current market prices for corn.  Given
the current price of ethanol, upon taking delivery under these contracts, the
Company would incur a loss.  Accordingly the Company recorded losses
on these purchase commitments of approximately $274,000 and $0 for the three
months ended March 31, 2009 and 2008, respectively.  The loss was
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 not be recovered, and further losses on the outstanding purchase commitments
could be recorded in future periods.




As of
March 31, 2009 and March 31, 2008 the Company recorded an inventory valuation
impairment of $767,000 and $0, respectively, 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.




10




RED TRAIL
ENERGY, LLC


NOTES TO
CONDENSED FINANCIAL STATEMENTS


FOR THE
PERIODS ENDED MARCH 31, 2009 AND DECEMBER 31, 2008




6.
BANK FINANCING




Long-term
debt consists of the following:




As
      of
                  
                  March 31, 2009
                  
                  
                  December 31, 2008Notes
      under loan agreement payable to bank, see details below
                  
                  $
                  44,701,423
                  
                  
                  $
                  43,436,721Subordinated
      notes payable, see details below
                  
                  
                  5,525,000
                  
                  
                  
                  5,525,000Capital
      lease obligations (Note 8)
                  
                  
                  87,771
                  
                  
                  
                  101,480Total
      Long-Term Debt
                  
                  
                  50,314,194
                  
                  
                  
                  49,063,201Less
      amounts due within one year*
                  
                  
                  50,314,194
                  
                  
                  
                  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 March 31,
2009.  The Company has projected that it will not meet compliance with
certain of its loan covenants throughout 2009 and it has not been able to secure
a waiver from the bank for violations as of March 31, 2009 or the projected
violations.  Under the terms of the proposed Agreement, the Bank would
reserve its rights under the loan agreement.  Due to these
circumstances, the Company is required to show all of its debt subject to those
covenant violations as a current liability.  As of May 14, 2009, the
Bank has not declared the Company in default of its loan agreements and has
allowed the Company to forgo its April 16, 2009 principal payment under the
assumption the proposed Agreement will be finalized.  The Company has
shown the scheduled debt maturities below, absent any effects of possibly being
declared in default of the loan agreement, taking into account the terms of the
proposed Agreement with the Bank and under the assumption that it will resume
its scheduled note payments under the original terms of the loan agreement in
October 2009.  If the Agreement is not finalized, the Company would be
required to make its April 16, 2009 note payment and the maturity schedule would
change accordingly.




Scheduled
      maturities for the twelve months ended March 31,2010
                  
                  $
                  2,456,5062011
                  
                  
                  5,101,7692012
                  
                  
                  5,407,6782013
                  
                  
                  37,345,1462014
                  
                  
                  3,095Thereafter
                  
                  
                  ―Total
                  
                  $
                  50,314,194




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.




11




RED TRAIL
ENERGY, LLC


NOTES TO
CONDENSED FINANCIAL STATEMENTS


FOR THE
PERIODS ENDED MARCH 31, 2009 AND DECEMBER 31, 2008




The
Company has been notified by FNBO that it is in violation of certain of the
covenants at March 31, 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 3 for further discussion of the covenant
violations and future projected waiver requests.




The
Company is in the final stages of negotiating an Agreement with FNBO for the
waiver of two scheduled principal payments (April 16, 2009 and July 16,
2009).  The Company will pay any interest accrued on those
dates.  In exchange for the waiver of principal and upon execution of
the final Agreement, the Company would agree to the following:




·
            Payment
      of a $150,000 fee (accrued as of March 31,
2009)




·
            Variable
      interest rates of the three month LIBOR rate plus four hundred (400) basis
      points with a minimum interest rate of
6%




·
            Language
      that requires Bank approval of any advance on the Company’s Line of
      Credit.




·
            An
      agreement that the Company would take the necessary steps to amend its
      current Member Control Agreement to allow for additional units to be
      issued in the Company without 100% member
  approval




·
            An
      agreement that the Company is working toward a resolution of the combustor
      issue with the Plant’s design builder, Fagen,
  Inc.




·
            An
      agreement that the Company will work on the implementation of the corn
      procurement program discussed in more detail in Note
  3




·
            An
      increase in the excess cash flow provisions of the loan agreement from 20%
      to 50%




·
            Certain
      weekly and bi-weekly reporting requirements from
  management




·
            The
      other terms of the Company’s loan agreements were not materially
      changed




Due to
the uncertainties surrounding the long-term viability of our Credit Agreement
with the Bank as of March 31, 2009 we recorded a $517,000 write off of our
deferred financing costs.  While we anticipate the Bank working with
us to restore short-term financing needs we are unsure as to the long-term
relationship.




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 (the “Construction Loan”) requires the Company to maintain certain
financial ratios and meet certain non-financial covenants.  The
Construction Loan is secured by substantially all of the assets of the Company
and includes the terms as described below.  Excluding the write-off of
the remaining deferred financing costs and estimated net settlements on the
Company’s interest rate swaps, which is recorded as interest expense on the
statement of operations, the Company incurred interest expense of approximately
$573,000 and $1.2 million for the three months ended March 31, 2009 and 2008,
respectively.




Construction
Loan




The
Company had four long-term notes (collectively the “Term Notes” or each a “Term
Note”) in place as of March 31, 2009.  Three of the Term Notes were
established in conjunction with the termination of the original Construction
Loan 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
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.  As mentioned above, the original terms
of the Term Notes would be modified by the proposed Agreement being negotiated
with the Bank.  Due to the Bank allowing the Company to forgo the
April 16, 2009 payment based on the terms of the proposed Agreement and the
proximity to which the Company believes a final Agreement will be executed, the
estimated principal payment amounts shown below reflect the terms of the
proposed Agreement.  If, for any reason, the Company is not successful
in entering into the Agreement, the estimated principal amounts shown below
would change accordingly.




12




RED TRAIL
ENERGY, LLC


NOTES TO
CONDENSED FINANCIAL STATEMENTS


FOR THE
PERIODS ENDED MARCH 31, 2009 AND DECEMBER 31, 2008




Fixed Rate
Note




The fixed
rate note (the “Fixed Rate Note”) had a balance outstanding of $24.1 million and
$24.7 million at March 31, 2009 and December 31, 2008,
respectively.  Interest payments are made on a quarterly basis with
interest charged at 3.0% over the three-month LIBOR rate.  The
interest rate is reset on a quarterly basis.  The rate was 4.0825% and
7.055% as of March 31, 2009 and 2008, respectively.  Remaining
quarterly principal payments range from approximately $530,000 to $650,000,
beginning in October 2009, with a final principal payment of approximately $17.7
million due in April 2012.




Variable Rate
Note




During
December 2007, $10 million of the variable rate note (the “Variable Rate Note”)
was transferred to the December 2007 Fixed Rate Note as part of the fourth
amendment to the loan agreement.  The Variable Rate Note had a balance
of approximately $2.5 million and $3 million at March 31, 2009 and December 31,
2008, respectively.  Interest payments are made on a quarterly basis
with interest charged at 3.4% over the three-month LIBOR rate.  The
interest rate is reset on a quarterly basis.  As of March 31, 2009 and
2008, the rates charged were 4.4825% and 7.455%,
respectively.  Remaining principal payments are to be made quarterly
according to the terms of the Construction Loan as amended by the fourth
amendment to the Construction Loan.  The amendment calls for quarterly
payments of $634,700 applied first to interest on the long-term revolving note
(“Long-Term Revolving Note”), next to accrued interest on the Variable Rate Note
and finally to principal on the Variable Rate Note.  Based on the
interest rate floor of 6% set in the proposed Agreement, and the current balance
of the Long-Term Revolving Note, the Company estimates that the remaining
Variable Rate Note will be paid off in January 2011.  The Company
anticipates the quarterly principal payments to range from approximately
$447,000 per quarter in October 2009 to approximately $475,000 in January
October 2010, with a final payment of approximately $185,000 in January
2011.




Long-Term Revolving
Note




The
Long-Term Revolving Note had a balance of $8.9 million and $6.4 million at March
31, 2009 and December 31, 2008, respectively.  The remaining $1.1
million of capacity was borrowed on this note in April 2009.  Interest
is charged at 3.4% over the one-month LIBOR rate with payments due quarterly.
The interest rate is reset monthly.  As of March 31, 2009 and 2008,
the rates charged were 3.80625% and 6.2175%, respectively.  The
maturity date of this note is April 2012.




December 2007 Fixed Rate
Note




The
December 2007 Fixed Rate Note was created by the fourth amendment to the
Construction Loan as noted above.  As of March 31, 2009 and December
31, 2008, the balance outstanding on this note was approximately $9.0 million
and $9.2 million, respectively.  Interest payments are made on a
quarterly basis with interest charged at 3.4% over the three-month LIBOR
rate.  The interest rate is reset on a quarterly basis.  As
of March 31, 2009 and 2008, the rates charged were 4.4825% and 7.455%,
respectively.  Principal payments are to be made quarterly according
to repayment terms of the Construction Loan, ranging from approximately $196,000
to $233,000, from October 2009 to January 2012, with a final principal payment
of approximately $6.8 million at April 2012.




All
unpaid amounts on the four Term Notes are due and payable in
April 2012.




Revolving Line of
Credit




In July
2008, the Company renewed its $3,500,000 line of credit agreement with its bank,
subject to certain borrowing base limitations, through July 17,
2009.  The Bank has indicated that it may not renew the line of credit
or that it may reduce the capacity on the line of credit when it is up for
renewal in July 2009.  The proposed Agreement also requires Bank
approval for advances on the Line of Credit.  Interest is payable
quarterly and charged on all borrowings at a rate of 3.4% over the one-month
LIBOR rate, which totaled 3.80625% and 6.2175% at March 31, 2009 and 2008,
respectively. The Company had no outstanding borrowings at March 31, 2009 and
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.





13




RED TRAIL
ENERGY, LLC


NOTES TO
CONDENSED FINANCIAL STATEMENTS


FOR THE
PERIODS ENDED MARCH 31, 2009 AND DECEMBER 31, 2008




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




Letters of
Credit




The
Construction Loan 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.
All letters of credit are due and payable at April 2012.  The
Construction Loan requires the Company to pay a quarterly commitment fee of
2.25% of all outstanding letters of credit. In addition, the Company has one
outstanding letter of credit for capital expenditures for natural gas services
with Montana-Dakota Utilities Co.  The balance outstanding on this
letter of credit was $137,000 as of March 31, 2009 and December 31, 2008,
respectively.




Subordinated
Debt




As part
of the Construction Loan, 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 6.4825% at March 31, 2009) 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 April 2012.  The balance outstanding on
these loans was $5,525,000 as of March 31, 2009 and December 31, 2008,
respectively.




7.
FAIR VALUE MEASUREMENTS





Effective
January 1, 2008, the Company adopted Statement of Financial Accounting Standard
No. 157, Fair Value
Measurements (“SFAS 157”), and Statement of Financial Accounting Standard
No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities (“SFAS
159”).  SFAS 157’s requirements for certain nonfinancial assets and
liabilities recognized or disclosed at fair value on a nonrecurring basis are
deferred until fiscal years beginning after November 15, 2008 in accordance with
FASB Staff Position 157-2 (“FSP 157-2”).




SFAS 157
defines fair value, outlines a framework for measuring fair value, and details
the required disclosures about fair value measurements. The adoption of SFAS 157
did not have a material effect on the Company’s financial position, results of
operations, or cash flows for fiscal 2008.




SFAS 159
permits the Company to irrevocably choose to measure certain financial
instruments and other items at fair value. Except for those assets and
liabilities which are required to be recorded at fair value the Company elected
not to record any other assets or liabilities at fair value, as permitted by
SFAS 159.




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.




14




RED TRAIL
ENERGY, LLC


NOTES TO
CONDENSED FINANCIAL STATEMENTS


FOR THE
PERIODS ENDED MARCH 31, 2009 AND DECEMBER 31, 2008





Fair Value Measurement UsingCarrying
                  Amount as of
                  March 31, 2009
                
                
                Fair Value as of
                  March 31, 2009
                
                
                Level 1
                
                
                Level 2
                
                
                Level 3AssetsMoney
      market funds
                
                $
                4,378,241
                
                
                $
                4,378,241
                
                
                $
                4,378,241
                
                
                $
                ―
                
                
                $
                ―Corn
      related derivativeinstruments
                
                
                314,671
                
                
                
                314,671
                
                
                
                314,671
                
                
                
                ―
                
                
                
                ―Total
                
                $
                4,692,912
                
                
                $
                4,692,912
                
                
                $
                4,692,912
                
                
                $
                ―
                
                
                $
                ―LiabilitiesInterest
      rate swap liability
                
                $
                3,007,119
                
                
                $
                3,007,119
                
                
                $
                ―
                
                
                $
                3,007,119
                
                
                $
                ―Total
                
                $
                3,007,119
                
                
                $
                3,007,119
                
                
                $
                ―
                
                
                $
                3,007,119
                
                
                $
                ―





The fair
value of the money market funds and corn and ethanol derivative instruments are
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 discounting 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.





8. 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 $102,000 and $8,000 for the three months ended March 31, 2009 and
2008, respectively.  Equipment under capital leases consists of office
equipment and plant equipment.





Equipment
under capital leases is as follows at:




March 31, 2009
                  
                  
                  December 31, 2008Equipment
                  
                  $
                  216,745
                  
                  
                  $
                  216,745Accumulated
      amortization
                  
                  
                  51,670
                  
                  
                  
                  45,996Net
      equipment under capital lease
                  
                  $
                  165,075
                  
                  
                  $
                  170,749





At March
31, 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 March 31:




Operating
                    Leases
                  
                  
                  Capital
                    Leases2010
                  
                  $
                  489,660
                  
                  
                  $
                  61,7012011
                  
                  
                  489,660
                  
                  
                  
                  29,9322012
                  
                  
                  451,990
                  
                  
                  
                  1,2772013
                  
                  
                  347,000
                  
                  
                  
                  ―2014
                  
                  
                  ―
                  
                  
                  
                  ―Total
      minimum lease commitments
                  
                  $
                  1,778,310
                  
                  
                  
                  92,910Less
      amount representing interest
                  
                  
                  
                  
                  
                  
                  5,138Present
      value of minimum lease commitments included in the preceding current
      liabilities
                  
                  
                  
                  
                  
                  $
                  87,772




15


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




9. 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
40,188,973 Units outstanding as of March 31, 2009 and December 31, 2008,
respectively.





10.
EQUITY-BASED COMPENSATION




2006 Equity-Based Incentive
Plan





During
2006, the Company implemented an equity-based incentive plan (the “Plan”) which
provides for the issuance of restricted Units to the Company’s key management
personnel, for the purpose of compensating services rendered. These restricted
Units have vesting terms established by the Company at the time of each grant.
Vesting terms of outstanding awards begin after three years of service and are
fully vested after ten years of service which is the contractual term of the
awards.  During 2007, the Company exercised an option to repurchase
200,000 Units in association with this Plan.  The Units will be held
in treasury until the vesting requirements of the Plan have been
met.  Equity-based compensation expense was $5,000 for the three
months ended March 31, 2009 and 2008, respectively.  As of March 31,
2009, the total equity-based compensation expense related to nonvested awards
not yet recognized was $130,000, which is expected to be recognized over a
weighted average period of approximately 7.25 years.




11. 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 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 March
31, 2009, the Company had various fixed and basis contracts for approximately
1.9 million bushels of corn.  Of the 1.9 million bushels under
contract, approximately 1.4 million bushels had a fixed price as of March 31,
2009.  Using the stated contract price for the fixed contracts and
using market prices, as of March 31, 2009, to price the basis contracts the
Company had commitments of approximately $7.9 million related to all 1.9 million
bushels under contract.




12. 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 DDGs 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.  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 a member of the Company.  Significant
related party activity affecting consolidated financial statements are as
follows:




16




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




March
      31, 2009
                                  
                                  December
      31, 2008Balance
      SheetAccounts
      receivable
                                  
                                  $
                                  2,312,484
                                  
                                  
                                  $
                                  2,198,277Accounts
      payable
                                  
                                  
                                  953,880
                                  
                                  
                                  
                                  788,149Notes
      payable
                                  
                                  
                                  1,525,000
                                  
                                  
                                  
                                  1,525,000
  For the three months
                                  ended March 31,
                                  2009
                                
                                For the three months
                                  ended March 31,
                                  2008Statement
      of OperationsRevenues
                                
                                $
                                17,484,495
                                
                                
                                $
                                31,438,601Cost
      of goods sold
                                
                                
                                697,310
                                
                                
                                
                                621,675General
      and administrative
                                
                                
                                106,715
                                
                                
                                
                                388,008Inventory
      Purchases
                                
                                $
                                1,513,137
                                
                                
                                $
                                1,549,298





17




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




We
prepared the following discussion and analysis to help you better understand our
financial condition, changes in our financial condition, and results of
operations for the three months ended March 31, 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 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 “Item 2 -
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”





Forward-looking
statements involve risks and uncertainties, which could cause actual results or
outcomes to differ materially from those expressed. 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 regulations on our operations, Plant downtime, capital expenditures,
interest income, receipt of grant income, receipt of state incentive plan
payments, increased ethanol prices and corn costs, hedging strategies, corn
usage and ethanol production, general and administrative costs, expected savings
from our coal unloading facility, our profit projections for the rest of 2009,
our ability to secure new grain warehouse and distilled spirits bonds and our
ability to fund our operations and capital expenditures from cash flows and
existing lines of credit.  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 raise additional capital whether through debt financing, an
      equity raise or other means of raising
capital;
 
 •
              Our
      ability to secure replacement debt financing in the event our current bank
      calls our loan amounts and requires payment in
  full.
  18
  •
              Our
      ability to secure grain warehouse and distilled spirits bonds for our
      operation;
 
 •
              Projected growth, overcapacity or
      contraction in the ethanol market in which we
    operate;
 
 •
              Fluctuations in the price and
      market for ethanol and DDGs;
 
 •
              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;
  19
  •
              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; 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 sales
and revenues, cost of sales, operating expenses and other items to total sales
and revenues in our statements of operations for the three months ended March
31, 2009 and 2008.




Three months ended
                    March 31, 2009
                    (Unaudited)
                  
                  
                  Three months ended
                    March 31, 2008
                    (Unaudited)Amount
                  
                  
                  Percent
                  
                  
                  Amount
                  
                  
                  PercentRevenuesEthanol,
      net of derivative fair value changes
                  
                  $
                  16,904,002
                  
                  
                  
                  80.90
                  %
                  
                  $
                  28,496,987
                  
                  
                  
                  85.27
                  %Distillers
      grains
                  
                  
                  3,991,611
                  
                  
                  
                  19.10
                  %
                  
                  
                  4,923,018
                  
                  
                  
                  14.73
                  %Total
      Revenue
                  
                  
                  20,895,613
                  
                  
                  
                  100.00
                  %
                  
                  
                  33,420,005
                  
                  
                  
                  100.00
                  %Cost
      of Goods SoldCost
      of goods sold, net of derivative fair value changes
                  
                  
                  18,391,358
                  
                  
                  
                  88.02
                  %
                  
                  
                  26,251,476
                  
                  
                  
                  78.55
                  %Loss
      on firm purchase commitments
                  
                  
                  274,000
                  
                  
                  
                  1.31
                  %
                  
                  
                  ―
                  
                  
                  
                  0.00
                  %Lower
      of cost or market adjustment for inventory on hand
                  
                  
                  767,000
                  
                  
                  
                  3.67
                  %
                  
                  
                  ―
                  
                  
                  
                  0.00
                  %Depreciation
                  
                  
                  1,470,219
                  
                  
                  
                  7.04
                  %
                  
                  
                  1,415,746
                  
                  
                  
                  4.24
                  %Total
      Cost of Goods Sold
                  
                  
                  20,902,577
                  
                  
                  
                  100.03
                  %
                  
                  
                  27,667,222
                  
                  
                  
                  82.79
                  %Gross
      Margin (Deficit)
                  
                  
                  (6,964
                  )
                  
                  
                  -0.03
                  %
                  
                  
                  5,752,783
                  
                  
                  
                  17.21
                  %General
      and Administrative
                  
                  
                  781,009
                  
                  
                  
                  3.74
                  %
                  
                  
                  746,596
                  
                  
                  
                  2.23
                  %Operating
      Income (Loss)
                  
                  
                  (787,973
                  )
                  
                  
                  -3.77
                  %
                  
                  
                  5,006,187
                  
                  
                  
                  14.98
                  %Interest
      Expense
                  
                  
                  1,305,222
                  
                  
                  
                  6.25
                  %
                  
                  
                  2,439,805
                  
                  
                  
                  7.30
                  %Other
      Income, net
                  
                  
                  42,221
                  
                  
                  
                  0.20
                  %
                  
                  
                  169,817
                  
                  
                  
                  0.51
                  %Net
      Income (Loss)
                  
                  $
                  (2,050,974
                  )
                  
                  
                  -9.82
                  %
                  
                  $
                  2,736,199
                  
                  
                  
                  8.19
                  %
  Additional
      Data
                      
                      Three
      Months ended
                        March
      31, 2009
                      
                      
                      Three
      Months ended
                        March
      31, 2008Ethanol
      sold (thousands of gallons)
                      
                      
                      11,792
                      
                      
                      
                      14,427Dried
      distillers grains sold (tons)
                      
                      
                      15,453
                      
                      
                      
                      24,636Modified
      distillers grains sold (tons)
                      
                      
                      34,600
                      
                      
                      
                      34,524Ethanol
      avg price/gallon (net of hedging activity)
                      
                      $
                      1.43
                      
                      
                      $
                      1.96Dried
      distillers grains avg price/ton
                      
                      $
                      138.28
                      
                      
                      $
                      127.31Modified
      distillers grains avg price/ton
                      
                      $
                      51.20
                      
                      
                      $
                      51.47Corn
      costs per bushel (net of hedging activity)
                      
                      $
                      3.98
                      
                      
                      $
                      4.00





20




Results
of Operations for the Three Months Ended March 31, 2009 as Compared to the Three
Months Ended March 31, 2008




Summary




We
recognized a loss of approximately $2.1 million during the three months ended
March 31, 2009 compared to a net income of approximately $2.7 million during the
three months ended March 31, 2008.  The $2.1 million loss includes a
charge of approximately $1.1 million related to lower of cost or market
inventory adjustments along with a write-off of deferred financing costs of
approximately $517,000 due to the tenuous nature of the status of our notes with
First National Bank of Omaha (“FNBO” or the “Bank”).  We have been
notified by the Bank that we are in violation of certain of our loan covenants
as of March 31, 2009 and that we have not been granted a waiver of those
violations.  We are in the final stages of negotiating an agreement
for the waiver of two principal payments (the “Agreement”) (previously termed a
forbearance agreement in our Annual Report on Form 10-K for the year ended
December 31, 2008).  Under the terms of the Agreement, we would
acknowledge that we are in violation of the loan covenants and that the Bank has
reserved its rights under the terms of our construction loan
agreement.  Based on the timing of entering into the Agreement and the
likelihood that the Agreement will be finalized, the results of operations for
the three months ended March 31, 2009 include an accrual of $150,000 for the
estimated fee related to the Agreement.





Our
margins improved from the fourth quarter of 2008 as we realized the benefit of
operating with near market priced corn throughout the first quarter of
2009.  Ethanol prices generally increased or decreased in conjunction
with corn prices during the first quarter of 2009; however, there were periods
that adversely impacted our margins where ethanol did not follow corn,
particularly in March when corn futures prices increased approximately $0.50 per
bushel and ethanol did not increase accordingly.  Barring any
unforeseen, negative state or federal government regulatory changes (for example
having many state governments or the federal government implement low carbon
fuel standard legislation that contains provisions detrimental to corn based
ethanol - similar to the regulation proposed and recently approved in
California), we anticipate that the first quarter of 2009 represents a
reasonable approximation of what our operating results will be (absent the
implementation of the corn procurement discount program in Note 3 to our
financial statements and other potential cost cutting/revenue enhancing
strategies not yet implemented) until such time as the current oversupply
situation in the ethanol industry is corrected.  Our ethanol marketing
firm estimates that approximately 20% of the ethanol production capacity in the
United States is currently shut down and that, while this has helped balance
supply and demand for the ethanol that is being produced, they do not forecast
an increase in ethanol margins until late 2010 or 2011.  Recently, the
United States Environmental Protection Agency opened a public comment period on
a request to allow ethanol blends in gasoline up to 15%.   While
this would not be a mandated increase in the amount of ethanol blended with
gasoline, we believe it would have a positive impact on our margin structure and
help to balance the supply and demand industry wide more quickly than it could
happen with the current blends of up to 10% ethanol.  In the mean
time, we continue to pursue several cost cutting/revenue enhancing measures in
an attempt to increase our margins and enhance the sustainability of our
Plant.





Due to
the going concern language contained in our December 31, 2008 audited financial
statements, we have started to see some negative impact on terms from our
vendors and in our ability to obtain and maintain certain bonds required for our
operation.  While it has not been widespread, a few of our vendors
have started to decrease our credit limits and/or require
prepayment.  We have also received a 90 day notice of cancellation
from the surety company that underwrites our grain warehouse and distilled
spirits bonds.  We are actively pursuing new bonds but we may be
forced to shut down our Plant in the unlikely event we would not be able to
secure new bonds.





Revenues




Three
Months Ended March 31, 2009 and 2008


Revenues
decreased approximately $12.5 million during the quarter ended March 31, 2009 as
compared to the quarter ended March 31, 2008.  Ethanol revenue
decreased approximately $11.6 million and distillers grains revenue decreased
approximately $900,000.  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.





21




Ethanol
revenue


As
mentioned above, during the first quarter of 2009 we operated the Plant at a
reduced rate compared to the first quarter of 2008.  We sold
approximately 2.6 million fewer gallons of ethanol during the first quarter of
2009 as compared to the first quarter of 2008 and we received an average net
price (excluding the effects of changes in ethanol related derivative
instruments) that was $0.65 per gallon lower ($2.08 per gallon vs. $1.43 per
gallon).  Compared to the extreme volatility experienced during the
year ended December 31, 2008, ethanol prices remained fairly steady during the
first quarter of 2009 with forward month Chicago Ethanol Swap closing prices
trading between a low of approximately $1.50 and a high of approximately
$1.66.  Gains and losses related to our hedging activities are
recorded in revenue.  We did not have any ethanol related hedging
activity during the first quarter of 2009 but we recognized a loss of
approximately $1.7 million related to ethanol hedging activities during the
first quarter of 2008.  Including the effect of our ethanol hedging
activities, our average price per gallon of ethanol sold was $1.96 during the
three months ended March 31, 2008.





Distillers
grains revenue


We sold
approximately 9,200 fewer tons of dried distillers grains with solubles (“DDGS”)
and the same number of tons of modified distillers grains (“DMWG”) during the
three months ended March 31, 2009 as compared to the three months ended March
31, 2008.  We contract all of our DMWG locally and need to produce a
certain amount of that product in order to most efficiently utilize the steam
generated from our boiler for the production of ethanol, DDGS and
DMWG.  By contracting with local farmers and feedlots for sales of our
DMWG we ensure that we have a market for our product and maintain what we
consider to be close to the best mix of products produced for our
operation.  Since we did run the Plant at a slower rate in the first
quarter of 2009, the decrease in the production of distillers grains came in the
DDGS product as we had to produce a certain amount of DMWG to meet our contract
obligations.  During the first quarter of 2009, the price we received
for our DDGS was higher than the price we received for our DMWG when compared on
a dry matter basis.  In this instance having our DMWG product
contracted had a negative impact on our overall revenue from distillers
grains.  Under normal operating conditions, however, we believe
contracting and having the local market for our DMWG product provides the best
results for the Plant.  The price of distillers grains typically
increases or decreases with the price of corn.  However, even though
corn prices were lower during the first quarter of 2009 as compared to 2008, we
received a higher average price for our DDGS product during this period ($138.28
per ton vs. $127.31 per ton).  The increase in price for our DDGS is
due to our Plant being able to capture a premium to market prices due to the
location of our Plant and the quality of our product.  The average
price we received for DMWG during the first quarter of 2009 was consistent with
the average price we received during 2008 ($51.20 per ton vs. $51.47 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 follow the price of corn.  However, this is only a
prediction on our part based on the knowledge and resources we have available
today.  There is a great amount of uncertainty in the market place
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 impact of the current global economic crisis and its effect on
commodity prices, 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.  Our Plant could
face additional negative impacts from low carbon fuel standards since we use
coal as our 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 decrease by approximately $10 -
$15 per ton (from our first quarter 2009 average price) during the April –
September time frame as demand for this product decreases due to cattle being
put out to pasture.  As of April 30, 2009 we have just started the
process of contracting our DMWG product for the 2009 – 2010 season and, due to a
change in the contract pricing index, anticipate an increase in our revenue of
approximately $5 - $10 per ton compared to our first quarter 2009 average price
of approximately $51 assuming corn prices stay comparable to the first quarter
of 2009.  At this point we cannot predict whether our customers will
be receptive to this new contract but we believe we will be successful in
implementing these changes and increasing our sales price for DMWG due to our
product quality and consistency.





22




Cost
of Sales




Three
Months Ended March 31, 2009 and 2008


Our
overall Cost of Goods Sold decreased by approximately $6.8 million during the
quarter ended March 31, 2009 as compared to the quarter ended March 31,
2008.  Some key components of our cost of goods sold structure have
decreased during the first quarter of 2009 as compared to the first quarter of
2008.


·
            Denaturant
      costs - while we did use approximately 85,000 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 $1.20 per gallon during the first quarter of 2009 as
      compared to 2009 ($1.32 per gallon vs. $2.53 per gallon).  Some
      of the decrease was 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
      resulted in an approximate savings of $300,000 during the first quarter of
      2009.


·
            Coal
      costs - the successful start up of our coal unloading facility in October
      2008 has also improved our cost structure as we experienced a decrease in
      our coal costs of approximately $11.50 per ton in the first quarter of
      2009 compared to the first quarter of 2008 ($40.50 per ton vs. $52.00 per
      ton).  We used approximately 20,400 tons of coal during the
      first quarter of 2009 which amounts to a savings of approximately
      $235,000.


·
            Corn
      costs - our corn costs were also lower in the first quarter of 2009
      compared to the first quarter of 2008 as market prices for corn were
      lower.  Our average cost per bushel, net of hedging activities
      ($133,000 loss) and write down of firm purchase commitments in accord with
      the lower of cost or market valuation, was approximately $3.82 per bushel
      and $4.00 per bushel for the three months ended March 31, 2009 and 2008,
      respectively.  Similar to ethanol prices, corn prices during the
      first quarter of 2009 remained relatively constant when compared to the
      volatility experienced during 2008.  During the first quarter of
      2008, corn prices were rising as part of the increase that led to the
      eventual peak in many commodity prices in late June/early July
      2008.  The corn that we had under contract at March 31, 2009,
      while very near market prices, was still approximately $.20 per bushel
      higher than market, on average.  This resulted in a write off of
      approximately $274,000 in the first quarter of
  2009.





Our other
cost of goods sold items remained fairly constant between the first quarter of
2009 and the first quarter of 2008 with the exception of our electricity
costs.  Our electric rates for 2009 increased approximately 18% per
kilowatt hour compared to 2008 which resulted in an increase in costs of
approximately $60,000.





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.





Corn
cost


Because
corn is a market driven commodity, corn prices are very hard to
predict.  We anticipate that, for as long as the current oversupply
situation exists in the ethanol markets, the spread between corn and ethanol
will tend to remain fairly constant over a period of time and not allow our
Plant to operate at a positive cash flow.  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.  Due to the restrictions placed on our hedging
program by our Bank, we will be evaluating ways to limit the amount of corn
purchased under fixed price contracts as we can no longer use futures and
options as a hedge against our long corn position.  This may have an
adverse impact on our corn costs in the future.





23




We track
the estimated cash flow level of the Plant, excluding working capital changes
and borrowing activity, based on our actual corn and ethanol prices and the
average of market corn and ethanol prices during a given
month.  Recent history has shown that, if we could have procured corn
at market prices and sold ethanol at market prices our Plant would have had a
negative cash flow of approximately $0.07 per gallon or roughly $0.25 per
bushel.  In an effort to increase the long-term viability of our Plant
we are exploring ways of partnering with our corn suppliers to possibly purchase
corn, at a discount to market prices, in exchange for future incentives to be
paid in the future, to those suppliers that participate in the program, if the
Plant were able to operate with positive cash flows sufficient enough to support
the incentive 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.





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 anticipate negotiating a new coal supply contract with our
coal supplier later this year but cannot predict what the new pricing will be at
this time.  We anticipate that the lower coal costs we experienced in
the first quarter of 2009 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 major price increases for chemicals during the second 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 March 31, 2009 and 2008


General
and administrative costs for the three months ended March 31, 2009 were
approximately $35,000 higher than the comparable period in 2008.  The
increase is primarily due to the accrual of an estimated $150,000 fee associated
with the Agreement entered into with the Bank.  The higher costs were
partially offset by a decrease in the variable portion of our management fees
which is based on our net income.  Since we had a net loss for the
first quarter of 2009, the variable portion of our management fees was $0 during
the first quarter compared to approximately $114,000 for the first quarter of
2008.  There were many other small variances within our general and
administrative costs but none were significant.





General
and Administrative - Prospective


As our
operation has matured, we have started to perform more tasks in house where we
previously relied on assistance from outside counsel including legal, accounting
and consulting.  For the rest of 2009, we anticipate those types of
general and administrative costs to remain consistent with 2008 but cannot be
certain that these goals will be met due to our changing business
climate.  We anticipate property taxes to be higher the rest of 2009
as this year represents the second year of a five year phase out of our property
tax exemption.




Interest
Expense




Three
Months Ended March 31, 2009 and 2008


Our net
interest expense for the three months ended March 31, 2009 and 2008 was
approximately $1.3 million and $2.4 million, respectively.  Our
interest expense is made up of three components: interest expense on long-term
debt, fluctuations in the market value of our interest rate swaps and
amortization of deferred financing costs.  Interest expense on
long-term debt and amortization of deferred financing costs totaled
approximately $642,000 and $1.2 million for the three months ended March 31,
2009 and 2008, respectively.  The main reason for the lower interest
expense is lower interest rates.  Our interest rates are primarily
based off of one month and three month LIBOR rates which have decreased
significantly due to the financial crisis.  We recognized losses on
the change in market value of our interest rate swaps of approximately $146,000
and $1.2 million for the three months ended March 31, 2009 and 2008,
respectively.  The increased loss on the market value of our swaps was
also caused by the decrease in interest rates.  We also wrote off the
remaining book balance of our deferred financing costs (approximately $517,000)
in the first quarter of 2009.  The write-off is a result of not
receiving a waiver of the loan covenant violations that existed as of March 31,
2009, management’s projections indicating projected loan covenant violations for
the rest of 2009 and uncertainties regarding the long-term viability of our
Credit Agreement with the Bank.  Our scheduled amortization for the
quarter would have resulted in approximately $50,000 of amortization
expense.





24




We
anticipate that our interest costs may increase during the rest of 2009 as a
result of the proposed Agreement we are negotiating with the
Bank.  The proposed Agreement calls for a minimum interest rate of 6%
and the variable rates on our notes are currently around 4.50%.  Even
without this interest rate floor, we anticipate it to be more likely that rates
will increase rather than decrease as rates are currently very close to
0%.  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.  These expected higher interest rates will be offset, in
part, by lower amortization expense due to the write-off of the remaining
balance of our deferred financing costs in the first quarter of
2009.





Other
Income (Expense), Net


We
recognized other income of approximately $42,000 and $170,000 during the three
months ended March 31, 2009 and 2008, respectively.  The decrease in
other income is primarily related to lower interest income during the first
quarter of 2009 as we had less cash on hand earning interest in money market
accounts.  Also, during the first quarter of 2008 we had some other
income from performing some outside consulting work at another Plant that was
not on-going and not repeated during the first quarter of 2009.  We do
anticipate receiving some funds from the North Dakota Ethanol Incentive program
during the rest of 2009 but cannot accurately predict the amount.  We
expect that the amount received will be significantly less than the amount
received during 2008 due, in part, to the funding status of the
program.  There currently are no funds available for distribution but
we anticipate the program to receive funds during June or July
2009.  The amount available for distribution will be significantly
less than last year.




Liquidity
and Capital Resources





Statement of Cash Flows
                      
                      For the three
                        months ended
                        March 31, 2009
                      
                      
                      For the three
                        months ended
                        March 31, 2008Cash
      flows provided by operating activities
                      
                      $
                      1,315,199
                      
                      
                      $
                      5,418,139Cash
      flows used in investing activities
                      
                      
                      (4,503
                      )
                      
                      
                      (207,463
                      )Cash
      flows provided by (used in) financing activities
                      
                      
                      1,250,993
                      
                      
                      
                      (880,939
                      )




Cash
Flows





During
the first quarter of 2008, net income before depreciation and amortization was a
significant contributor to cash flows from operating
activities.  During the first quarter of 2009, the net loss before
depreciation and amortization was approximately a break even and not 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 Months Ended
March 31, 2009 as Compared to the Three Months Ended March 31, 2008” and also
are affected by changes in working capital.




Three
Months Ended March 31, 2009 and 2008




Operating
activities




Cash
flows provided by operating activities during the three months ended March 31,
2009 decreased approximately $4.1 million from the comparable period, primarily
as a result of a net decrease in our net income of approximately $4.8
million.  A net positive change in cash flow between the two periods
from changes in working capital items of approximately $2.4 million (primarily
due to a decrease in corn inventories), along with a net positive change in cash
flow between the two periods of $517,000 from an increase in amortization
expense of due to the write-off of deferred financing costs in the first quarter
of 2009 was largely offset by a negative change in cash flow between the two
periods related to two noncash items – the market value of our interest rate
swaps and the loss on firm purchase commitments.




25




Investing
activities




Cash
flows used in investing activities decreased by approximately $200,000 during
the three months ended March 31, 2009 as compared to 2008.  The
decrease was primarily related to lower cash outflows related to our investment
in RPMG as we made a down payment of $105,000 during the first quarter of 2008
along with lower capital expenditures during the first quarter of 2009 as we
received approximately $50,000 in sales tax refunds that will decrease the cost
of our Plant.




Financing
activities




Cash
flows provided by financing activities increased approximately $2.1 million from
the comparable period in 2008.  The increase is primarily related to
borrowing $2.5 million during the first quarter of 2009 of the amount paid down
on our Long-Term Revolving Note during 2008.




Capital
Expenditures




We do not
anticipate any significant capital expenditures during 2009.




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 March 31, 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.  The Company is in the final
stages of negotiating an Agreement with the Bank for the waiver of its next two
scheduled quarterly principal payments (April 16, 2009 and July 16,
2009).  Under the terms of the proposed Agreement, the Bank would
reserve its rights to enforce its remedies under the terms of the construction
loan agreement.  For further information please see the discussion in
Note 3 to the Notes of our unaudited condensed financial statements in this
Quarterly Report.




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 May
14, 2009, we had available capital (cash plus borrowing capacity) of
approximately $9.1 million.  This included $5.6 million of cash on
hand and $3.5 million of capacity under our Line of Credit.  Our
available capital does not include $4.2 million that has been aside in
conjunction with amounts withheld from Fagen, Inc. as described in Note 11 to
our Financial Statements in this Quarterly Report (the $4.2 million includes
interest earned on the balance as well as a small amount owed to another third
party).  Taking into account the relief provided by the waiver of our
quarterly principal payments for April 2009 and July 2009 under the terms of the
proposed Agreement with FBNO along with current market conditions we anticipate
that we will have available capital to operate our business through the end of
2009 but that the level of available capital that we have left may be
insufficient to sustain operations through the first quarter of
2010.





26




If market
conditions worsen, we may not be able to fund our operations from existing cash
flows and existing lines of credit during 2009.  Our Bank has also
indicated that they may seek to reduce the borrowing capacity on our Line of
Credit, when it is up for renewal in July 2009, and the proposed Agreement
places restrictions that required Bank approval on advances on the Line of
Credit.  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.  We are also asking our
members to adopt an Amended and Restated Member Control Agreement that would
eliminate existing restrictions on the level of membership approval needed to
issue new membership units in our Company.  As previously mentioned,
we are also trying to implement a corn procurement strategy that we feel would
positively impact our cash flow.  There is no guarantee we will be
successful in any of these ventures.




During
January 2009, we borrowed $2.5 million of the approximate $3.5 million of
available borrowing capacity we had on our Long-Term Revolving
Note.  We borrowed the remaining approximately $1 million of capacity
on this note during April 2009.





Short-term
Debt Sources




We have a
$3.5 million line of credit with the Bank.  The line of credit matures
during July 2009 and, as mentioned above, the Bank has indicated they may
decrease the capacity of the line of credit and/or restrict advances to certain
approved uses.  Interest is payable quarterly and charged on all
borrowings at a rate of 3.4% over the one-month LIBOR rate, which totaled
3.80625% and 6.2175% at March 31, 2009 and 2008, respectively.  We had
no outstanding borrowings on the revolving promissory note as of March 31, 2009
and December 31, 2008.




Long-Term
Debt Sources




We had
four long-term notes with the Bank (collectively the “Term Notes”) in place as
of March 31, 2009.  The Term Notes are secured by substantially all of
our assets.  Three of the notes were established in conjunction with
the termination of the original construction loan agreement (the “Construction
Loan”) on April 16, 2007.  The fourth note was entered into during
December 2007 (the “December 2007 Fixed Rate Note”) when we entered into a
second interest rate swap agreement which effectively fixed the interest rate on
an additional $10 million of debt. The Construction Loan requires us to maintain
certain financial ratios and meet certain non-financial
covenants.  Each note has specific interest rates and original terms
as described below.  The terms of the Term Notes may be modified by
the proposed Agreement being negotiated with First National for the waiver of
principal.  Due to the Bank allowing the Company to forgo the April
16, 2009 payment based on the terms of the proposed Agreement and the proximity
to which the Company believes a final Agreement will be executed, the estimated
principal payment amounts shown below reflect the terms of the proposed
Agreement. Please refer to Note 6 to the Notes of our unaudited
Condensed Financial Statements, in this Quarterly Report, for a listing of
the proposed terms of the Agreement. If, for any reason, the Company is not
successful in entering into the Agreement, the estimated principal amounts shown
below would change accordingly.




Fixed Rate
Note




The fixed
rate note (the “Fixed Rate Note”) had a balance outstanding of $24.1 million and
$24.7 million at March 31, 2009 and December 31, 2008,
respectively.  Interest payments are made on a quarterly basis with
interest charged at 3.0% over the three-month LIBOR rate.  The
interest rate is reset on a quarterly basis.  The rate was 4.0825% and
7.055% as of March 31, 2009 and 2008, respectively.  Remaining
quarterly principal payments range from approximately $530,000 to $650,000,
beginning in October 2009, with a final principal payment of approximately $17.7
million due in April 2012.




Variable Rate
Note




During
December 2007, $10 million of the variable rate note (the “Variable Rate Note”)
was transferred to the December 2007 Fixed Rate Note as part of the fourth
amendment to the loan agreement.  The Variable Rate Note had a balance
of approximately $2.5 million and $3 million at March 31, 2009 and December 31,
2008, respectively.  Interest payments are made on a quarterly basis
with interest charged at 3.4% over the three-month LIBOR rate.  The
interest rate is reset on a quarterly basis.  As of March 31, 2009 and
2008, the rates charged were 4.4825% and 7.455%,
respectively.  Remaining principal payments are to be made quarterly
according to the terms of the Construction Loan as amended by the fourth
amendment to the Construction Loan.  The amendment calls for quarterly
payments of $634,700 applied first to interest on the long-term revolving note
(“Long-Term Revolving Note”), next to accrued interest on the Variable Rate Note
and finally to principal on the Variable Rate Note.  Based on the
interest rate floor of 6% set in the proposed Agreement, and the current balance
of the Long-Term Revolving Note, the Company estimates that the remaining
Variable Rate Note will be paid off in January 2011.  The Company
anticipates the quarterly principal payments to range from approximately
$447,000 per quarter in October 2009 to approximately $475,000 in January
October 2010, with a final payment of approximately $185,000 in January
2011.




27




Long-Term Revolving
Note




The
Long-Term Revolving Note had a balance of $8.9 million and $6.4 million at March
31, 2009 and December 31, 2008, respectively.  The remaining $1.1
million of capacity was borrowed on this note in April 2009.  Interest
is charged at 3.4% over the one-month LIBOR rate with payments due quarterly.
The interest rate is reset monthly.  As of March 31, 2009 and 2008,
the rates charged were 3.80625% and 6.2175%, respectively.  The
maturity date of this note is April 2012.




December 2007 Fixed Rate
Note




The
December 2007 Fixed Rate Note was created by the fourth amendment to the
Construction Loan as noted above.  As of March 31, 2009 and December
31, 2008, the balance outstanding on this note was approximately $9.0 million
and $9.2 million, respectively.  Interest payments are made on a
quarterly basis with interest charged at 3.4% over the three-month LIBOR
rate.  The interest rate is reset on a quarterly basis.  As
of March 31, 2009 and 2008, the rates charged were 4.4825% and 7.455%,
respectively.  Principal payments are to be made quarterly according
to repayment terms of the Construction Loan, ranging from approximately $196,000
to $233,000, from October 2009 to January 2012, with a final principal payment
of approximately $6.8 million at April 2012.




All
unpaid amounts on the four Term Notes are due and payable in
April 2012.




Interest Rate Swap
Agreements




In
December 2005, we 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, we 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. Market value adjustments and net settlements are shown in interest
expense.




We
recognized unrealized losses related to these interest rate swaps of
approximately $146,000 and $1.2 million for the three months ended March 31,
2009 and 2008, respectively.  Net settlement payments of approximately
$20,000 and $0 were recorded for the three months ended March 31, 2009 and 2008,
respectively.




Letters
of Credit




The
Construction Loan provides for up to $1,000,000 in letters of credit with the
Bank to be used for any future line of credit requested by a supplier to the
Plant. All letters of credit are due and payable at April 2012.  The
Construction Loan requires us to pay a quarterly commitment fee of 2.25% of all
outstanding letters of credit. In addition, as of March 31, 2009, we have one
outstanding letter of credit for $137,000 for capital expenditures for natural
gas services with Montana-Dakota Utilities Co.




Subordinated
Debt




As part
of the Construction Loan, we 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 6.4825% at March 31, 2009) 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 April 2012. As of March 31, 2009, the outstanding
amount on these loans was $5,525,000.  Due to the uncertainties noted
above, these amounts are also shown as a current liability on our balance sheet
at March 31, 2009 and December 31, 2008.




28




Contractual
Obligations and Commercial Commitments




We have
the following contractual obligations as of May 14, 2009:




ContractualObligations
                  
                  Total
                  
                  
                  Lessthan1Yr
                  
                  
                  1-3Years
                  
                  
                  3-5Years
                  
                  
                  Morethan5YrsLong-term
      debt obligations *
                  
                  $
                  61,624,579
                  
                  
                  $
                  5,943,513
                  
                  
                  $
                  16,639,089
                  
                  
                  $
                  39,041,977
                  
                  
                  $
                  ―Capital
      leases
                  
                  
                  92,910
                  
                  
                  
                  61,701
                  
                  
                  
                  31,209
                  
                  
                  
                  ―
                  
                  
                  
                  ―Operating
      lease obligations
                  
                  
                  1,778,310
                  
                  
                  
                  489,660
                  
                  
                  
                  941,650
                  
                  
                  
                  347,000
                  
                  
                  
                  ―Corn
      Purchases **
                  
                  
                  7,905,800
                  
                  
                  
                  7,905,800
                  
                  
                  
                  ―
                  
                  
                  
                  ―
                  
                  
                  
                  ―Coal
      purchases
                  
                  
                  966,600
                  
                  
                  
                  966,600
                  
                  
                  
                  ―
                  
                  
                  
                  ―
                  
                  
                  
                  ―Water
      purchases
                  
                  
                  3,087,600
                  
                  
                  
                  398,400
                  
                  
                  
                  796,800
                  
                  
                  
                  796,800
                  
                  
                  
                  1,095,600Total
                  
                  $
                  75,455,799
                  
                  
                  $
                  15,765,674
                  
                  
                  $
                  18,408,748
                  
                  
                  $
                  40,185,777
                  
                  
                  $
                  1,095,600





* -
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 provided for in the proposed Agreement.  Amounts have been
determined assuming the interest rate floor in the Agreement disclosed above in
the “Long-Term Debt
Sources” section for the Long-Term Revolving Note and Variable Rate
Note.  Used the rates fixed in the interest rate swap agreements (see
“Interest Rate Swap
Agreements” section above) 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.  This schedule takes into
account the borrowing of the remaining approximately $1 million of borrowing
capacity on the Long-Term Revolving Note that occurred in April
2009.  These amounts do not take into account any effect of possibly
being declared in default of our 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 March
31, 2009 for basis contracts that had not yet been fixed.




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 first quarter of
2009.  We did not receive any funds during the first quarter of 2009
or 2008 from the Job Service North Dakota grant related to employee
training.




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 not receive any funds from this program
during the first quarter of 2009 or 2008.  We do anticipate receiving
some funds later this year once the program again receives funding but we cannot
accurately estimate the amount.  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.


29




·
            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 the carrying amount of property, plant and equipment; valuation
allowances for inventory and purchase commitments of inventory; and valuation of
derivative instruments. 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 3  and Note 5 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 March 31, 2009.




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 derivative
financial instruments for trading or speculative purposes, nor do we designate
these contracts as hedges for accounting purposes pursuant to the requirements
of SFAS 133, “Accounting for Derivative Instruments and Hedging
Activities.”




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 March 31, 2009.  We anticipate that a
hypothetical 1% change in interest rates, from those in effect on March 31,
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 March 31, 2009, would change the fair
value of our interest rate swaps by approximately $700,000.


30




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.  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.  Over the last 18 months, corn and ethanol prices have
generally maintained a spread that has been large enough to allow plants to
operate at a positive cash flow level.  This changed during the month
of December 2008 when corn prices increased approximately $1 per bushel but
ethanol prices did not increase accordingly.  This also happened
during March 2009 when corn prices increased approximately $0.50 per bushel but
ethanol prices did not increase accordingly.  This “delinking” of corn
and ethanol prices had the effect of decreasing the spread between corn and
ethanol prices to the point where, we believe, many plants are operating at a
negative cash flow level.  Both after December 2008 and March 2009,
corn and ethanol prices became “linked” again and started to move in
tandem.  We have come to believe that, as long as ethanol prices are
following corn prices, our exposure to price changes in corn and ethanol is
greatest when we have locked in a price for these commodities through fixed
price contracts.  Accordingly, we changed our hedging strategy in late
2008 in reaction to this trend.  If this trend changes, it may warrant
another change in our current hedging strategy.  We have been in
negotiations with our Bank related to the proposed Agreement for the waiver of
principal payments.  As part of those negotiations, our Bank has asked
that we no longer engage in using short positions to offset our long corn
position.  In response to this change in hedging strategy, we are
exploring ways to minimize 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.




We enter
in to fixed price contracts for corn purchases on a regular basis.  It
is our intent that, as we enter in to these contracts, we will use various
hedging instruments (puts, calls and futures) to maintain a near even market
position.  For example, if we have 1 million bushels of corn under
fixed price contracts we would generally expect to enter into a short hedge
position to offset our price risk relative to those bushels we have under fixed
price contracts.  Because our ethanol marketing company (RPMG) is
selling substantially all of the gallons it markets on a spot basis we also
include the corn bushel equivalent of the ethanol we have produced that is
inventory but not yet priced as bushels that need to be hedged.




As of
March 31, 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 $274,000 related to these bushels as average fixed price of
these contracts was approximately $0.20 above market value.  We would
expect a $0.10 change in the price of corn to have an approximate $140,000
impact on our net income.




While we
have previously used ethanol swap contracts to lock in a price for a small
portion of our ethanol production, we do not anticipate using these types of
contracts during 2009 but may use them, if we believe it will produce positive
results for the Plant and we receive the approval of our Bank to use these
contracts.  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.




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 March 31, 2009 and December 31, 2008, we
had investments of $315,000 and $447,000 in corn derivative instruments,
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.




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 - 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.


31





Our Chief
Executive Officer and Chief Financial Officer, after evaluating the
effectiveness of our disclosure controls and procedures as of March 31, 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 March 31, 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.





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 first 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.


32





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 May 14,
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
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.  The Bank has not granted a waiver of those covenant
violations.  We are in the final stages of negotiating an Agreement
with the Bank for the waiver of our next two quarterly principal payments (April
16, 2009 and July 16 2009) however, under the terms of the proposed Agreement,
the Bank would reserve its rights under the terms of the construction loan
agreement during this period.  This means that 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.




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 have received
90-day cancellation notices from the insurer that provided our Grain Warehouse
Bond and our Distilled Spirits Bond.Both of these bonds have
been cancelled by our insurer effective in July 2009.  If we cannot
find an insurer to replace these bonds we will be forced to shut down our
Plant.  As of May 14, 2009 we had not yet been able to find an insurer
to replace these bonds.  We are working to find a resolution to this
issue.




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




None.


33





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
March 31, 2009.  Please see Note 3 and Note 6 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.


34


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:
      May 15, 2009
              By:
              
              /s/ Mick J. MillerMick
      J. MillerPresident
      and Chief Executive OfficerDate:
      May 15, 2009
              By:
              
              /s/
      Mark E. KlimpelMark
      E. KlimpelChief
      Financial Officer


35


EXHIBIT INDEX




RED
TRAIL ENERGY, LLC


FORM 10-Q FOR THE QUARTER ENDED MARCH
31, 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.


36