##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934.
 FOR THE QUARTERLY PERIOD ENDED September 30, 2006
 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
  NORTH DAKOTA
(State or other jurisdiction 
of incorporation or organization)
    
    76-0742311
(IRS Employer
Identification No.)
 
 
 þ o
  o o þ
 o þ




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##### 



PagePART I  FINANCIAL INFORMATION
    
    
    1Item 1. Financial Statements (Unaudited)
    
    
    1Balance Sheets
    
    
    1Statements of Operations
    
    
    2Statements of Cash Flows
    
    
    3Notes to Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Cautionary Statement Regarding Forward-Looking Statements
    
    
    12Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    19Item 4. Controls and Procedures
    
    
    20PART II  OTHER INFORMATION
    
    
    21Item 6. Exhibits
    
    
    21SIGNATURES
    
    
    2223New Jobs Loan Agreement302 Certification of Chief Executive Officer302 Certification of Chief Financial OfficerSection 906 CertificationSection 906 Certification
  i




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
  RED TRAIL ENERGY, LLC
 
  September 30, 2006
    
    
    December 31, 2005(Unaudited)
    
    
    (Audited)ASSETSCURRENT ASSETSCash and equivalents
    
    $
    41,759
    
    
    $
    19,043,811Derivative instrument
    
    
    353,321
    
    
    
    Prepaid expenses
    
    
    13,699
    
    
    
    25,345Total current assets
    
    
    408,779
    
    
    
    19,069,156PROPERTY AND EQUIPMENTLand
    
    
    300,602
    
    
    
    300,602Office Equipment
    
    
    78,696
    
    
    
    Land Improvements
    
    
    6,022
    
    
    
    Buildings
    
    
    313,295
    
    
    
    Construction in progress
    
    
    69,733,116
    
    
    
    16,647,58370,431,731
    
    
    
    16,948,185Less Accumulated Depreciation
    
    
    4,251
    
    
    
    Total property and equipment, net
    
    
    70,427,480
    
    
    
    16,948,185OTHER ASSETSDebt issuance costs, net of amortization
    
    
    1,022,365
    
    
    
    955,238Total other assets
    
    
    1,022,365
    
    
    
    955,238Total Assets
    
    $
    71,858,624
    
    
    $
    36,972,579LIABILITIES AND MEMBERS EQUITYCURRENT LIABILITIESCurrent maturities of long term debt
    
    $
    944,850Accounts payable
    
    
    6,863,836
    
    
    $
    7,971,436Accrued expenses
    
    
    126,323
    
    
    
    9,497Market value  interest rate swap
    
    
    147,874
    
    
    
    277,952Total current liabilities
    
    
    8,062,521
    
    
    
    8,258,885Long-term debt
    
    
    28,888,677
    
    
    
    Members Equity
    
    
    34,907,426
    
    
    
    28,713,694Total Liabilities and Members Equity
        $
    71,858,624
    
    
    $
    36,972,579
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##### Table of Contents



RED TRAIL ENERGY, LLC
 
  FromInceptionNine Months
    
    
    Nine Months
    
    
    July 16, 2003Qtr Ended
    
    
    Qtr Ended
    
    
    Ended
    
    
    Ended
    
    
    toSeptember
    
    
    September
    
    
    September
    
    
    September
    
    
    September 30,30, 2006
    
    
    30, 2005
    
    
    30, 2006
    
    
    30, 2005
    
    
    2006(Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)Revenues
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Operating Expenses
    
    
    406,079
    
    
    
    115,016
    
    
    
    808,837
    
    
    
    321,821
    
    
    
    3,750,168Operating Loss
    
    
    (406,079
    )
    
    
    (115,016
    )
    
    
    (808,837
    )
    
    
    (321,821
    )
    
    
    (3,750,168
    )Other Income (Expense)Grant income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    150,000Gain (loss) from
non-designated
hedging derivatives
    
    
    (623,306
    )
    
    
    
    
    
    
    83,358
    
    
    
    
    
    
    
    (194,553
    )Interest income
    
    
    735
    
    
    
    181,921
    
    
    
    179,546
    
    
    
    339,578
    
    
    
    814,706Total other
income, net
    
    
    (622,571
    )
    
    
    181,921
    
    
    
    262,904
    
    
    
    389,578
    
    
    
    770,153Net Income (Loss)
    
    $
    (1,028,650
    )
    
    $
    66,905
    
    
    $
    (545,933
    )
    
   $
    67,757
    
    
    $
    (2,980,015
    )Weighted Average
Units Outstanding
    
    
    40,375,973
    
    
    
    31,497,630
    
    
    
    39,375,382
    
    
    
    21,510,089
    
    
    
    13,981,925Net Income (Loss) Per
Unit
    
    $
    (.03
    )
    
    $
    .00
    
    
    $
    (.01
    )
    
    $
    .00
    
    
    $
    (.21
    )
  2




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##### Table of Contents



RED TRAIL ENERGY, LLC
 
  Nine Months
    
    
    Nine Months
    
    
    From InceptionEnded
    
    
    Ended
    
    
    July 16, 2003 toSeptember 30,
    
    
    September 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006(Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)Cash Flows from Operating ActivitiesNet income (loss)
    
    $
    (545,933
    )
    
    $
    67,757
    
    
    $
    (2,980,015
    )Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:Depreciation
    
    
    4,251
    
    
    
    
    
    
    
    4,251Unrealized loss on derivative instruments
    
    
    46,679
    
    
    
    
    
    
    
    46,679Amortization of unearned compensation
    
    
    
    
    
    
    
    
    
    
    56,825(Gain) loss from non-designated hedging activities
    
    
    (130,078
    )
    
    
    
    
    
    
    147,874Changes in assets and liabilitiesDerivative instruments
    
    
    (400,000
    )
    
    
    
    
    
    
    (400,000
    )Prepaid expenses
    
    
    11,646
    
    
    
    
    
    
    
    (13,699
    )Accounts payable
    
    
    (1,367,062
    )
    
    
    (892
    )
    
    
    6,604,374Accrued expenses
    
    
    116,826
    
    
    
    4,162
    
    
    
    126,323Net cash provided by (used in)
operating activities
    
    
    (2,263,671
    )
    
    
    71,027
    
    
    
    3,592,612Cash Flows from Investing ActivitiesCapital expenditures
    
    
    (52,745,500
    )
    
    
    (866,281
    )
    
    
    (69,693,685
    )Net cash used in investing activities
    
    
    (52,745,500
    )
    
    
    (866,281
    )
    
    
    (69,693,685
    )Cash Flows from Financing ActivitiesPayments for deferred offering costs
    
    
    
    
    
    
    (3,353
    )
    
    
    (107,315
    )Payments for debt issuance costs
    
    
    (545,865
    )
    
    
    (73,000
    )
    
    
    (1,501,103
    )Proceeds from long-term debt
    
    
    29,833,527
    
    
    
    
    
    
    
    29,833,527Proceeds from stock subscriptions held in escrow
    
    
    
    
    
    
    
    
    
    
    25,983,452Member contributions
    
    
    6,719,457
    
    
    
    29,483,309
    
    
    
    11,934,271Net cash provided by financing activities
    
    
    36,007,119
    
    
    
    29,406,956
    
    
    
    66,142,832Net Increase (Decrease) in Cash and Equivalents
    
    
    (19,002,052
    )
    
    
    28,611,702
    
    
    
    41,759Cash and Equivalents  Beginning of Period
    
    
    19,043,811
    
    
    
    136,346
    
    
    
    Cash and Equivalents  End of Period
    
    $
    41,759
    
    
    $
    28,748,048
    
    
    $
    41,759SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND
FINANCING ACTIVITIESDebt issuance costs included in accounts payable
    
    $
    6,000
    
    
    $
    
    
    
    $
    6,000Capital expenditures included in accounts payable
    
    $
    6,662,492
    
    
    $
    32,036
    
    
    $
    6,662,492Stock subscriptions held in escrow converted to member
contributions
    
    $
    
    
    
    $
    29,483,309
    
    
    $
    25,983,452Member unit subscriptions
    
    $
    
    
    
    $
    
    
    
    $
    33,550Issuance of restricted shares
    
    $
    
    
    
    $
    
    
    
    $
    56,825
  3




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##### Table of Contents



Red Trail Energy, LLC
 
   1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
   Nature of Business
  Fiscal Reporting Period
  Accounting Estimates
  Cash
   Derivative Instruments
 Accounting for Derivative Instruments and Hedging Activities ,
 4




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##### Table of Contents



Property and Equipment
   Debt Issuance Costs
  Deferred Offering Costs
  Grants
   Income Taxes
  Organizational and Start Up Costs
  Equity-Based Compensation
  5
    Table of Contents  Leases
  Environmental Liabilities
  Recently Issued Accounting Pronouncements
  2. DEVELOPMENT STAGE ENTERPRISE
   6
    Table of Contents  3. DERIVATIVE INSTRUMENTS
   4. CONSTRUCTION IN PROGRESS
  September 30, 2006
    
    
    December 31, 2005Construction Costs
    
    $
    66,089,693
    
    
    $
    15,516,973Rail infrastructure and development
    
    
    2,609,654
    
    
    
    1,026,124Water wells
    
    
    556,314
    
    
    
    4,678Other costs
    
    
    447,505
    
    
    
    99,808$
    69,733,116
    
    
    $
    16,647,583
 5. BANK FINANCING
  September 30, 2006Construction loan agreement payable to bank, see below
    
    $
    23,894,106Revolving line of credit payable to bank, see below
    
    
    404,176Subordinated notes payable, see below
    
    
    5,525,000Capital lease obligation, see below
    
    
    10,245Totals
    
    $
    29,833,527Less amounts due within one year
    
    
    944,850Totals
    
    $
    28,888,677
  2007
    
    $
    944,8502008
    
    
    2,001,5512009
    
    
    2,161,3052010
    
    
    2,327,7912011
    
    
    2,507,101Thereafter
    
    
    19,890,929Total long-term liabilities
    
    $
    29,833,527
  7
    Table of Contents  Construction Loan
       Revolving Line of Credit
  Interest Rate Swap Agreement
   Letters of Credit
  8
    Table of Contents  Subordinated Debt
   6. MEMBERS EQUITY
       7. GRANTS
  9
    Table of Contents  8. COMMITMENTS AND CONTINGENCIES
 Design Build Contract
  Consulting Contracts
     Utility Agreements
   10
    Table of Contents  Marketing Agreements
   Coal Purchase Contract
  Grain Origination Contract
   Rail Track Design
  Leases
  11
    Table of Contents  PART 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  
    
    The availability and adequacy of our cash flow to meet its requirements, including
payment of loans;
    
    Economic, competitive, demographic, business and other conditions in our local, regional
and national markets;
    
    Changes or developments in laws, regulations or taxes in the ethanol, agricultural or
energy industries;
    
    Actions taken or not taken by third parties, including our suppliers and competitors, as
well as legislative, regulatory, judicial and other governmental authorities;
    
    Competition in the ethanol industry;
    
    The loss of any license or permit;
    
    The loss of our plant due to casualty, weather, mechanical failure or any extended or
extraordinary maintenance or inspection that may be required; and
    
    Changes in our business strategy, capital to support capital improvements and
development.
 Application of Critical Accounting Policies
  Accounting Estimates
  Cash and Equivalents
   Property and Equipment
  12
    Table of Contents  Debt Issuance Costs
  Deferred Offering Costs
  Income Taxes
  Organization and Start Up Costs
  Derivative Instruments
    Summary
  Results of Operations for the Three Months Ended September 30, 2006 and September 30, 2005 and
the Nine Months Ended September 30, 2006 and September 30, 2005
  13
    Table of Contents  Three Months
    
    
    
    

    
    
    Three Months
    
    
    
    

    
    
    Nine Months
    
    
    
    

    
    
    Nine MonthsEnded September
    
    
    
    

    
    
    Ended September
    
    
    
    

    
    
    Ended September
    
    
    
    

    
    
    Ended September30, 2006
    
    
    
    

    
    
    30, 2005
    
    
    
    

    
    
    30, 2006
    
    
    
    

    
    
    30, 2005Amount   

    
    %   

    
    Amount   

    
    %   

    
    Amount   

    
    %   

    
    Amount   

    
    %Revenues
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $Costs of SalesGross MarginOperating expenses
    
    
    406,079
    
    
    
    
    
    
    
    115,016
    
    
    
    
    
    
    
    808,837
    
    
    
    
    
    
    
    321,821Operating income
(loss)
    
    
    (406,079
    )
    
    
    
    
    
    
    (115,016
    )
    
    
    
    
    
    
    (808,837
    )
    
    
    
    
    
    
    (321,821
    )Grant Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,000Gain (loss) from
non-designated
hedging derivatives
    
    
    (623,306
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    83,358
    
    
    
    
    
    
    
    Interest income
    
    
    735
    
    
    
    
    
    
    
    181,921
    
    
    
    
    
    
    
    179,546
    
    
    
    
    
    
    
    339,578(622,571
    )
    
    
    
    
    
    
    181,921
    
    
    
    
    
    
    
    262,904
    
    
    
    
    
    
    
    389,578Net Income
    
    $
    (1,028,650
    )
    
    
    
    
    
    $
    66,905
    
    
    
    
    
    
    $
    (545,933
    )
    
    
    
    
    
    $
    67,757
 Results of Operations
  Revenues
  Cost of Sales
  Operating Expenses
  14
    Table of Contents  Other Income, Net
     Plan of Operations Until Start-Up of Ethanol Plant
   Plant Construction and Start-Up of Plant Operations
  Liquidity and Capital Resources
 Overview
  15
    Table of Contents  Construction Loan Agreements
  Construction Loan
        
    
    Providing the bank with current and accurate financial statements;
    
    Maintaining certain financial ratios, minimum net worth, and working capital;
 16
    Table of Contents  
    
    Maintaining adequate insurance;
    
    Make, or allow to be made, any significant change in our business or tax structure; and
    
    Limiting our ability to make distributions to members.
  
    
    declaring all the debt owed to the bank immediately due and payable; and
    
    taking possession of all of our assets, including any contract rights.
  Revolving Line of Credit
  Interest Rate Swap Agreement
  Letters of Credit
  Subordinated Debt
   Grants
  17
    Table of Contents  Fuel Tax Incentive Program
  Corn Price
 a.
    
    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.b.
    
    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.c.
    
    For every cent that the average quarterly 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 of ethanol produced by the facility during the
quarter.
 Ethanol Price
 a.
    
    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.b.
    
    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.c.
    
    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.
  Tax Credit for Investors
  18
    Table of Contents  Off-Balance Sheet Arrangements
  Contractual Obligations
  Payments Due by PeriodLess than 1
    
    
    
    
    
    More thanTotal
    
    Year
    
    1-3 Years
    
    5 YearsContractual ObligationsPurchase Option(1)
    
    $
    76,000,000
    
    
    $
    20,087,000
    
    
    0
    
    
    
    0Total Contractual obligations
    
    $
    76,000,000
    
    
    $
    20,087,000
    
    
    0
    
    
    
    0
 
 (1)
    
    Relates to our contract with Fagen. As of September 30, 2006, we have already paid
approximately $56,913,000. 
 ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Interest Rate Risk
   Commodity Price Risk
   19
    Table of Contents  ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
  20
    Table of Contents  PART II  OTHER INFORMATION
 
 Item 6. Exhibits
  10.32
    
    New Jobs Loan Agreement dated September 11, 2006 by
and between the Company and Job Service North Dakota31.1
    
    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.
   21
    Table of Contents  SIGNATURES
  RED TRAIL ENERGY, LLCDate: November 15, 2006
    By:
    /s/ Mick J. MillerMick J. MillerPresident and Chief Executive Officer 22