UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q





xQuarterly report pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934





For
the quarterly period ended September 30, 2010





 ̈Transition report pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934





For
the transition period from _____________ to ______________





Commission
file number 000-53039





RED
TRAIL ENERGY, LLC


(Name of
registrant as specified in its charter)





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





3682
      Highway 8 South, P.O. Box 11, Richardton, North Dakota
                58652(Address
      of principal executive offices)
                (Zip
      Code)





(701) 974-3308


(Registrant’s
telephone number)





Indicate
by check mark whether the registrant (1) 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.


x   Yes 
 ̈ No





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).       ̈Yes      ̈No





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





Large
      accelerated filer
                 ̈
                Accelerated
      filer
                 ̈Non-accelerated
      filer
                x (Do not check if a smaller
      reporting company)
                Smaller
      reporting company
                 ̈





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


 ̈  Yes          x  No





Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date:  As of November 19, 2010 there
were 40,193,973 Class A Membership Units.





INDEX





PagePART
      I — FINANCIAL INFORMATION
                
                3Item
      1. – Condensed Financial Statements
                
                3Item
      2.  Management's Discussion and Analysis of Financial Condition
      and Results of Operations
                
                13Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
                
                24Item
      4.  Controls and Procedures
                
                25PART
      II — OTHER INFORMATION
                
                26Item
      1.Legal
      Proceedings
                
                26Item
      1A.  Risk Factors
                
                26Unregistered
      Sales of Equity Securities and Use of
    Proceeds
                
                27Item
      4.Removed
      and Reserved
                
                27Item
      5.Other
      Information
                
                27Item
      6.  Exhibits
                
                27SIGNATURES
                
                28


2


PART
I — FINANCIAL INFORMATION


Item 1.
– Condensed Financial Statements


RED
TRAIL ENERGY, LLC


CONDENSED
BALANCE SHEETS





September 30, 2010(Unaudited)
                  
                  
                  December31,2009ASSETSCurrent
      AssetsCash
      and equivalents
                  
                  $
                  6,760,815
                  
                  
                  $
                  13,214,091Restricted
      cash
                  
                  
                  1,283,412
                  
                  
                  
                  2,217,013Accounts
      receivable
                  
                  
                  3,771,941
                  
                  
                  
                  2,635,775Derivative
      instruments, at fair value
                  
                  
                  ―
                  
                  
                  
                  129,063Inventory
                  
                  
                  5,550,046
                  
                  
                  
                  6,993,031Prepaid
      expenses
                  
                  
                  85,397
                  
                  
                  
                  195,639Total
      current assets
                  
                  
                  17,451,611
                  
                  
                  
                  25,384,612Property,
      Plant and EquipmentLand
                  
                  
                  351,280
                  
                  
                  
                  351,280Land
      improvements
                  
                  
                  3,970,500
                  
                  
                  
                  3,970,500Buildings
                  
                  
                  5,312,995
                  
                  
                  
                  5,312,995Plant
      and equipment
                  
                  
                  79,523,377
                  
                  
                  
                  79,199,850Construction
      in progress
                  
                  
                  265,846
                  
                  
                  
                  ―89,423,998
                  
                  
                  
                  88,834,625Less
      accumulated depreciation
                  
                  
                  21,751,455
                  
                  
                  
                  17,419,043Net
      property, plant and equipment
                  
                  
                  67,672,543
                  
                  
                  
                  71,415,582Other
      AssetsInvestment
      in RPMG
                  
                  
                  605,000
                  
                  
                  
                  605,000Patronage
      equity
                  
                  
                  309,990
                  
                  
                  
                  192,207Deposits
                  
                  
                  40,000
                  
                  
                  
                  80,000Total
      other assets
                  
                  
                  954,990
                  
                  
                  
                  877,207Total
      Assets
                  
                  $
                  86,079,144
                  
                  
                  $
                  97,677,401LIABILITIES
      AND MEMBERS' EQUITYCurrent
      LiabilitiesAccounts
      payable
                  
                  $
                  6,724,387
                  
                  
                  $
                  7,605,302Accrued
      expenses
                  
                  
                  1,759,300
                  
                  
                  
                  2,634,534Derivative
      instruments, at fair value
                  
                  
                  176,975
                  
                  
                  
                  806,490Current
      maturities of long-term debt
                  
                  
                  8,876,300
                  
                  
                  
                  6,500,000Current
      portion of interest rate swaps, at fair value
                  
                  
                  1,222,795
                  
                  
                  
                  785,591Total
      current liabilities
                  
                  
                  18,759,757
                  
                  
                  
                  18,331,917Other
      LiabilitiesContracts
      payable
                  
                  
                  275,000
                  
                  
                  
                  275,000Long-Term
      DebtNotes
      payable
                  
                  
                  26,634,000
                  
                  
                  
                  43,620,025Long-term
      portion of interest rate swaps, at fair value
                  
                  
                  789,973
                  
                  
                  
                  1,575,095Total
      long-term debt
                  
                  
                  27,423,973
                  
                  
                  
                  45,195,120Commitments
      and ContingenciesMembers'
      Equity
                  
                  
                  39,620,414
                  
                  
                  
                  33,875,364Total
      Liabilities and Members' Equity
                  
                  $
                  86,079,144
                  
                  
                  $
                  97,677,401




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




3




RED TRAIL ENERGY,
LLC


CONDENSED
STATEMENTS OF OPERATIONS





ThreeMonths
                                EndedSeptember
                                30,2010
                                (Unaudited)
                              
                              
                              ThreeMonths
                                EndedSeptember
                                30,2009
                                (Unaudited)
                              
                              
                              NineMonthsEnded
                                September30,2010
                                (Unaudited)
                              
                              
                              NineMonthsEnded
                                September30,2009
                                (Unaudited)RevenuesEthanol,
      net of derivative fair value changes
                              
                              $
                              23,633,718
                              
                              
                              $
                              21,119,497
                              
                              
                              $
                              66,240,070
                              
                              
                              $
                              57,486,329Distillers
      grains
                              
                              
                              4,103,556
                              
                              
                              
                              4,127,699
                              
                              
                              
                              12,902,153
                              
                              
                              
                              12,289,311Total
      Revenue
                              
                              
                              27,737,274
                              
                              
                              
                              25,247,196
                              
                              
                              
                              79,142,223
                              
                              
                              
                              69,775,640Cost
      of Goods SoldCost
      of goods sold, net of changes in fair value of derivative
      instruments
                              
                              
                              21,567,650
                              
                              
                              
                              20,932,722
                              
                              
                              
                              65,722,450
                              
                              
                              
                              60,983,797(Gain)/loss
      on firm purchase commitments
                              
                              
                              (60,000
                              )
                              
                              
                              (477,000
                              )
                              
                              
                              ―
                              
                              
                              
                              218,000Lower
      of cost or market adjustment for inventory on hand
                              
                              
                              ―
                              
                              
                              
                              221,500
                              
                              
                              
                              ―
                              
                              
                              
                              1,464,500Depreciation
                              
                              
                              1,455,262
                              
                              
                              
                              1,449,900
                              
                              
                              
                              4,358,380
                              
                              
                              
                              4,390,783Total
      Cost of Goods Sold
                              
                              
                              22,962,912
                              
                              
                              
                              22,127,122
                              
                              
                              
                              70,080,830
                              
                              
                              
                              67,057,080Gross
      Margin
                              
                              
                              4,774,362
                              
                              
                              
                              3,120,074
                              
                              
                              
                              9,061,393
                              
                              
                              
                              2,718,560General
      and Administrative
                              
                              
                              798,337
                              
                              
                              
                              758,489
                              
                              
                              
                              2,024,673
                              
                              
                              
                              2,240,835Operating
      Income
                              
                              
                              3,976,025
                              
                              
                              
                              2,361,585
                              
                              
                              
                              7,036,720
                              
                              
                              
                              477,725Interest
      Expense
                              
                              
                              766,652
                              
                              
                              
                              1,211,111
                              
                              
                              
                              2,629,000
                              
                              
                              
                              3,082,549Other
      Income, net
                              
                              
                              324,773
                              
                              
                              
                              678,845
                              
                              
                              
                              1,337,330
                              
                              
                              
                              1,123,516Net
      Income (Loss)
                              
                              $
                              3,534,146
                              
                              
                              $
                              1,829,319
                              
                              
                              $
                              5,745,050
                              
                              
                              $
                              (1,481,308
                              )Basic
      and diluted for each:Weighted
      Average Units Outstanding
                              
                              
                              40,193,973
                              
                              
                              
                              40,193,973
                              
                              
                              
                              40,193,973
                              
                              
                              
                              40,190,676Net
      Income (Loss) Per Unit
                              
                              $
                              0.08
                              
                              
                              $
                              0.05
                              
                              
                              $
                              0.14
                              
                              
                              $
                              (0.04
                              )




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


4


RED TRAIL ENERGY,
LLC


CONDENSED
STATEMENTS OF CASH FLOWS





Ninemonthsended
                        September30,2010
                        (Unaudited)
                      
                      
                      Ninemonthsended
                        September30,2009
                        (Unaudited)Cash
      Flows from Operating ActivitiesNet
      income (loss)
                      
                      $
                      5,745,050
                      
                      
                      $
                      (1,481,308
                      )Adjustment
      to reconcile net income (loss) to net cash provided by operating
      activities:Depreciation
                      
                      
                      4,403,634
                      
                      
                      
                      4,428,307Amortization
      and write-off of debt financing costs
                      
                      
                      ―
                      
                      
                      
                      567,385Loss
      on disposal of fixed assets
                      
                      
                      68,446
                      
                      
                      
                      ―Change
      in fair value of derivative instruments
                      
                      
                      198,183
                      
                      
                      
                      94,331Equity-based
      compensation
                      
                      
                      ―
                      
                      
                      
                      (49,301
                      )Noncash
      patronage equity
                      
                      
                      (117,783
                      )
                      
                      
                      (75,911
                      )Loss
      on lower of cost or market adjustment for inventory on
hand
                      
                      
                      ―
                      
                      
                      
                      1,464,500Unrealized
      loss on firm purchase commitments
                      
                      
                      ―
                      
                      
                      
                      (1,208,800
                      )Changes
      in assets and liabilitiesRestricted
      cash
                      
                      
                      933,601
                      
                      
                      
                      (42,882
                      )Accounts
      receivable
                      
                      
                      (1,136,166
                      )
                      
                      
                      (510,857
                      )Inventory
                      
                      
                      1,442,985
                      
                      
                      
                      (3,525,857
                      )Prepaid
      expenses
                      
                      
                      110,242
                      
                      
                      
                      4,141,483Deposits
                      
                      
                      40,000
                      
                      
                      
                      ―Accounts
      payable
                      
                      
                      (1,047,490
                      )
                      
                      
                      454,261Accrued
      expenses
                      
                      
                      (875,234
                      )
                      
                      
                      997,737Cash
      settlements on interest rate swaps
                      
                      
                      (1,046,553
                      )
                      
                      
                      (639,688
                      )Net
      cash provided by operating activities
                      
                      
                      8,718,915
                      
                      
                      
                      4,613,400Cash
      Flows from Investing ActivitiesInvestment
      in RPMG
                      
                      
                      ―
                      
                      
                      
                      (169,110
                      )Refund
      of sales tax on fixed assets
                      
                      
                      ―
                      
                      
                      
                      763,630Proceeds
      from disposal of fixed assets
                      
                      
                      134,845
                      
                      
                      
                      ―Capital
      expenditures
                      
                      
                      (697,311
                      )
                      
                      
                      (34,125
                      )Net
      cash provided by (used in) investing activities
                      
                      
                      (562,466
                      )
                      
                      
                      560,395Cash
      Flows from Financing ActivitiesDebt
      repayments
                      
                      
                      (14,609,725
                      )
                      
                      
                      (1,297,007
                      )Restricted
      cash - collateral
                      
                      
                      ―
                      
                      
                      
                      (750,000
                      )Treasury
      units issued
                      
                      
                      ―
                      
                      
                      
                      5,000Proceeds
      from long-term debt
                      
                      
                      ―
                      
                      
                      
                      3,573,508Net
      cash provided by (used in) financing activities
                      
                      
                      (14,609,725
                      )
                      
                      
                      1,531,501Net
      Increase (Decrease) in Cash and Equivalents
                      
                      
                      (6,453,276
                      )
                      
                      
                      6,705,296Cash
      and Equivalents - Beginning of Period
                      
                      
                      13,214,091
                      
                      
                      
                      4,433,839Cash
      and Equivalents - End of Period
                      
                      $
                      6,760,815
                      
                      
                      $
                      11,139,135Supplemental
      Disclosure of Cash Flow InformationInterest
      paid
                      
                      $
                      3,150,452
                      
                      
                      $
                      2,216,077SUPPLEMENTAL
      DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIESCapital
      expenditures included in accounts payable
                      
                      $
                      166,575
                      
                      
                      $
                      ―Write-off
      of debt issuance costs
                      
                      $
                      ―
                      
                      
                      $
                      517,823Investment
      in RPMG included in accounts payable
                      
                      $
                      ―
                      
                      
                      $
                      169,110





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


5


RED
TRAIL ENERGY, LLC


NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


FOR
THE PERIODS ENDED SEPTEMBER 30, 2010 AND DECEMBER 31, 2009





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, 2009, contained in the Company’s Annual Report on
Form 10-K.





In the
opinion of management, the interim condensed unaudited 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, 2010.





1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES





Nature
of Business


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





Accounting
Estimates


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





Reclassifications


The
presentation of certain items in the financial statements for the nine months
ended September 30, 2009 have been changed to conform to the classifications
used in 2010.  These reclassifications had no effect on members’
equity, net income (loss) or operating cash flows as previously
reported.





Fair Value of Financial
Instruments




The fair
value of the Company’s cash and equivalents, accounts receivable, accounts
payable, and derivative instruments, including interest rate swap agreements,
approximate their carrying value.   The Company evaluated the
fair value of its long-term debt at September 30, 2010 and December 31, 2009 and
the fair value approximated the carrying value (see Note 4 for additional
information).





The
Company has adopted guidance for accounting for fair value measurements of
financial assets and financial liabilities and for fair value measurements of
nonfinancial items that are recognized or disclosed at fair value in the
financial statements on a recurring basis and for fair value measurement related
to nonfinancial items that are recognized and disclosed at fair value in the
financial statements on a nonrecurring basis.  The guidance
establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value.





The
hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 measurements) and the
lowest priority to measurements involving significant unobservable inputs (Level
3 measurements). The three levels of the fair value hierarchy are as
follows:





·
            Level
      1 inputs are quoted prices (unadjusted) in active markets for identical
      assets or liabilities that the Company has the ability to access at the
      measurement date,


·
            Level
      2 inputs are inputs other than quoted prices included within Level 1 that
      are observable for the asset  or  liability, either
      directly or indirectly,


·
            Level
      3 inputs are unobservable inputs for the asset or
    liability.


6


RED
TRAIL ENERGY, LLC


NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


FOR
THE PERIODS ENDED SEPTEMBER 30, 2010 AND DECEMBER 31, 2009





The level
in the fair value hierarchy within which a fair measurement in its entirety
falls is based on the lowest level input that is significant to the fair value
measurement in its entirety.





Net Income (Loss) Per
Unit




Net
income (loss) per unit is calculated on a basic and fully diluted basis using
the weighted average units outstanding during the period.  There were
no member unit equivalents outstanding during the periods presented;
accordingly, the Company’s basic and diluted net income (loss) per unit are the
same.





2. DERIVATIVE
INSTRUMENTS




Commodity
Contracts




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





Asof:
                                                                      
                                                                      September30,2010
                                                                      
                                                                      
                                                                      December31,2009ContractType
                                                                      
                                                                      #of
                                                                        Contracts
                                                                      
                                                                      
                                                                      NotionalAmount
                                                                        (Qty)
                                                                      
                                                                      FairValue
                                                                      
                                                                      
                                                                      #of
                                                                        Contracts
                                                                      
                                                                      
                                                                      NotionalAmount
                                                                        (Qty)
                                                                      
                                                                      FairValueCorn
      futures
                                                                      
                                                                      
                                                                      152
                                                                      
                                                                      
                                                                      
                                                                      760,000
                                                                      
                                                                      bushels
                                                                      
                                                                      $
                                                                      (173,350
                                                                      )
                                                                      
                                                                      
                                                                      82
                                                                      
                                                                      
                                                                      
                                                                      410,000
                                                                      
                                                                      bushels
                                                                      
                                                                      $
                                                                      129,063Ethanol
      swap contracts
                                                                      
                                                                      
                                                                      30
                                                                      
                                                                      
                                                                      
                                                                      432,000
                                                                      
                                                                      gallons
                                                                      
                                                                      
                                                                      (3,625
                                                                      )
                                                                      
                                                                      
                                                                      530
                                                                      
                                                                      
                                                                      
                                                                      7,632,000
                                                                      
                                                                      gallons
                                                                      
                                                                      
                                                                      (806,490
                                                                      )Total
      fair value
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      $
                                                                      (176,975
                                                                      )
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      $
                                                                      (677,427
                                                                      )




Amounts
are recorded separately on the balance sheet - negative numbers represent
liabilties




Interest
Rate Contracts




The
Company had approximately $28.5 million and $30.8 million of notional amount
outstanding in interest rate swap agreements, as of September 30, 2010 and
December 31, 2009, respectively that exchange variable interest rates (one-month
LIBOR and three-month LIBOR) for fixed interest rates over the terms of the
agreements. At September 30, 2010 and December 31, 2009, the fair value of the
interest rate swaps totaled approximately $2.0 million and $2.4 million,
respectively, and are recorded as a liability on the balance
sheets.  These agreements are not designated as effective hedges for
accounting purposes and the change in fair market value and associated net
settlements are recorded in interest expense.  The swaps mature in
April 2012.




The
Company recorded net settlements of approximately $1,047,000 and $640,000 for
the nine months ended September 30, 2010 and 2009, respectively.  See
Note 4 for a description of these agreements.





The
following tables provide details regarding the Company’s derivative financial
instruments at September 30, 2010 and December 31, 2009:


7


RED
TRAIL ENERGY, LLC


NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


FOR
THE PERIODS ENDED SEPTEMBER 30, 2010 AND DECEMBER 31, 2009





Derivatives
not designated as hedging instruments:





Balance Sheet - as of September 30,
      2010
                        
                        Asset
                        
                        
                        LiabilityCorn
      derivative instruments, at fair value
                        
                        $
                        ―
                        
                        
                        $
                        173,350Ethanol
      derivative instruments, at fair value
                        
                        
                        ―
                        
                        
                        
                        3,625Interest
      rate swaps, at fair value
                        
                        
                        ―
                        
                        
                        
                        2,012,768Total
      derivatives not designated as hedging instruments for accounting
      purposes
                        
                        $
                        ―
                        
                        
                        $
                        2,189,743Balance Sheet - as of December 31,
      2009
                        
                        Asset
                        
                        
                        LiabilityCorn
      and ethanol derivative instruments, at fair value
                        
                        $
                        129,063
                        
                        
                        $
                        806,490Interest
      rate swaps, at fair value
                        
                        
                        ―
                        
                        
                        
                        2,360,686Total
      derivatives not designated as hedging instruments for accounting
      purposes
                        
                        $
                        129,063
                        
                        
                        $
                        3,167,176





StatementofOperations
                                    Income/(expense)
                                  
                                  Locationofgain
                                    (loss)infairvalue
                                    recognizedinincome
                                  
                                  Amountofgain(loss)
                                    recognizedinincome
                                    duringthreemonths
                                    endedSeptember30,
                                    2010
                                  
                                  
                                  Amountofgain(loss)
                                    recognizedinincome
                                    duringthreemonths
                                    endedSeptember30,
                                    2009
                                  
                                  
                                  Amountofgain(loss)
                                    recognizedinincome
                                    duringninemonths
                                    endedSeptember30,
                                    2010
                                  
                                  
                                  Amountofgain(loss)
                                    recognizedinincome
                                    duringninemonths
                                    endedSeptember30,
                                    2009Corn
      derivative instruments
                                  
                                  Cost
      of Goods Sold
                                  
                                  $
                                  (1,457,759
                                  )
                                  
                                  $
                                  (110,185
                                  )
                                  
                                  $
                                  (1,613,686
                                  )
                                  
                                  $
                                  603,934Ethanol
      derivative instruments
                                  
                                  Revenue
                                  
                                  
                                  (3,625
                                  )
                                  
                                  
                                  (360,325
                                  )
                                  
                                  
                                  1,997,331
                                  
                                  
                                  
                                  (360,325
                                  )Interest
      rate swaps
                                  
                                  Interest
      Expense
                                  
                                  
                                  146,107
                                  
                                  
                                  
                                  (86,895
                                  )
                                  
                                  
                                  347,918
                                  
                                  
                                  
                                  262,630Total
                                  
                                  
                                  
                                  $
                                  (1,315,277
                                  )
                                  
                                  $
                                  (557,405
                                  )
                                  
                                  $
                                  731,563
                                  
                                  
                                  $
                                  506,239





3.
INVENTORY




Inventory
is valued at lower of cost or market.  Inventory values as of
September 30, 2010 and December 31, 2009 were as follows:




Asof
                      
                      September30,2010
                      
                      
                      December31,2009Raw
      materials, including corn, chemicals and supplies
                      
                      $
                      4,040,893
                      
                      
                      $
                      4,921,532Work
      in process
                      
                      
                      710,361
                      
                      
                      
                      642,701Finished
      goods, including ethanol and distillers grains
                      
                      
                      798,792
                      
                      
                      
                      1,428,798Total
      inventory
                      
                      $
                      5,550,046
                      
                      
                      $
                      6,993,031




Lower of
cost or market adjustments for the three and nine months ended September 30,
2010 and 2009 were as follows:




For the three
                        months ended
                        September 30,
                        2010
                      
                      
                      For the three
                        months ended
                        September 30,
                        2009
                      
                      
                      For the nine
                        months ended
                        September 30,
                        2010
                      
                      
                      For the nine
                        months ended
                        September 30,
                        2009(Gain)/loss
      on firm purchase commitments
                      
                      $
                      (60,000
                      )
                      
                      $
                      (477,000
                      )
                      
                      $
                      -
                      
                      
                      $
                      218,000Loss
      on lower of cost or market adjustment for inventory on
hand
                      
                      
                      -
                      
                      
                      
                      221,500
                      
                      
                      
                      -
                      
                      
                      
                      1,464,500Total
      (gain)/loss on lower of cost or market adjustments
                      
                      $
                      (60,000
                      )
                      
                      $
                      (255,500
                      )
                      
                      $
                      -
                      
                      
                      $
                      1,682,500




The
Company has entered into forward corn purchase contracts under which it is
required to take delivery at the contract price.  At the time the
contracts were created, the price of the contract price approximated market
price.  Subsequent changes in market conditions could cause the
contract prices to become higher or lower than market prices.  As of
September 30, 2010, the average price of corn purchased under fixed price
contracts, that had not yet been delivered, was lower than market
price.  Based on this information, the Company did not accrue an
estimated loss of firm purchase commitments for the nine months ended September
30, 2010.  The Company recorded a loss on firm purchase commitments of
approximately $218,000 for the nine month period ended September 30,
2009.  The gain is recorded in “(Gain)/loss on firm purchase
commitments” on the statement of operations.  The amount of the
(gain)/loss was determined by applying a methodology similar to that used in the
impairment valuation with respect to inventory.  Given the uncertainty
of future ethanol prices, this loss may or may not be recovered, and further
losses on the outstanding purchase commitments could be recorded in future
periods.


8


RED
TRAIL ENERGY, LLC


NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


FOR
THE PERIODS ENDED SEPTEMBER 30, 2010 AND DECEMBER 31, 2009





The
Company recorded inventory valuation impairments of $0 and $221,500 for the
three months ended and $0 and $464,500 for the nine months ended September 30,
2010 and 2009, respectively.  The impairments, as applicable, were
attributable primarily to decreases in market prices of corn and
ethanol.  The inventory valuation impairment was recorded in “Lower of
cost or market adjustment for inventory on hand” on the statement of
operations.




4.
BANK FINANCING




Long-term
debt consists of the following:


Asof
                      
                      September30,2010
                      
                      
                      December31,2009Notes
      payable under loan agreement to bank
                      
                      $
                      29,974,817
                      
                      
                      $
                      44,541,350Subordinated
      notes payable
                      
                      
                      5,525,000
                      
                      
                      
                      5,525,000Capital
      lease obligations (Note 6)
                      
                      
                      10,483
                      
                      
                      
                      53,675Total
      Long-Term Debt
                      
                      
                      35,510,300
                      
                      
                      
                      50,120,025Less
      amounts due within one year
                      
                      
                      8,876,300
                      
                      
                      
                      6,500,000Total
      Long-Term Debt Less Amounts Due Within One Year
                      
                      $
                      26,634,000
                      
                      
                      $
                      43,620,025Market
      value of interest rate swaps
                      
                      
                      2,012,768
                      
                      
                      
                      2,360,686Less
      amounts due within one year
                      
                      
                      1,222,795
                      
                      
                      
                      785,591Total
      Interest Rate Swaps Less Amounts Due Within One Year
                      
                      $
                      789,973
                      
                      
                      $
                      1,575,095





Scheduled
maturities for the twelve months ended September 30





Interestrateswaps
                        
                        
                        Long-termdebt
                        
                        
                        Totals2011+
                        
                        $
                        1,222,795
                        
                        
                        $
                        8,876,300
                        
                        
                        $
                        10,099,0952012
                        
                        
                        789,973
                        
                        
                        
                        26,628,817
                        
                        
                        
                        27,418,7902013
                        
                        
                        ―
                        
                        
                        
                        3,019
                        
                        
                        
                        3,0192014
                        
                        
                        ―
                        
                        
                        
                        2,164
                        
                        
                        
                        2,164Thereafter
                        
                        
                        ―
                        
                        
                        
                        ―
                        
                        
                        
                        ―Total
                        
                        $
                        2,012,768
                        
                        
                        $
                        35,510,300
                        
                        
                        $
                        37,523,068





+ -
Scheduled maturities for the twelve months ended September 30, 2011 include the
full outstanding balance of our subordinated debt which has a maturity date of
March 2011.  However, the subordination agreement requires the Bank to
provide us written consent to make any principal payments to the subordinated
debt holders and we have not received such consent.




As of
September 30, 2010, the Company was in compliance with all of its debt
covenants.  For the quarter ended September 30, 2010, the Bank
provided the Company with approval to exceed the capital expenditure threshold
per the loan agreement for capital improvements to the Plant.




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, which is included in the total under notes payable under
loan agreement to bank above.  In December 2007, the Company entered
into a second interest rate swap transaction that effectively fixed the interest
rate at 7.695% on the outstanding principal of the December 2007 Fixed Rate
Note.




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


9


RED
TRAIL ENERGY, LLC


NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


FOR
THE PERIODS ENDED SEPTEMBER 30, 2010 AND DECEMBER 31, 2009





Interest Expense
                                
                                For the three months
                                  ended September 30,
                                  2010
                                
                                
                                For the three months
                                  ended September 30,
                                  2009
                                
                                
                                For the nine months
                                  ended September 30,
                                  2010
                                
                                
                                For the nine months
                                  ended September 30,
                                  2009Interest
      expense on long-term debt
                                
                                $
                                574,863
                                
                                
                                $
                                817,829
                                
                                
                                $
                                1,930,365
                                
                                
                                $
                                2,138,105Amortization/write-off
      of deferred financing costs
                                
                                
                                ―
                                
                                
                                
                                ―
                                
                                
                                
                                ―
                                
                                
                                
                                567,386Change
      in fair value of interest rate swaps
                                
                                
                                (146,107
                                )
                                
                                
                                86,895
                                
                                
                                
                                (347,918
                                )
                                
                                
                                (262,630
                                )Net
      settlements on interest rate swaps
                                
                                
                                337,896
                                
                                
                                
                                306,387
                                
                                
                                
                                1,046,553
                                
                                
                                
                                639,688Total
      interest expense
                                
                                $
                                766,652
                                
                                
                                $
                                1,211,111
                                
                                
                                $
                                2,629,000
                                
                                
                                $
                                3,082,549




5.
FAIR VALUE MEASUREMENTS




The
following table provides information on those assets and liabilities that are
measured at fair value on a recurring basis as of September 30, 2010 and
December 31, 2009, respectively.  Money market funds shown below are
included in cash and equivalents on the balance sheet.





FairValueMeasurementUsingCarrying
                                      Amountasof
                                      September30,
                                      2010
                                    
                                    
                                    FairValueasof
                                      September30,
                                      2010
                                    
                                    
                                    Level1
                                    
                                    
                                    Level2
                                    
                                    
                                    Level3AssetsMoney
      market funds
                                    
                                    $
                                    1,283,412
                                    
                                    
                                    $
                                    1,283,412
                                    
                                    
                                    $
                                    1,283,412
                                    
                                    
                                    $
                                    ―
                                    
                                    
                                    $
                                    ―Derivative
      instruments
                                    
                                    
                                    ―
                                    
                                    
                                    
                                    ―
                                    
                                    
                                    
                                    ―
                                    
                                    
                                    
                                    ―
                                    
                                    
                                    
                                    ―Total
                                    
                                    $
                                    1,283,412
                                    
                                    
                                    $
                                    1,283,412
                                    
                                    
                                    $
                                    1,283,412
                                    
                                    
                                    $
                                    ―
                                    
                                    
                                    $
                                    ―LiabilitiesInterest
      rate swaps
                                    
                                    $
                                    2,012,768
                                    
                                    
                                    $
                                    2,012,768
                                    
                                    
                                    $
                                    ―
                                    
                                    
                                    $
                                    2,012,768
                                    
                                    
                                    $
                                    ―Derivative
      instruments
                                    
                                    
                                    176,975
                                    
                                    
                                    
                                    176,975
                                    
                                    
                                    
                                    176,975
                                    
                                    
                                    
                                    ―
                                    
                                    
                                    
                                    ―Total
                                    
                                    $
                                    2,189,743
                                    
                                    
                                    $
                                    2,189,743
                                    
                                    
                                    $
                                    176,975
                                    
                                    
                                    $
                                    2,012,768
                                    
                                    
                                    $
                                    ―





FairValueMeasurementUsingCarrying
                                      Amountasof
                                      December31,
                                      2009
                                    
                                    
                                    FairValueasof
                                      December31,
                                      2009
                                    
                                    
                                    Level1
                                    
                                    
                                    Level2
                                    
                                    
                                    Level3AssetsMoney
      market funds
                                    
                                    $
                                    5,010,325
                                    
                                    
                                    $
                                    5,010,325
                                    
                                    
                                    $
                                    5,010,325
                                    
                                    
                                    $
                                    ―
                                    
                                    
                                    $
                                    ―Derivative
      instruments
                                    
                                    
                                    129,063
                                    
                                    
                                    
                                    129,063
                                    
                                    
                                    
                                    129,063
                                    
                                    
                                    
                                    ―
                                    
                                    
                                    
                                    ―Total
                                    
                                    $
                                    5,139,388
                                    
                                    
                                    $
                                    5,139,388
                                    
                                    
                                    $
                                    5,139,388
                                    
                                    
                                    $
                                    ―
                                    
                                    
                                    $
                                    ―LiabilitiesInterest
      rate swaps
                                    
                                    $
                                    2,360,686
                                    
                                    
                                    $
                                    2,360,686
                                    
                                    
                                    $
                                    ―
                                    
                                    
                                    $
                                    2,360,686
                                    
                                    
                                    $
                                    ―Derivative
      instruments
                                    
                                    
                                    806,490
                                    
                                    
                                    
                                    806,490
                                    
                                    
                                    
                                    806,490
                                    
                                    
                                    
                                    ―
                                    
                                    
                                    
                                    ―Total
                                    
                                    $
                                    3,167,176
                                    
                                    
                                    $
                                    3,167,176
                                    
                                    
                                    $
                                    806,490
                                    
                                    
                                    $
                                    2,360,686
                                    
                                    
                                    $
                                    ―





The fair
value of the money market funds and corn and ethanol derivative instruments is
based on quoted market prices in an active market.  The fair value of
the interest rate swap instruments are determined by using widely accepted
valuation techniques including discounted cash flow analysis on the expected
cash flows of each instrument. The analysis of the interest rate swaps reflect
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.


10


RED
TRAIL ENERGY, LLC


NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


FOR
THE PERIODS ENDED SEPTEMBER 30, 2010 AND DECEMBER 31, 2009




Financial
Instruments Not Measured at Fair Value




The
estimated fair value of the Company’s long-term debt, including the short-term
portion, at September 30, 2010, approximated the carrying value of approximately
$35.5 million.  The Company negotiated an amendment to its loan
agreements during 2009 that set an interest rate floor of 6% which was the
interest rate in effect at September 30, 2010 and was thought to approximate the
market interest rate for this debt.  The estimated fair value of the
Company’s long-term debt, including the short-term portion, at December 31, 2009
approximated its carrying value of $50 million.  Fair value was
estimated using estimated variable market interest rates as of December 31,
2009.  The fair values and carrying values consider the terms of the
related debt and exclude the impacts of debt discounts and derivative/hedging
activity.





6. LEASES





The
Company leases equipment under operating leases through 2014 and capital leases
through 2015. 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 $138,000 and $398,000 for the three and nine months
ended September 30, 2010, respectively and $122,000 and $358,000 for the three
and nine months ended September 30, 2009, respectively.  Equipment
under capital leases consists of office equipment and plant
equipment.





Equipment
under capital leases is as follows at:


As of
                      
                      September 30,2010
                      
                      
                      December 31, 2009Equipment
                      
                      $
                      12,976
                      
                      
                      $
                      219,476Accumulated
      amortization
                      
                      
                      3,244
                      
                      
                      
                      63,248Net
      equipment under capital lease
                      
                      $
                      9,732
                      
                      
                      $
                      156,228





At
September 30, 2010, the Company had the following minimum commitments, which at
inception had non-cancelable terms of more than one year.  Amounts
shown below are for the 12 months period ending September 30:





Operating
                        Leases
                      
                      
                      Capital
                        Leases2011
                      
                      $
                      556,589
                      
                      
                      $
                      3,3542012
                      
                      
                      490,909
                      
                      
                      
                      3,3542013
                      
                      
                      170,000
                      
                      
                      
                      3,3542014
                      
                      
                      31,200
                      
                      
                      
                      2,2362015
                      
                      
                      23,400
                      
                      
                      
                      ―Thereafter
                      
                      
                      ―
                      
                      
                      
                      ―Total
      minimum lease commitments
                      
                      $
                      1,272,098
                      
                      
                      
                      12,298Less
      amount representing interest
                      
                      
                      
                      
                      
                      
                      1,815Present
      value of minimum lease commitments included in the preceding current
      liabilities
                      
                      
                      
                      
                      
                      $
                      10,483





7. COMMITMENTS AND
CONTINGENCIES





Design-Build
Agreement





The
Company signed a design-build agreement (the “Design-Build Agreement”) with
Fagen, Inc. (“Fagen”) in September 2005 to design and build the Plant at a total
contract price of approximately $77 million.  The Company has
remaining payments under the Design-Build Agreement of approximately $3.9
million.  This payment has been withheld pending satisfactory
resolution of a punch list of items, including a major issue with the coal
combustor experienced during start up.  The Plant was originally
designed to be able to run on lignite coal.  During the first four
months of operation, however, the Plant experienced numerous shut downs related
to running on lignite coal.  In April 2007, the Company switched to
using Powder River Basin (“PRB”) coal as its fuel source. The Company engaged in
mediation proceedings with Fagen during September 2010 in an effort to resolve
the design build issues.  An amount approximately equal to the final
payment was used to pay down the Company’s Long-Term Revolving Note during
fiscal 2010 and these funds have been restricted to be used only for resolution
of the design build issue.  The funds may be released upon resolution
of this issue.


11


RED
TRAIL ENERGY, LLC


NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


FOR
THE PERIODS ENDED SEPTEMBER 30, 2010 AND DECEMBER 31, 2009




Firm Purchase Commitments
for Corn





To ensure
an adequate supply of corn to operate the Plant, the Company enters into
contracts to purchase corn from local farmers and elevators.  At
September 30, 2010, the Company had various fixed price contracts for the
purchase of approximately 991,000 bushels of corn.  Using the stated
contract price for the fixed price contracts, the Company had commitments of
approximately $4.0 million related to the 991,000 bushels under
contract.





8.
RELATED-PARTY TRANSACTIONS





The
Company has balances and transactions in the normal course of business with
various related parties for the purchase of corn, sale of distillers grains and
sale of ethanol.  The related parties include Unit holders, members of
the board of governors of the Company, and RPMG, Inc. (“RPMG”) for three and
nine months ended September 30, 2010.  For three and nine months ended
September 30, 2009 and December 31, 2009, the related parties include Unit
holders, members of the board of governors of the Company, RPMG and Greenway
Consulting, LLC.  The Company also has a note payable to Greenway and
paid Greenway for consulting fees (recorded in general and administrative
expense).  Significant related party activity affecting the financial
statements are as follows:





September30,2010
                          
                          
                          December31,2009Balance
      SheetAccounts
      receivable
                          
                          $
                          3,315,471
                          
                          
                          $
                          2,155,238Accounts
      payable
                          
                          
                          280,303
                          
                          
                          
                          1,164,218Notes
      payable
                          
                          
                          -
                          
                          
                          
                          1,525,000





Forthethreemonths
                                endedSeptember30,
                                2010
                              
                              
                              Forthethreemonths
                                endedSeptember30,
                                2009
                              
                              
                              Fortheninemonths
                                endedSeptember30,
                                2010
                              
                              
                              Fortheninemonths
                                endedSeptember30,2009Statement
      of OperationsRevenues
                              
                              $
                              23,855,825
                              
                              
                              $
                              22,037,498
                              
                              
                              $
                              65,404,700
                              
                              
                              $
                              59,737,463Cost
      of goods sold
                              
                              
                              794,284
                              
                              
                              
                              706,369
                              
                              
                              
                              2,410,236
                              
                              
                              
                              2,060,175General
      and administrative
                              
                              
                              -
                              
                              
                              
                              139,973
                              
                              
                              
                              114,614
                              
                              
                              
                              423,656Inventory
      Purchases
                              
                              $
                              1,989,322
                              
                              
                              $
                              1,481,245
                              
                              
                              $
                              4,320,565
                              
                              
                              $
                              4,173,738


12


Item
2.  Management's Discussion and Analysis of Financial Condition and
Results of Operations.




We
prepared the following discussion and analysis to help you better understand our
financial condition, changes in our financial condition, and results of
operations for the three and nine month periods ended September 30, 2010,
compared to the same period of the prior fiscal year. This discussion should be
read in conjunction with the consolidated financial statements and the
Management’s Discussion and Analysis section for the fiscal year ended December
31, 2009, included in the Company’s Annual Report on Form 10-K.





Cautionary
Statements Regarding Forward-Looking Statements





This
report contains forward-looking statements that involve future events, our
future performance and our future operations and actions.  In some cases
you can identify forward-looking statements by the use of words such as “may,”
“should,” “anticipate,” “believe,” “expect,” “plan,” “future,” “intend,”
“could,” “estimate,” “predict,” “hope,” “potential,” “continue,” or the negative
of these terms or other similar expressions.  These forward-looking
statements are only our predictions and involve numerous assumptions, risks and
uncertainties.  Our actual results or actions may differ materially
from these forward-looking statements for many reasons, including the following
factors:





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


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


·
            Changes in the environmental
      regulations that apply to our plant operations and our ability to comply
      with such regulations;


·
            Ethanol supply exceeding demand
      and corresponding ethanol price reductions impacting our ability to
      operate profitably and maintain a positive spread between the selling
      price of our products and our raw material
  costs;


·
            Our ability to generate and
      maintain sufficient liquidity to fund our operations, meet debt service
      requirements and necessary capital
  expenditures;


·
            Our ability to continue to meet
      our loan covenants;


·
            Limitations and restrictions
      contained in the instruments and agreements governing our
      indebtedness;


·
            Results of our hedging
      transactions and other risk management
  strategies;


·
            Changes in or elimination of
      governmental laws, tariffs, trade or other controls or enforcement
      practices that currently benefit the ethanol industry
      including:


o
            national, state or local energy
      policy – examples include legislation already passed such as the
      California low-carbon fuel standard as well as potential legislation in
      the form of carbon cap and
trade;


o
            federal and state ethanol tax
      incentives;


o
            legislation mandating the use of
      ethanol or other oxygenate
additives;


o
            state and federal regulation
      restricting or banning the use of
MTBE;


o
            environmental laws and
      regulations that apply to our plant operations and their enforcement;
      or


o
            reduction or elimination of
      tariffs on foreign ethanol.


·
            Changes and advances in ethanol
      production technology; and


·
            Competition from alternative
      fuels and alternative fuel
additives.





Our
actual results or actions could and likely will differ materially from those
anticipated in the forward-looking statements for many reasons, including the
reasons described in this report.  We are not under any duty to update
the forward-looking statements contained in this report.  We cannot
guarantee future results, levels of activity, performance or
achievements.  We caution you not to put undue reliance on any
forward-looking statements, which speak only as of the date of this
report.  You should read this report and the documents that we
reference in this report and have filed as exhibits completely and with the
understanding that our actual future results may be materially different from
what we currently expect.  We qualify all of our forward-looking
statements by these cautionary statements.


13


Available Information





Information
about us is also available at our website atwww.redtrailenergyllc.com,
which includes links to reports we have filed with the Securities and Exchange
Commission. The contents of our website are not incorporated by reference in
this Quarterly Report on Form 10-Q.





Overview




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”).  Our revenues are
derived from the sale and distribution of our ethanol and distillers grains
primarily in the continental United States.   Corn is our largest
cost component and our profitability is highly dependent on the spread between
the price of corn and the price of ethanol.





On April 8, 2010, the Company announced
its intent to engage in a reclassification and reorganization of the Company’s
membership units.  On October 28, 2010 the Special Meeting of Members
was held to vote on the proposed reclassification and reorganization of the
Company’s membership units to provide for three separate and distinct classes of
units would have enabled the Company to voluntarily terminate the registration
of its units under the Securities and Exchange Act of 1934.  Both
proposals related to the reclassification and reorganization of the Company’s
membership units failed to garner support of two-thirds of the total membership
units and therefore neither proposal was implemented.




For the three month period ended
September 30, 2010 the Company had a net income of approximately $3,500,000,
which is approximately 12.7 percent of our revenues for that
period.  Our net income for the nine month period ended September 30,
2009 was approximately $5,750,000, which is approximately 7.3 percent our
revenues for that period.  Since December 31, 2009 we have reduced the
Company’s long term debt from approximately $45,200,000 to approximately
$27,400,000.  The Company’s management team will continue to operate
the Plant in a manner that optimizes margin opportunities during this period of
volatile commodities prices.





We expect to fund our operations during
the next 12 months using cash flow from our continuing operations and our
current credit facilities.





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




The following table shows the results
of our operations and the percentages of revenues, cost of goods sold, general
and administrative expenses and other items to total sales and revenues in our
statements of operations for the three months ended September 30, 2010 and 2009,
respectively.





Three Months Ended
                      September 30, 2010
                      (Unaudited)
                    
                    
                    Three Months Ended
                      September 30, 2009
                      (Unaudited)Statements of Operations Data
                    
                    Amount
                    
                    
                    % of Revenue
                    
                    
                    Amount
                    
                    
                    % of RevenueRevenues
                    
                    $
                    27,737,274
                    
                    
                    
                    100.0
                    %
                    
                    $
                    25,247,196
                    
                    
                    
                    100.00
                    %Cost
      of Goods Sold
                    
                    
                    22,962,912
                    
                    
                    
                    82.79
                    %
                    
                    
                    22,127,122
                    
                    
                    
                    87.64
                    %Gross
      Margin
                    
                    
                    4,774,362
                    
                    
                    
                    17.21
                    %
                    
                    
                    3,120,074
                    
                    
                    
                    12.36
                    %General
      and Administrative Expenses
                    
                    
                    798,337
                    
                    
                    
                    2.88
                    %
                    
                    
                    758,489
                    
                    
                    
                    3.00
                    %Operating
      Income
                    
                    
                    3,976,025
                    
                    
                    
                    14.33
                    %
                    
                    
                    2,361,585
                    
                    
                    
                    9.35
                    %Interest
      Expense
                    
                    
                    766,652
                    
                    
                    
                    2.76
                    %
                    
                    
                    1,211,111
                    
                    
                    
                    4.80
                    %Other Income
                    
                    
                    324,773
                    
                    
                    
                    1.17
                    %
                    
                    
                    678,845
                    
                    
                    
                    2.69
                    %Net Income
                    
                    $
                    3,534,146
                    
                    
                    
                    12.74
                    %
                    
                    $
                    1,829,319
                    
                    
                    
                    7.25
                    %


14


Revenues





The
following table shows the sources of our revenue for the three months ended
September 30, 2010 and September 30, 2009.





Three Months Ended
                      September 30, 2010
                    
                    
                    Three Months Ended
                      September 30, 2009Revenue Source
                    
                    Amount
                    
                    
                    % of Revenues
                    
                    
                    Amount
                    
                    
                    % of RevenuesEthanol
      Sales
                    
                    $
                    23,633,718
                    
                    
                    
                    85.21
                    %
                    
                    $
                    21,119,497
                    
                    
                    
                    83.65
                    %Dried
      Distillers Grains Sales
                    
                    
                    3,676,744
                    
                    
                    
                    13.25
                    %
                    
                    
                    3,691,783
                    
                    
                    
                    14.62
                    %Modified Distillers Grains
      Sales
                    
                    
                    426,812
                    
                    
                    
                    1.54
                    %
                    
                    
                    435,916
                    
                    
                    
                    1.73
                    %Total Revenues
                    
                    $
                    27,737,274
                    
                    
                    
                    100.00
                    %
                    
                    $
                    25,247,196
                    
                    
                    
                    100.00
                    %





The following table shows additional
data regarding production and price levels for our primary inputs and products
for the three months ended September 30, 2010 and September 30,
2009.





Three Months ended
                  September 30, 2010
                
                
                Three Months ended
                  September 30, 2009Production:Ethanol
      sold (thousands of gallons)
                
                
                13,175
                
                
                
                14,086Dried
      distillers grains sold (tons)
                
                
                37,645
                
                
                
                39,305Modified
      distillers grains sold (tons)
                
                
                8,182
                
                
                
                8,439Revenues:Ethanol
      price/gallon (net of hedging)
                
                $
                1.79
                
                
                $
                1.50Distillers
      grains avg price/ton
                
                $
                97.67
                
                
                $
                93.93Modified
      distillers grains avg price/ton
                
                $
                51.24
                
                
                $
                51.59Primary
      Input:Corn
      ground (thousands of bushels)
                
                
                4,744
                
                
                
                4,981Costs
      of Primary Input:Corn
      avg price/bushel (net of hedging)
                
                $
                3.72
                
                
                $
                3.40Other
      Costs (per gallon of ethanol sold):Chemical
      and additive costs
                
                $
                0.085
                
                
                $
                0.075Denaturant
      cost
                
                $
                0.038
                
                
                $
                0.039Electricity
      cost
                
                $
                0.048
                
                
                $
                0.042Direct
      labor cost
                
                $
                0.039
                
                
                $
                0.033





Ethanol
production and sales were down slightly during the three month period ended
September 30, 2010 as compared to the same period in 2009.  We sold
13,175,308 gallons of ethanol during the three month period ended September 30,
2010 compared to 14,086,009, for the same three month period ending in
2009.  However, the average price we received for our ethanol was
$1.79 for the three month period ended September 30, 2010 as compare to $1.50
for the three month period ending September 30, 2010.





We
experienced a decrease in the amount of dried distillers grains sold in the
three month period ended September 30, 2010 as compared to the same period in
2009 due to a decrease in demand.  We sold 37,645 tons of dried
distillers grains during the three month period ended September 30, 2010
compared to 39,305 tons of dried distillers grains during the three month period
ended September 30, 2009.  The average price per ton of dried
distillers grains was $97.67 and $93.93 for the three month period ending
September 30, 2010 and 2009, respectively.





Our
modified distillers grains sales were down slightly for the three month period
ended September 30, 2010 as compared to the same period in 2009.  We
sold 8,182 tons of modified distillers grains during the three month period
ended September 30, 2010 compared to 8,439 tons of modified distillers grains
during the three month period ended September 30, 2009.  The average
price per ton of modified distillers grains was $51.24 and $51.59 for the three
month period ending September 30, 2010 and 2009, respectively.


15





In the event that we decrease our
production of ethanol, our production of distillers grains would also
decrease.  Such a decrease in our volume of production of ethanol and
distillers grains would result in lower revenues.  However, if we
decreased production, we would experience a corresponding decrease in the
quantity of corn and coal used by the plant, thereby lowering our costs of good
sold.  Therefore, the effect of a decrease in our product volume would
be largely dependent on the market prices of the products we produce and the
inputs we use to produce our products at the time of such a production
decrease.  We anticipate operating at less than full capacity only if
industry margins become unfavorable or we experience technical difficulties in
operating the plant.





For the three months ended September
30, 2010, we received approximately 85% of our revenue from the sale of ethanol
and approximately 15% of our revenue from the sale of distillers grains. Our
revenue from ethanol increased slightly during the three months ended September
30, 2010 compared to the same period in 2009, as we experienced an increase in
the price we received for our ethanol.





During the three months ended September
30, 2010, distillers grains prices trended upward- Management attributes this
increasing price trend to an underlying increase in the price of
corn.  Management anticipates that distillers grains prices will
continue to track the price of corn which has been extremely volatile due to
uncertainty over the condition of the corn crop and price volatility in the
wheat and soybean markets.





There
have been a number of recent developments in legislation that may impact the
ethanol industry and our Company’s revenue stream:





·
            One
      such development concerns the federal Renewable Fuels Standard
      (RFS).  The ethanol industry is benefited by the RFS which
      requires that a certain amount of renewable fuels must be used in the
      United States each year.  In February 2010, the EPA issued new
      regulations governing the RFS.  These new regulations have been
      called RFS2.  The most controversial part of RFS2 involves what
      is commonly referred to as the lifecycle analysis of greenhouse gas
      emissions.  Specifically, the EPA adopted rules to determine
      which renewable fuels provided sufficient reductions in greenhouse gases,
      compared to conventional gasoline, to qualify under the RFS
      program.  The scientific method of calculating these greenhouse
      gas reductions has been a contentious issue.  Many in the
      ethanol industry were concerned that corn based ethanol would not meet the
      20% greenhouse gas reduction requirement based on certain parts of the
      environmental impact model that many in the ethanol industry believed was
      scientifically suspect.  However, RFS2 as adopted by the EPA
      provides that corn-based ethanol from modern ethanol production processes
      does meet the definition of a renewable fuel under the RFS
      program.





·
            In
      addition to RFS2 which included greenhouse gas reduction requirements, in
      2009, California passed a Low Carbon Fuels Standard (LCFS).  On
      November 2, 2010 the residents of California voted down Proposition 23
      which would have delayed the implementation of the LCFS. The California
      LCFS requires that renewable fuels used in California must accomplish
      certain reductions in greenhouse gases which are measured using a
      lifecycle analysis, similar to RFS2.  Management believes that
      this lifecycle analysis is based on unsound scientific principles that
      unfairly disadvantages corn based ethanol.  Management believes
      that these new regulations may preclude corn based ethanol from being used
      in California which could negatively impact the price of the ethanol that
      we sell.  A lawsuit has been filed by ethanol industry groups
      challenging the constitutionality of the LCFS.  A court hearing
      on this case is scheduled for February
2011.





·
            Ethanol
      production in the United States is benefited by various tax
      incentives.  The most significant of these tax incentives is the
      federal Volumetric Ethanol Excise Tax Credit (VEETC).  VEETC
      provides a volumetric ethanol excise tax credit of 45 cents per gallon of
      ethanol  that is blended with gasoline.  VEETC is
      scheduled to expire on December 31, 2010.  If this tax credit is
      not renewed, it likely would have a negative impact on the price of
      ethanol and demand for ethanol in the
  marketplace.




16


·
            In
      addition to the tax incentives, United States ethanol production is also
      benefited by a 54 cent per gallon tariff imposed on ethanol imported into
      the United States.  However, the 54 cent per gallon tariff is
      set to expire at the end of the 2010 calendar year.  Elimination
      of the tariff that protects the United States ethanol industry could lead
      to the importation of ethanol produced in other countries, especially in
      areas of the United States that are easily accessible by international
      shipping ports.  Ethanol imported from other countries may be a
      less expensive alternative to domestically produced ethanol and may affect
      our ability to sell our ethanol
profitably.





·
            On
      October 13, 2010 the Environmental Protection Agency (the “EPA”) decided
      to allow gasoline that contains up to 15% ethanol to be used in certain
      vehicles model year 2007 and newer.  The EPA has deferred any
      decision on whether to allow E15 to be used in vehicles model year 2000 to
      2006 until additional testing has been completed.  Many in the
      ethanol industry believe that due to restrictions the EPA has imposed on
      the use of E15 in older vehicles, the effect E15 may ultimately have on
      ethanol demand might be minimal.  Management believes that many
      gasoline retailers may refuse to provide E15 due to the fact that not all
      vehicles are allowed to use E15 and the labeling requirements the EPA has
      imposed likely will unfairly discourage consumers from using
      E15.





Cost of Goods
Sold





Our cost of goods sold from the
production of ethanol and distillers grains is primarily made up of corn and
energy expenses.  The per bushel price we paid for our main input,
corn, was higher during the third quarter of 2010 compared to the third quarter
of 2009.  Our overall cost of goods sold decreased as a percentage of
our revenues to 82.79% for the three months ended September 30, 2010 compared to
87.64% for the same period in 2009. The decrease in our cost of goods sold was
primarily due to our lower aggregate corn costs due to a decline in corn ground
and fewer gallons sold.





Our cost of corn is also affected by
gains and losses on the corn derivative instruments we use to manage our
exposure to risk in the corn market.   For the three months ended
September 30, 2010, we recognized a loss on our corn derivatives of
approximately $1,458,000 compared to a loss of approximately $110,185 for the
three months ended September 30, 2009.





Competition
for corn in our area has tightened basis levels.  Although we believe
there is corn available nationally from a supply and demand standpoint, there is
uncertainty over the quantity and quality of local corn for the
plant.  The cost of corn is the highest input to the plant and these
uncertainties could dramatically affect our expected input
costs.  During the three month period ended September 30, 2010, corn
prices were relatively steady but increased after the end of the
quarter.  We expect that corn prices will continue to be volatile for
the rest of our fiscal year, depending on weather conditions and other demand
factors.





The per unit cost of our other costs of
goods sold were all somewhat higher compared to last year although we did
experience a decrease in our chemical and additive
costs.





We purchase the coal needed to power
our ethanol plant from a supplier under a long-term contract.  This
arrangement helps us to mitigate price volatility in the coal
market.  Our coal costs remained steady during the third quarter of
2010 compared to the third quarter of 2009.  Our coal contract is up
for renewal in December 2011.





General and
Administrative




General and administrative costs for
the three months ended September 30, 2010 were approximately $798,000 or 2.9% of
our revenues compared to approximately $758,000 or 3.0% of revenues for the same
period in 2009.  The increase is primarily related to an increase in
legal fees.





Operating
Income





Our income from operations for the
three months ended September 30, 2010 was approximately $3,976,000 compared to
an operating income of approximately $2,362,000 for the same period in
2009.  This increase in our operating income is primarily due to an
improvement in the relationship between the selling price of our products and
our input costs for the current year.




17


Interest
Expense





Our interest expense for the three
months ended September 30, 2010 was approximately $767,000 compared to
approximately $1,211,000 for the three months ended September 30,
2009.  This decrease in primarily due to fluctuations in the market
value of our interest rate swaps and principal outstanding and current
replacement rates.  Net settlements on the fair value of our interest
rate swaps are recorded in interest expense on a monthly basis.





Other
Income





Our other income for the three months
ended September 30, 2010 was 1.2% of our revenues compared to 2.7% of revenues
for the same period in 2009.  Our other income for the three month
period ended September 30, 2010 consisted primarily of incentive/grant
income.  During the three month period ended September 30, 2009, other
income consisted primarily of incentive/grant income and interest
income.





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





The following table shows the results
of our operations and the approximate percentage of revenues, costs of sales,
operating expenses and other items to total revenues in our unaudited statements
of operations for the nine months ended September 30, 2010 and
2009:





Nine Months Ended
                              September 30, 2010
                              (Unaudited)
                            
                            
                            Nine Months Ended
                              September 30, 2009
                              (Unaudited)Statement of Operations
Data
                            
                            Amount
                            
                            
                            Percent
                            
                            
                            Amount
                            
                            
                            PercentRevenues
                            
                            $
                            79,142,223
                            
                            
                            
                            100.0
                            %
                            
                            $
                            69,775,640
                            
                            
                            
                            100.00
                            %Cost
      of Goods Sold
                            
                            
                            70,080,830
                            
                            
                            
                            88.55
                            %
                            
                            
                            67,057,080
                            
                            
                            
                            96.10
                            %Gross
      Profit
                            
                            
                            9,061,393
                            
                            
                            
                            11.45
                            %
                            
                            
                            2,718,560
                            
                            
                            
                            3.90
                            %General
      and Administrative Expenses
                            
                            
                            2,024,673
                            
                            
                            
                            2.56
                            %
                            
                            
                            2,240,835
                            
                            
                            
                            3.21
                            %Operating
      Income
                            
                            
                            7,036,720
                            
                            
                            
                            8.89
                            %
                            
                            
                            477,725
                            
                            
                            
                            0.68
                            %Interest
      Expense
                            
                            
                            2,629,000
                            
                            
                            
                            3.32
                            %
                            
                            
                            3,082,549
                            
                            
                            
                            4.42
                            %Other Income
                            
                            
                            1,337,330
                            
                            
                            
                            1.69
                            %
                            
                            
                            1,123,516
                            
                            
                            
                            1.61
                            %Net Income (Loss)
                            
                            $
                            5,745,050
                            
                            
                            
                            7.26
                            %
                            
                            $
                            (1,481,308
                            )
                            
                            
                            (2.12
                            )%




Revenues





Our revenues from operations come from
two primary sources: sales of ethanol and sales of distillers grains. The
following table shows the sources of our revenue for the nine months ended
September 30, 2010 and September 30, 2009.





Nine Months Ended
                              September 30, 2010
                            
                            
                            Nine Months Ended
                              September 30, 2009Revenue Source
                            
                            Amount
                            
                            
                            % of Revenues
                            
                            
                            Amount
                            
                            
                            % of RevenuesEthanol
      Sales
                            
                            $
                            66,240,070
                            
                            
                            
                            83.70
                            %
                            
                            $
                            57,486,329
                            
                            
                            
                            82.39
                            %Dried
      Distillers Grains Sales
                            
                            
                            10,752,474
                            
                            
                            
                            13.58
                            %
                            
                            
                            8,842,710
                            
                            
                            
                            12.67
                            %Modified Distillers Grains
      Sales
                            
                            
                            2,149,679
                            
                            
                            
                            2.72
                            
                            
                            
                            3,446,601
                            
                            
                            
                            4.94
                            %Total Revenues
                            
                            $
                            79,142,223
                            
                            
                            
                            100.00
                            %
                            
                            $
                            69,775,640
                            
                            
                            
                            100.00
                            %




18


The
following table shows additional data regarding production and price levels for
our primary inputs and products for the nine months ended September 30, 2010 and
2009:





Nine Months ended
                  September 30, 2010
                
                
                Nine Months ended
                  September 30, 2009Production:Ethanol
      sold (thousands of gallons)
                
                
                40,142
                
                
                
                38,567Dried
      distillers grains sold (tons)
                
                
                105,131
                
                
                
                78,813Modified
      distillers grains sold (tons)
                
                
                39,671
                
                
                
                65,127Revenues:Ethanol
      average price/gallon (net of hedging)
                
                $
                1.60
                
                
                $
                1.49Dried
      distillers grains avg price/ton
                
                $
                102.28
                
                
                $
                112.20Modified
      distillers grains avg price/ton
                
                $
                53.87
                
                
                $
                52.84Primary
      Input:Corn
      ground (thousands of bushels)
                
                
                14,544
                
                
                
                13,734Costs
      of Primary Input:Corn
      avg price/bushel (net of hedging)
                
                $
                3.56
                
                
                $
                3.77Other
      Costs (per gallon of ethanol sold):Chemical
      and additive costs
                
                $
                0.081
                
                
                $
                0.081Denaturant
      cost
                
                $
                0.043
                
                
                $
                0.034Electricity
      cost
                
                $
                0.047
                
                
                $
                0.043Direct
      Labor cost
                
                $
                0.037
                
                
                $
                0.036





In the nine month period ended
September 30, 2010, ethanol sales comprised approximately 84% of our revenues
and distillers grains sales comprised approximately 16% of our revenues. For the
nine month period ended September 30, 2009, ethanol sales comprised
approximately 82% of our revenues and distillers grains sales comprised
approximately 18% of our revenue. Our revenues were higher for our first nine
months of fiscal year 2010 compared to the same period of 2009 primarily as a
result of an increase in the sales price of our ethanol.





The average ethanol sales price we
received for the nine month period ended September 30, 2010 was approximately
7.4% higher than our average ethanol sales price for the comparable 2009 period.
Management anticipates that ethanol prices will continue to be subject to the
uncertainties surrounding several pieces of legislation as well as the prices of
oil and gasoline.





The price we received for our dried
distillers grains decreased by approximately 8.8% during the nine month period
ended September 30, 2010 compared to the same period of 2009. Management
attributes this decrease in the price of our dried distillers grains to an
increase in the supply of dried distillers grains in our local market
area.  The price of dried distillers grains changes in proportion to
the price of corn, which has decreased in the nine month period ended September
30, 2010 as compared to the prior year period.   Accordingly, we
anticipate that the market price of distillers grains will continue to be
volatile as a result of changes in the price of corn and competing animal feed
substitutes such as soybean meal.





Cost of Good
Sold





Our costs of goods sold as a
percentage of revenues were approximately 88.55% for the nine month period ended
September 30, 2010 compared to approximately 96.10% for the same period of 2009.
Our cost of goods sold increased by approximately 4.5% in the nine months ended
September 30, 2010, compared to the nine months ended September 30, 2009, and
our revenue for the same period increased by approximately 13.4%. This increase
in the cost of goods sold is primarily a result of an increase in the volume of
corn processed at our facility.  The increase in our revenues is due
primarily to an increase in the volume of ethanol sold along with an increase in
the price we received for our ethanol.




19


General and Administrative
Expenses





Our general and administrative expenses
as a percentage of revenues were lower for the nine month period ended September
30, 2010 than they were for the same period ended September 30, 2009. These
percentages were approximately 2.56% and approximately 3.21% for the nine months
ended September 30, 2010 and 2009, respectively. This decrease in general and
administrative expenses is primarily due to increased operating efficiencies and
our concerted effort to lower general and administrative expenses. We expect
that going forward our general and administrative expenses will remain
relatively steady.





Operating
Income





Our income from operations for the nine
months ended September 30, 2010 was approximately 8.89% of our revenues compared
to loss of approximately 0.68% of our revenues for the nine months ended
September 30, 2009. This increase in our profitability is primarily due to the
increase in the price we received for our ethanol for the nine months ended
September 30, 2010 compared to the nine months ended September 30,
2009.  During the same period we experienced a $0.21 per bushel
decrease in our cost of corn.  Both of these factors moved in our
favor at the time we increased production at our facility.





Interest
Expense





Our interest expense for the nine
months ended September 30, 2010 was approximately $2,629,000 compared to
approximately $3,083,000 for the nine months ended September 30,
2009.  The outstanding balance on our long-term debt obligations
decreased by approximately $14,610,000 during the first nine months of
2010.  However, this reduction in long-term debt was partially offset
by the unfavorable performance of our interest rate swap.





Other
Income





Other income for the nine months ended
September 30, 2010, was approximately 1.69% of our revenue and totaled
approximately $1,300,000. Other income for the nine months ended September 30,
2009 totaled approximately $1,100,000 and was approximately 1.61% of our
revenues.  During the nine months ended September 30, 2010, we
received approximately $1,000,000 from a business interruption insurance claim
related to an unplanned outage at our plant during October
2009.  During the nine months ended September 30, 2009, other income
included approximately $679,000 in incentive/grant income and approximately
$446,000 of interest income earned on a sales tax refund related to plant
construction.





Changes
in Financial Condition for the Nine Months Ended September 30, 2010




The following table highlights the
changes in our financial condition:





September 30, 2010
                    
                    
                    December 31, 2009Current
      Assets
                    
                    $
                    17,451,611
                    
                    
                    $
                    25,384,612Current
      Liabilities
                    
                    $
                    18,759,757
                    
                    
                    $
                    18,331,917Members'
      Equity
                    
                    $
                    39,620,414
                    
                    
                    $
                    33,875,364





We
experienced a decrease in our current assets of approximately $8,000,000 at
September 30, 2010 compared to our fiscal year ended December 31,
2009.  We had approximately $6,454,000 less cash on hand at September
30, 2010 compared to December 31, 2009, and approximately $934,000 less in
restricted cash.  Our accounts receivable increased by approximately
$1,136,000 over the same period and our inventory was approximately $1,443,000
less at September 30, 2010 than December 31, 2010.





We
experienced a slight increase in our total current liabilities on September 30,
2010 compared to December 31, 2009 due primarily to an increase in current
maturities of long-term debt.


20


Our
long-term liabilities as of September 30, 2010 are approximately $17,771,000
less than our long-term liabilities as of December 31, 2009, primarily as a
result of principal payments made on our long-term debt and the movement of some
long-term debt to current maturities of long-term debt.  At September
30, 2010, we had approximately $29,975,000 outstanding in the form of long-term
loans, compared to approximately $44,541,000 at December 31, 2009.





We
experienced an increase in members' equity at September 30, 2010 compared to our
fiscal year ended December 31, 2009.  This is a result of our net
income so far this fiscal year in the amount of approximately $5,745,050 as
compared to a loss of $1,481,308 during the nine months ended September 30, 2010
and 2009, respectively.





Liquidity
and Capital Resources





Based on financial forecasts performed
by our management, we anticipate that we will have sufficient cash from our
current credit facilities and cash from our operations to continue to operate
the ethanol plant for the next 12 months.  We do not anticipate
seeking additional equity or debt financing during the twelve month period
ending September 30, 2011.  However, should we experience unfavorable
operating conditions in the future, we may have to secure additional debt or
equity sources for working capital or other purposes.





Statements of Cash Flows
                  
                  For the nine months
                    ended September
      30, 2010
                  
                  
                  For the nine
       months
                    ended September
      30, 2009Cash
      flows provided by operating activities
                  
                  $
                  8,885,490
                  
                  
                  $
                  4,613,400Cash
      flows provided by (used in) investing activities
                  
                  $
                  (729,041
                  )
                  
                  $
                  560,395Cash
      flows provided by (used in) financing activities
                  
                  $
                  (14,609,725
                  )
                  
                  $
                  1,531,501





Operating
activities




We experienced a significant increase
in our net cash provided by operations for the nine month period ended September
30, 2010 as compared to the same period in 2009.  Cash provided by
operating activities was approximately $8,885,000 for the nine months ended
September 30, 2010 as compared to approximately $4,613,000 provided by operating
activities for the nine months ended September 30, 2009.  Our net
income from operations for the nine months ended September 30, 2010 was
approximately $5,745,000 as compared to a net loss of approximately $1,481,000
for the same period in 2009.




Investing
activities




We had minimal investing activities for
the periods ended September 30, 2010 and 2009, respectively.  The
majority of investing activities was cash used for capital
expenditures.




Financing
activities




We had a
significant increase in cash used for financing activities for the nine month
period ended September 30, 2010 as compared to the same period in
2009.  Cash used for financing activities was approximately
$14,610,000 for the nine months ended September 30, 2010.  All of this
cash was used to pay down our long-term debt.  For the nine month
period ended September 30, 2009, we had net borrowing activity of approximately
$1,530,000 as we borrowed an additional $3,574,000 on our long-term debt
instruments which was offset by a regularly scheduled debt payment of
approximately $1,297,000 and the issuance of letters of credit in the amount of
$750,000 to support grain warehouse bonds and distilled spirits
bonds.





Our
liquidity, results of operations and financial performance will be impacted by
many variables, including the market price for commodities such as, but not
limited to, corn, ethanol and other energy commodities, as well as the market
price for any co-products generated by the facility and the cost of labor and
other operating costs.  Assuming future relative price levels for corn,
ethanol and distillers grains remain consistent we expect operations to generate
adequate cash flows to maintain operations. This expectation assumes that we
will be able to sell all the ethanol that is produced at the plant.




21


Capital
Expenditures




The Company currently has four capital
projects in progress that it anticipates will cost a total of approximately $1.0
million.  We anticipate completion of these projects to occur in the
fourth quarter of 2010 and first half of 2011.  The Company is also
evaluating certain other capital projects related to reducing the carbon
intensity of its fuel in anticipation of trying to meet the requirements of the
California low-carbon fuel standard.  The Company is in the early
stages of reviewing potential projects and does not currently have any accurate
cost estimates.  We anticipate being able to fund our current on-going
capital projects from our operating cash flows.




Capital
Resources




Short-Term Debt
Sources




The Company does not currently have any
short-term credit facilities.




Long-Term Debt
Sources





Our primary debt instruments are with
First National Bank of Omaha (the “Bank”) and have a scheduled maturity date of
April 2012.  These debt instruments include fixed and variable rate
notes.  The following table summarizes our long-term debt instruments
with the Bank.




Outstanding Balance
                                (Millions)
                              
                              
                              Interest Rate
                              
                              
                              Range of EstimatedTerm Note
                              
                              September 30,
                                2010
                              
                              
                              December 31,
                                2009
                              
                              
                              September 30,
                                2010
                              
                              
                              December 31,
                                2009
                              
                              
                              Quarterly Principal
                                Payment Amounts
                              
                              
                              NotesFixed
      Rate Note
                              
                              $
                              21.85
                              
                              
                              $
                              23.60
                              
                              
                              
                              6.00
                              %
                              
                              
                              6.00
                              %
                              
                              $595,000
      - $650,000
                              
                              
                              1,
      2, 42007
      Fixed Rate Note
                              
                              
                              8.12
                              
                              
                              
                              8.80
                              
                              
                              
                              6.00
                              %
                              
                              
                              6.00
                              %
                              
                              $219,000
      - $240,000
                              
                              
                              1,
      2, 5Variable
      Rate Note
                              
                              
                              0
                              
                              
                              
                              2.10
                              
                              
                              
                              6.00
                              %
                              
                              
                              6.00
                              %
                              
                              $1,600,000
                              
                              
                              1,
      2, 3, 5Long-Term
      Revolving Note
                              
                              
                              0
                              
                              
                              
                              10.00
                              
                              
                              
                              6.00
                              %
                              
                              
                              6.00
                              %
                              
                              $550,000
      - $610,000
                              
                              
                              1,
      2, 6, 7, 8




Notes





1 - The
scheduled maturity date is April 2012





2 - Range
of estimated quarterly principal payments is based on principal balances and
interest rates as of September 30, 2010.





3 -
Quarterly payments of $634,700 are applied first to interest on the Long-Term
Revolving Note, next to accrued interest on the Variable Rate Note and finally
to principal on the Variable Rate Note.  The Variable Rate Note was
paid off in April 2010 as the Excess Cash Flow payment was applied to the
Variable Rate Note.





4 -
Interest rate based on 5.0% over three-month LIBOR with a 6% minimum, reset
quarterly.





5 -
Interest rate based on 5.0% over three-month LIBOR with a 6% minimum, reset
quarterly.





6 -
Interest rate based on 5.0% over one-month LIBOR with a 6% minimum, reset
monthly.




22


7 -
Principal payments would be made on the Long-Term Revolving Note once the
Variable Rate Note is paid in full.  Any principal applied to the
Long-Term Revolving Note reduces the amount available under the
revolver.





8 - Funds
withheld from the plant's design builder (approx $4,100,000) which were
previously set aside in a money market account were applied to the Long-Term
Revolving Note in March 2010 pursuant to the terms of the 7th Amendment to our
loan agreement with Bank.  Accordingly, the payment amounts above take
into account the application of those funds which may ultimately be paid to the
design builder depending upon the terms of any resolution of the
dispute.




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.





Subordinated
Debt





As part of our construction loan
agreement, we entered into three separate subordinated debt agreements totaling
$5,525,000 and received funds from these debt agreements during 2006. Interest
is charged at a rate of 2.0% over the Variable Rate Note interest rate (a total
of 8% and 6.4825% at September 30, 2010 and 2009, respectively) and has a
scheduled maturity of March 2011.  The outstanding balance of the
subordinated debt has been included in our current debt
maturities.  However, the subordination agreement requires the Bank to
provide consent to make principal payments to the subordinated debt holders but
we have not received such consent.  Interest is compounding with any
unpaid interest converted to principal.  The balance outstanding on
these loans was $5,525,000 as of September 30, 2010 and December 31,
2009.





Letters of
Credit





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





Restrictive
Covenants





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.


·
            Maintain
      a threshold of capital expenditures





The debt instruments with Banks also
contain 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.




23


As of September 30, 2010 we are in
compliance with our loan covenants.





Industry
Support




There has been no change in the
repayment status of our grant from the North Dakota State Industrial Commission
(totaling $275,000) during the third quarter of 2010.




North Dakota Ethanol
Incentive Program




Under this 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 $1,600,000 per
plant per year up to a lifetime maximum of $10,000,000 per plant.  We
did receive approximately $334,000 and $662,000 from this program during the
nine months ended September 30, 2010 and 2009, respectively.  We have
been informed that the funds available within this program have been exhausted
for 2010, therefore we do not anticipate receiving additional funds from this
program during the remainder of 2010.





Critical
Accounting Estimates




Our most critical accounting policies,
which are those that require significant judgment, include policies related to
the carrying amount of property, plant and equipment; valuation of derivatives,
inventory and purchase commitments of inventory; and analysis of intangibles
impairment.  An in-depth description of these can be found in our
Annual Report on Form 10-K for the fiscal year ended December 31,
2009.  For valuation allowances related to firm purchase commitments
of inventory, please refer to the disclosures in Note 2 and Note 3 of the Notes
to the unaudited condensed financial statements in this Quarterly
Report.  Management has not changed the method of calculating and
using estimates and assumptions in preparing our condensed financial statements
in accordance with generally accepted accounting principles.  There
have been no changes in the policies for our accounting estimates for the
quarter ended September 30, 2010.




Off-Balance
Sheet Arrangements




We do not
have any off-balance sheet arrangements.





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 U.S. 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, ethanol and natural
gas. 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 Generally Accepted
Accounting Principles (“GAAP”).





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. 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 $27,600,000 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
$10,000,000 of our outstanding long-term debt.  The interest rate
swaps are not designated as either a cash flow or fair value
hedge.  Market value adjustments and net settlements are recorded in
interest expense.  We anticipate that a hypothetical 1% change in
interest rates, from those in effect on September 30, 2010, would change the
fair value of our interest rate swaps by approximately
$560,000.


24


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.




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.




Although we believe our hedge positions
will accomplish an economic hedge against our future purchases, they are not
designated as hedges for accounting purposes, which would match the gain or loss
on our hedge positions to the specific commodity purchase being
hedged.  We use fair value accounting for our hedge positions, which
means as the current market price of our hedge positions changes, the gains and
losses are immediately recognized in our cost of sales.  The immediate
recognition of hedging gains and losses under fair value accounting can cause
net income to be volatile from quarter to quarter and year to year due to the
timing of the change in value of derivative instruments relative to the cost of
the commodity being hedged.  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.




As of September 30, 2010 we had
approximately 991,000 bushels of corn under fixed price
contracts.  These contracts were priced below current market prices so
no accrual for a loss on firm purchase commitments has been
recorded.




It is the current position of RPMG (our
ethanol marketing company) that, under current market conditions, selling
ethanol in the spot market will yield the best price for our
ethanol.  RPMG will, from time to time, contract a portion of the
gallons they market with fixed price contracts.




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




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





Item
4.  Controls and Procedures





Evaluation of Disclosure
Controls and Procedures





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




25


Our Chief Executive Officer and Chief
Financial Officer, after evaluating the effectiveness of our disclosure controls
and procedures as of September 30, 2010, have concluded that our disclosure
controls and procedures are effective in ensuring that material information
required to be disclosed is included in the reports that we file with the
SEC.





Changes in Internal
Controls





There have been no changes in our
internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) that occurred during the fiscal quarter ended September
30, 2010, 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




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
$77,000,000.  The Company has remaining payments under the
Design-Build Agreement of approximately $3,900,000.  This payment has
been withheld pending satisfactory resolution of certain punch list items,
including an issue with the coal combustor experienced during start
up.  The plant was originally designed to be able to run on lignite
coal.  During the first four months of operation, however, the plant
experienced numerous shut downs related to running on lignite
coal.  In April 2007, the Company switched to using Powder River Basin
(“PRB”) coal as its fuel.  The Company and Fagen are currently engaged
in mediation to resolve the issues related to the plant’s coal
combustor.





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, 2009. “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 2010, 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.




26


The California
Low Carbon Fuel Standard may decrease demand for corn based ethanol which could
negatively impact our profitability.Recently, California passed a
Low Carbon Fuels Standard (LCFS).  The California LCFS requires that
renewable fuels used in California must accomplish certain reductions in
greenhouse gases which are measured using a lifecycle analysis.  Management
believes that these new regulations could preclude corn based ethanol produced
in the Midwest from being used in California.  California represents a
significant ethanol demand market.  If we are unable to supply ethanol to
California, it could significantly reduce demand for the ethanol we
produce.  Any decrease in ethanol demand could negatively impact ethanol
prices which could reduce our revenues and negatively impact our ability to
profitably operate the ethanol plant.




If the Federal
Volumetric Ethanol Excise Tax Credit (“VEETC”) expires on December 31,
2010, it could negatively impact our profitability.  The ethanol
industry is benefited by VEETC which is a federal excise tax credit of 45 cents
per gallon of ethanol blended with gasoline.  This excise tax credit is set
to expire on December 31, 2010.  We believe that VEETC positively
impacts the price of ethanol.  On December 31, 2009, the portion of
VEETC that benefits the biodiesel industry was allowed to expire.  This
resulted in the biodiesel industry ceasing to produce biodiesel because the
price of biodiesel without the tax credit was uncompetitive with the cost of
petroleum based diesel.  If the portion of VEETC that benefits ethanol is
allowed to expire, it could negatively impact the price we receive for our
ethanol and could negatively impact our profitability.





If the secondary
tariff on imported ethanol is allowed to expire in January 2011, we could
see an increase in ethanol produced in foreign countries being marked in the
Untied States which could negatively impact our profitability.The
secondary tariff on imported ethanol is a 54 cent per gallon tariff on ethanol
imports from certain foreign countries.  The secondary tariff on imported
ethanol is scheduled to expire in January 2011.  If this tariff is
allowed to expire, an influx of imported ethanol on the domestic ethanol market
could have a significant negative impact on ethanol prices and our
profitability.




Item 2.  Unregistered Sales of Equity
Securities and Use of Proceeds -None





Item 3.  Defaults Upon Senior Securities –None.





Item
4   Removed and Reserved





Item 5.  Other Information–None.




Item
6.  Exhibits.The following exhibits are included
herein:





Exhibit No.
                  
                  Description31.1
                  
                  Certificate
      Pursuant to 17 CFR 240.15d-14(a).31.2
                  
                  Certificate
      Pursuant to 17 CFR 240.15d-14(a).32.1
                  
                  Certificate
      Pursuant to 18 U.S.C. § 1350.32.2
                  
                  Certificate
      Pursuant to 18 U.S.C. §
1350.




27




SIGNATURES





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





RED
      TRAIL ENERGY, LLCDate:
                November 19, 2010
                
                /s/
      Gerald BachmeierGerald
      BachmeierChief
      Executive OfficerDate:
                November 19, 2010
                
                /s/
      Kent AndersonKent
      AndersonChief
      Financial Officer




28