UNITED STATES SECURITIES AND EXCHANGE
COMMISSION


WASHINGTON, DC
20549




FORM 10-Q




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




FOR
THE QUARTERLY PERIOD ENDED JUNE 30, 2009




o
            
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934




FOR
THE TRANSITION PERIOD FROM
           TO




COMMISSION
FILE NUMBER: 000-52033




RED TRAIL ENERGY,
LLC


(Exact
name of registrant as specified in its charter)




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




P.O. Box
11


3682
Highway 8 South


Richardton,
ND 58652


(Address
of principal executive offices)




(701) 974-3308


(Registrant’s
telephone number, including area code)




Indicate
by checkmark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.


Yes þ No o




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).


o Yes o No




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filter. See definition of “accelerated
filer and larger accelerated filer” in Rule 12b-2 of the Exchange Act
(Check one):




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





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


o Yes þ No




As of
August 14, 2009, the Company has outstanding 40,193,973 Class A Membership
Units.












RED TRAIL
ENERGY, LLC


FORM 10-Q
QUARTERLY REPORT FOR THE QUARTER ENDED


JUNE 30,
2009




TABLE OF
CONTENTS




PagePART
      I – FINANCIAL INFORMATION
              
              
              1Item 1.
      Condensed Financial Statements (Unaudited)
              
              
              1Condensed
      Balance Sheets
              
              
              1Condensed
      Statements of Operations
              
              
              2Condensed
      Statements of Cash Flows
              
              
              3Notes
      to Unaudited Condensed Financial Statements
              
              
              4Item 2.
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations
              
              
              17Disclosure
      Regarding Forward-Looking Statements
              
              
              17Item 3.
      Quantitative and Qualitative Disclosures About Market Risk
              
              
              30Item 4.
      Controls and Procedures
              
              
              31PART
      II - OTHER INFORMATION
              
              
              32Item 1.
      Legal Proceedings
              
              
              32Item 1A.
      Risk Factors
              
              
              32Item 2.
      Unregistered Sales of Equity Securities and Use of
Proceeds
              
              
              33Item 3.
      Defaults Upon Senior Securities
              
              
              33Item 4.
      Submission of Matters to a Vote of Security Holders
              
              
              34Item 5.
      Other Information
              
              
              34Item 6.
      Exhibits
              
              
              34SIGNATURES
              
              
              35Exhibit
      Index
              
              
              36










PART
I — FINANCIAL INFORMATION




Item 1.
– Condensed Financial Statements




RED
TRAIL ENERGY, LLC


CONDENSED BALANCE SHEETS




June
      30, 2009(Unaudited)
                  
                  
                  December
      31, 2008ASSETSCurrent
      AssetsCash
      and equivalents
                  
                  $
                  9,026,862
                  
                  
                  $
                  4,433,839Restricted
      cash - collateral
                  
                  
                  750,000
                  
                  
                  
                  ―Derivative
      instruments, at fair value
                  
                  
                  ―
                  
                  
                  
                  447,739Accounts
      receivable
                  
                  
                  5,056,997
                  
                  
                  
                  2,697,695Inventory
                  
                  
                  4,417,298
                  
                  
                  
                  3,353,592Prepayments
      of corn purchases
                  
                  
                  ―
                  
                  
                  
                  4,398,046Prepaid
      expenses
                  
                  
                  184,158
                  
                  
                  
                  41,767Total
      current assets
                  
                  
                  19,435,315
                  
                  
                  
                  15,372,678Property,
      Plant and EquipmentLand
                  
                  
                  351,280
                  
                  
                  
                  351,280Plant
      and equipment
                  
                  
                  79,191,700
                  
                  
                  
                  79,898,657Land
      improvements
                  
                  
                  3,939,294
                  
                  
                  
                  3,939,294Buildings
                  
                  
                  5,312,995
                  
                  
                  
                  5,312,995Construction
      in progress
                  
                  
                  ―
                  
                  
                  
                  33,67988,795,269
                  
                  
                  
                  89,535,905Less
      accumulated depreciation
                  
                  
                  14,495,449
                  
                  
                  
                  11,525,863Net
      property, plant and equipment
                  
                  
                  74,299,820
                  
                  
                  
                  78,010,042Other
      AssetsDebt
      issuance costs, net of amortization
                  
                  
                  ―
                  
                  
                  
                  567,385Investment
      in RPMG
                  
                  
                  605,000
                  
                  
                  
                  605,000Patronage
      equity, at fair value
                  
                  
                  192,207
                  
                  
                  
                  116,296Deposits
                  
                  
                  80,000
                  
                  
                  
                  80,000Total
      other Assets
                  
                  
                  877,207
                  
                  
                  
                  1,368,681Total
      Assets
                  
                  $
                  94,612,342
                  
                  
                  $
                  94,751,401LIABILITIES
      AND MEMBERS' EQUITYCurrent
      LiabilitiesCurrent
      maturities of long-term debt
                  
                  $
                  51,352,997
                  
                  
                  $
                  49,063,201Accounts
      payable
                  
                  
                  7,334,901
                  
                  
                  
                  5,720,764Accrued
      expenses
                  
                  
                  2,238,363
                  
                  
                  
                  1,845,101Accrued
      loss on firm purchase commitments
                  
                  
                  695,000
                  
                  
                  
                  1,426,800Interest
      rate swaps, at fair value
                  
                  
                  2,512,004
                  
                  
                  
                  2,861,530Total
      current liabilities
                  
                  
                  64,133,265
                  
                  
                  
                  60,917,396Other
      LiabilitiesContracts
      payable
                  
                  
                  275,000
                  
                  
                  
                  275,000Commitments
      and ContingenciesMembers'
      Equity
                  
                  
                  30,204,077
                  
                  
                  
                  33,559,005Total
      Liabilities and Members' Equity
                  
                  $
                  94,612,342
                  
                  
                  $
                  94,751,401




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




1




RED TRAIL ENERGY,
LLC


CONDENSED STATEMENTS OF OPERATIONS




Quarter
      Ended June 30, 2009 (Unaudited)
              
              
              Quarter
      Ended June 30, 2008 (Unaudited)
              
              
              Six
      Months Ended June 30, 2009 (Unaudited)
              
              
              Six
      Months Ended June 30, 2008 (Unaudited)RevenuesEthanol,
      net of derivative fair value changes
              
              $
              19,462,830
              
              
              $
              30,671,979
              
              
              $
              36,366,832
              
              
              $
              59,168,966Distillers
      grains
              
              
              4,170,001
              
              
              
              5,020,336
              
              
              
              8,161,612
              
              
              
              9,943,354Total
      Revenue
              
              
              23,632,831
              
              
              
              35,692,315
              
              
              
              44,528,444
              
              
              
              69,112,320Cost
      of Goods SoldCost
      of goods sold, net of
                changes
      in fair value of
                derivative
      instruments
              
              
              21,659,717
              
              
              
              29,043,731
              
              
              
              40,051,075
              
              
              
              55,295,207Loss
      on firm purchase commitments
              
              
              421,000
              
              
              
              ―
              
              
              
              695,000
              
              
              
              ―Lower
      of cost or market adjustment for inventory on hand
              
              
              476,000
              
              
              
              ―
              
              
              
              1,243,000
              
              
              
              ―Depreciation
              
              
              1,470,664
              
              
              
              1,416,794
              
              
              
              2,940,883
              
              
              
              2,832,540Total
      Cost of Goods Sold
              
              
              24,027,381
              
              
              
              30,460,525
              
              
              
              44,929,958
              
              
              
              58,127,747Gross
      Margin (Deficit)
              
              
              (394,550
              )
              
              
              5,231,790
              
              
              
              (401,514
              )
              
              
              10,984,573General
      and Administrative
              
              
              701,337
              
              
              
              919,333
              
              
              
              1,482,346
              
              
              
              1,665,929Operating
      Income (Loss)
              
              
              (1,095,887
              )
              
              
              4,312,457
              
              
              
              (1,883,860
              )
              
              
              9,318,644Interest
      Expense
              
              
              566,216
              
              
              
              (62,661
              )
              
              
              1,871,438
              
              
              
              2,377,144Other
      Income, net
              
              
              402,450
              
              
              
              688,926
              
              
              
              444,671
              
              
              
              858,743Net
      Income (Loss)
              
              $
              (1,259,653
              )
              
              $
              5,064,044
              
              
              $
              (3,310,627
              )
              
              $
              7,800,243Wtd
      Avg Units Outstanding -    Basic
              
              
              40,189,028
              
              
              
              40,173,973
              
              
              
              40,189,001
              
              
              
              40,173,973Net
      Income (Loss) Per Unit -   Basic
              
              $
              (0.03
              )
              
              $
              0.13
              
              
              $
              (0.08
              )
              
              $
              0.19Wtd
      Avg Units Outstanding -   Diluted
              
              
              40,189,028
              
              
              
              40,228,973
              
              
              
              40,189,001
              
              
              
              40,228,973Net
      Income (Loss) Per Unit -   Diluted
              
              $
              (0.03
              )
              
              $
              0.13
              
              
              $
              (0.08
              )
              
              $
              0.19




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




2




RED TRAIL ENERGY,
LLC


CONDENSED STATEMENTS OF CASH FLOWS




Six
      months ended
                June
      30, 2009
                (Unaudited)
              
              
              Six
      months ended
                June
      30, 2008
                (Unaudited)Cash
      Flows from Operating ActivitiesNet
      income (loss)
              
              $
              (3,310,627
              )
              
              $
              7,800,243Adjustment
      to reconcile net income (loss) to net cash provided byoperating
      activities:Depreciation
              
              
              2,969,586
              
              
              
              2,859,759Amortization
      and write-off of debt financing costs
              
              
              567,385
              
              
              
              100,512Change
      in fair value of derivative instruments
              
              
              447,739
              
              
              
              3,124,463Change
      in fair value of interest rate swap
              
              
              (682,827
              )
              
              
              33,197Equity-based
      compensation
              
              
              3,334
              
              
              
              10,000Equity-based
      compensation non-cash write-off
              
              
              (52,635
              )
              
              
              ―Noncash
      patronage equity
              
              
              (75,911
              )
              
              
              ―Unrealized
      loss on firm purchase commitments
              
              
              (731,800
              )
              
              
              ―Changes
      in assets and liabilitiesAccounts
      receivable
              
              
              (2,359,302
              )
              
              
              (1,407,594
              )Inventory
              
              
              (1,063,706
              )
              
              
              (619,579
              )Prepaid
      expenses
              
              
              4,255,655
              
              
              
              (54,857
              )Accounts
      payable
              
              
              1,742,108
              
              
              
              (1,145,567
              )Accrued
      expenses
              
              
              393,262
              
              
              
              1,932,602Cash
      settlements on interest rate swap
              
              
              333,301
              
              
              
              73,715Net
      cash provided by operating activities
              
              
              2,435,562
              
              
              
              12,706,894Cash
      Flows from Investing ActivitiesInvestment
      in RPMG
              
              
              (127,971
              )
              
              
              (273,734
              )Refund
      of sales tax on fixed assets
              
              
              753,386
              
              
              
              ―Capital
      expenditures
              
              
              (12,750
              )
              
              
              (714,066
              )Net
      cash provided by (used in) investing activities
              
              
              612,665
              
              
              
              (987,800
              )Cash
      Flows from Financing ActivitiesDebt
      repayments
              
              
              (1,270,078
              )
              
              
              (13,171,074
              )Restricted
      cash
              
              
              (750,000
              )
              
              
              ―Treasury
      units issued
              
              
              5,000
              
              
              
              ―Proceeds
      from long-term debt
              
              
              3,559,874
              
              
              
              ―Net
      cash provided by (used in) financing activities
              
              
              1,544,796
              
              
              
              (13,171,074
              )Net
      Increase (Decrease) in Cash and Equivalents
              
              
              4,593,023
              
              
              
              (1,451,980
              )Cash
      and Equivalents - Beginning of Period
              
              
              4,433,839
              
              
              
              8,231,709Cash
      and Equivalents - End of Period
              
              $
              9,026,862
              
              
              $
              6,779,729Supplemental
      Disclosure of Cash Flow InformationInterest
      paid
              
              $
              1,434,732
              
              
              $
              2,477,864SUPPLEMENTAL
      DISCLOSURE OF NON-CASHINVESTING
      AND FINANCING ACTIVITIESCapital
      expenditures included in accounts payable
              
              $
              ―
              
              
              $
              489,729Write-off
      of debt issuance costs
              
              $
              517,823
              
              
              $
              ―Investment
      in RPMG included in accounts payable
              
              $
              127,971
              
              
              $
              331,266




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




3




RED TRAIL
ENERGY, LLC


NOTES TO
CONDENSED FINANCIAL STATEMENTS


FOR THE
PERIODS ENDED JUNE 30, 2009 AND DECEMBER 31, 2008




The
accompanying condensed unaudited financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(“SEC”). Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted as permitted by such rules and regulations. These financial statements
and related notes should be read in conjunction with the financial statements
and notes thereto included in the Company’s audited financial statements for the
year ended December 31, 2008, contained in the Company’s Annual Report on
Form 10-K.




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




1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES




Nature
of Business




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




Accounting
Estimates




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





Reclassifications




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




Restricted
Cash




During
June 2009, the Company was required to restrict cash for use as collateral on
two letters of credit issued in relation to its distilled spirits and grain
warehouse bonds.  As of June 30, 2009 and December 31, 2008, the total
amount of restricted cash was $750,000 and $0, respectively.




Debt Issuance
Costs




Debt
issuance costs were amortized over the term of the related debt by use of the
effective interest method. Amortization commenced June 2006 when the
Company began drawing on the related bank loan. Due to the uncertainties with
our loan agreements described in Note 2 and Note 5, the Company wrote off the
remaining balance (approximately $517,000) of its debt issuance costs during the
first quarter of 2009.  Amortization and impairment expense totaled $0
and $567,000 (including the write-off of $517,000) for the three and six months
ended June 30, 2009, respectively and $50,000 and $101,000 for the three and six
months ended June 30, 2008, respectively.  The amortization and debt
issuance cost impairment expense is included in interest expense.




Earnings (Loss) Per
Unit




Earnings
(Loss) per unit are calculated on a basic and fully diluted basis using the
weighted average units outstanding during the period.  Diluted units
outstanding include 0 and 55,000 units as of June 30, 2009 and 2008,
respectively, for the vested equivalents of restricted member units issued to
management.  For the three and six months ended June 30, 2009, these
equivalent units are not included in fully diluted earnings per units as their
effects would be anti-dilutive.




4


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


Subsequent
Events




The
Company has evaluated subsequent events through August 14, 2009, the date which
the financial statements were available to be issued.




Fair Value of Financial
Instruments




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




Going
Concern and Management’s Plans




The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of
business.  The Company has determined that the following factors raise
substantial doubt about its ability to continue as a going concern –
1.  Poor market conditions in the ethanol industry have led the
Company to incur operating losses and negative operating cash flow since August
2008.  2.  The Company first violated certain of its loan
covenants at December 31, 2008 and was granted a waiver of those violations by
the Bank.  The Company was also found to be in violation of the same
loan covenants at March 31, 2009 and June 30, 2009 and has not been granted a
waiver of those violations.  3.  The Company projects that
it will continue to be in violation of its loan covenants through 2009 and into
2010 and has not been granted a waiver of these projected covenant
violations.  Please see the following paragraphs for a discussion of
these factors.




1.  Market
Conditions




The
Company has incurred operating losses and negative operating cash flow since
August 2008.  As of June 30, 2009, market conditions in the ethanol
industry, and for the Company, have improved relative to the market conditions
in place at March 31, 2009 and December 31, 2008 to the point where operating
cash flows are very close to breakeven or even slightly
positive.  Even with the improvement in market conditions, the Company
anticipates that it will continue to incur losses but those losses should
continue to decline during the third quarter of 2009 as long as current market
conditions prevail or show further improvement.  The Company tracks an
estimate of its margins on a daily basis based on market corn and ethanol
prices.  During the last two weeks of June 2009 and through the end of
July 2009, these estimated margins improved to the point where the Company would
have shown a small positive cash flow purchasing market priced corn and selling
market priced ethanol.




The
Company has implemented certain cost saving and revenue enhancing measures to
offset the poor margin conditions.  The Company is also in the process
of developing a corn procurement program that would essentially allow it
purchase corn at a discount to today’s market prices in exchange for an
incentive to be paid in the future based on the Company’s financial
performance.  The Company believes that such a program would have a
positive impact on the long-term viability of its operations.




2.  Long-Term
Debt




The
Company received a waiver for violations of its loan covenants for the period
ended December 31, 2008.  The Company has been notified by the Bank
that it is in violation of certain of the covenants in its loan agreements at
both March 31, 2009 and June 30, 2009.  The Company has not been
granted a waiver of those violations.  While the Bank has reserved its
rights to declare the Company in default of its loan agreements, as of August
14, 2009 the Bank has not declared the Company to be in default of its loan
agreements and considers the Company to be in good standing with its loan
agreements.  The Company is currently projecting that it will be in
violation of certain of its loan covenants through 2009 and into
2010.  Due to the current and projected covenant violations, the Bank
has the ability to call the Company’s debt due and payable during 2009 which has
resulted in the reclassification of the Company’s long-term debt to a current
liability.




The
Company has maintained a good working relationship with the Bank and, as of May
28, 2009, the Company successfully negotiated an Agreement for waiver of
principal payments which became the Sixth Amendment.  The Sixth
Amendment allowed the Company to forgo two principal payments (April 16, 2009
and July 16, 2009) in an effort to give the Company time to implement its corn
procurement program and continue to work on its cost saving and revenue
enhancing strategies as well as allow time for market conditions to
improve.




5


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


The Sixth
Amendment calls for the Company to make progress in three main areas – most of
which had a due date of July 16, 2009.  As of the date of this filing,
the Company has been notified by the Bank that it has made acceptable progress
in those three main areas and is in compliance with the terms of the Sixth
Amendment.  The Company is continuing to work in earnest on the corn
procurement program referenced in Section 7 Item 6.3.16 of the Sixth Amendment
and, if successful, anticipates having this program in place by the fourth
quarter of fiscal 2009.




As part
of negotiating the Sixth Amendment, the Bank restricted the Company’s ability to
advance funds on its line of credit and, as of July 16, 2009 allowed the Line of
Credit to expire and not be renewed. The Company is negotiating with the Bank to
extend the line of credit for 90 days.  The Company has never advanced
funds on its Line of Credit and does not anticipate needing to borrow against it
during the next three months based on current market
conditions.  However, the Company has very limited short-term capital
options if a need to borrow funds on a short-term basis would arise during the
next three months.




The
Company has been in contact with the Bank regarding a potential restructuring of
its current debt load to match the current economic reality in the ethanol
industry.  The Company believes that such a restructuring would
include reinstatement of a line of credit.  There is no set time line
for this potential restructuring and no guarantee that it will take place but,
if it were to happen, the Company anticipates it would be complete by December
31, 2009.




3.  Going
Concern




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




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




2.  NATURE
OF CURRENT OPERATIONS




Market
Conditions




During
the second quarter of 2009, corn and ethanol prices continued to trade within a
relatively narrow range compared to the extremes experienced during the year
ended December 31, 2008.  For example, the July corn contract closing
prices for the second quarter of 2009 traded within a range that included a high
of approximately $4.50 per bushel and a low of approximately $3.50 per
bushel.  In comparison, corn prices during 2008 ranged from a low of
roughly $4.00 per bushel to a high near $8.00 per bushel.  The last
trading day of the second quarter (June 30, 2009) did see a large drop in corn
prices as the United States Department of Agriculture (USDA) released its
planting intentions report which showed significantly more acres of corn being
planted than the trade expected.  Industry margins, while still poor,
started to show improvement during the second quarter relative to the margins at
March 31, 2009 and December 31, 2008.  The Company’s margins continued
to improve as well due to processing corn that was valued much closer to market
prices along with the continued implementation of its cost saving and revenue
enhancing measures in conjunction with lower prices for some of the other main
chemicals used in the production process.




During
the second quarter of 2009, the Company operated with near market corn prices –
the result of decreased volatility in the corn markets (aside from trading
activity on June 30, 2009 as described above) and the Company’s efforts to
implement a strategy to limit the number of bushels under fixed price contracts
and in inventory on hand.  In connection with negotiating the Sixth
Amendment, the Bank has placed restrictions on the Company’s ability to hedge
its long corn position which has also led the Company to try to minimize its
exposure to market volatility.  The Company believes hedging can be a
valuable tool in managing its risk exposure and continues discussions with the
Bank in order to restore its ability to hedge its long corn
position.




6


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


While the
Company has worked to limit its exposure to market fluctuations, it does still
have some exposure as evidenced by the write down recorded related to corn
purchased under fixed price contracts not yet delivered as of June 30,
2009.  This write down was due, in large part, to the decrease in
market prices experienced on June 30, 2009.  The Company had
approximately 1.6 million bushels of corn under fixed price contracts at June
30, 2009 and recognized a write down of approximately $421,000, or $.27 per
bushel during the three months ended June 30, 2009 (the corn market dropped $.30
per bushel on June 30, 2009).  The Company also recorded a lower of
cost or market adjustment related to its corn inventory on hand of approximately
$200,000 or $0.45 per bushel.  Due to the location of the Plant along
with the logistics of corn movement in its region, the Company believes it will
always have to procure a certain amount of corn under fixed price contracts to
ensure an adequate supply of corn to efficiently operate the Plant.




The
Company regularly calculates an estimate of the Plant’s cash flow, excluding
changes in working capital and borrowing activity, using what it considers
“market” prices for corn and ethanol along with the actual corn and ethanol
prices experienced by the Plant.  The trend of this information
started to show improvement starting in June 2009.  By the end of June
2009, this information projected that the Company would have an operating cash
flow at or slightly above $0.  This indicator has floated between a
small negative and small positive cash flow through July 20,
2009.  The Company believes that this indicator will continue to
fluctuate between negative and positive cash flow until the current imbalance in
supply and demand within the ethanol industry is stabilized.




Banking
Update




·
            During
      May 2009, the Company successfully negotiated an agreement (Sixth
      Amendment) for the waiver of two principal payments (April 16, 2009 and
      July 16, 2009) in order to gain additional time to implement certain
      strategies the Company believes will help return the Company to a positive
      cash flow.  The Sixth Amendment called for the Company to make
      progress on various Company initiatives.  The Company has been
      notified by the Bank that it has met the progress requirements and is in
      compliance with the terms of the Sixth
  Amendment.




·
            The
      Company has approached the Bank about possibly restructuring its current
      long-term debt to match the current and projected market conditions in the
      ethanol industry.




·
            The
      Company’s short term line of credit matured on July 16,
      2009.  The Bank notified the Company that it would not renew the
      line of credit.  The Company does not anticipate having to
      borrow on its line of credit during the third quarter but has approached
      the Bank about possibly extending the line of credit for 90
      days.




·
            The
      Company was notified by the Bank that it was in violation of its loan
      covenants at June 30, 2009 and that it had not received a waiver of those
      covenant violations.  While the Bank has reserved its rights to
      declare the Company in default of its loan agreements, as of August 14,
      2009, the Bank has not declared the Company in default of its loan
      agreements and considers the Company to be in good
    standing.




Company
Initiatives




·
            The
      Company was successful in its efforts to adopt an Amended and Restated
      Member Control Agreement which eliminates language that effectively
      limited the Company’s ability to raise equity capital by offering
      additional ownership units for sale.  The Company is in the
      process of registering an intrastate offering that would be used in
      conjunction with its corn procurement program (see below) and be offered
      only to North Dakota residents.




·
            In
      an effort to mitigate the effect of anticipated continued negative (or
      very small positive) cash flow, the Company is in the process of
      developing a corn purchasing strategy that would allow it to purchase corn
      at a discount to current market prices in exchange for repayment
      of such discounted amounts and payment of future incentives,
      to those that participate in
      the program, if the Plant is able to operate with positive
      cash flows sufficient enough to support the payments along with applicable
      debt service.  The Company views this strategy as a way of
      partnering with its corn supply chain to enhance its prospects to remain a
      viable company.  The strategy is still being developed but the
      Company anticipates that, if successfully implemented, it will be in place
      during the fourth quarter of 2009.




7


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


·
            The
      Company successfully implemented a new price index in its Modified
      Distillers Grain (MDGS) contracts.  The Company prices its MDGS
      product based off an index to corn prices.  The new index
      effectively increases the selling price of its MDGS product at the same
      corn prices and should result in additional revenue to the
      Company.




·
            Through
      various changes in its production process (and better corn quality), the
      Company has captured a yield increase of approximately 0.08 gallons per
      bushel of corn during the second quarter of 2009 vs. the first quarter of
      2009.  If maintained, this higher yield would result in using
      approximately 600,000 fewer bushels of corn over a twelve month period
      which would result in an approximately $2.4 million savings if corn
      averaged $4 per bushel during that
time.




·
            The
      Company has increased its production rate to approximately 110% of
      nameplate capacity as margins have improved.  The Company
      continues to evaluate, on an on-going basis, the capacity at which to
      operate the Plant, including possibly shutting down.  At this
      time, the Company believes that operating the Plant at this rate, is a
      more favorable option than running at a reduced rate or shutting
      down.  The rate is being monitored in conjunction with industry
      margins to determine the best rate at which to operate the
      Plant.




·
            The
      Company continues to evaluate other cost cutting/revenue enhancing
      measures.




·
            As
      reported in its Quarterly Report on Form 10-Q for the period ended March
      31, 2009, the Company had received a cancellation notice on two bonds
      which are required for the Company to operate.  During June
      2009, the Company was able to secure replacement bonds without any
      interruption in its operations.




3. DERIVATIVE
INSTRUMENTS




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




During
the first quarter of 2008, the FASB issued FASB Statement No. 161 – “Disclosures
about Derivative Instruments and Hedging Activities” (“SFAS
161”).  This statement requires holders of derivative instruments to
provide qualitative disclosures about objectives and strategies for using
derivatives, quantitative disclosures about fair value amounts of gains and
losses from derivative instruments, and disclosures about credit-risk-related
contingent features in derivative agreements.  The Company adopted
this statement effective with the first quarter of 2009.





As of
June 30, 2009, the Company had entered into interest rate swap
agreements.  In the past, the Company has also used corn and ethanol
derivative instruments but did not have any in place at June 30,
2009.  SFAS No. 133 requires that companies record derivative
financial instruments as either assets or liabilities at fair value in the
statement of financial position.  Derivatives qualify for treatment as
hedges when there is a high correlation between the change in fair value of the
derivative instrument and the related change in value of the underlying hedged
item. Furthermore, the Company must designate the hedging instruments based upon
the exposure being hedged as a fair value hedge, a cash flow hedge or a hedge
against foreign currency exposure.  The Company formally documents,
designates, and assesses the effectiveness of transactions that receive hedge
accounting initially and on an on-going basis.   The Company does
not currently have any derivative instruments that are designated as effective
hedging instruments for accounting purposes under SFAS 133 or SFAS
161.




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.




8


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


As of
June 30, 2009, the Company did not have any outstanding contracts for the
forward sale of ethanol nor did it have any outstanding corn futures or options
contracts.  The Company exited all of its corn futures and options
positions in April 2009 at the request of the Bank in conjunction with
negotiating the Sixth Amendment.




Interest
Rate Contracts




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




At June
30, 2009, the Company had approximately $33 million of notional amount
outstanding in swap agreements that exchange variable interest rates (one-month
LIBOR and three-month LIBOR) for fixed interest rates over the terms of the
agreements. At June 30, 2009, the value of the interest rate swaps totaled
approximately $2.5 million and is included in current
liabilities.  These agreements are not designated as an effective
hedge for accounting purposes and the change in fair market value and associated
net settlements are recorded in interest expense.  The swaps mature in
April 2012.




The
Company recorded net settlements of approximately $313,000 and $333,000 for the
three and six months ended June 30, 2009, respectively, and $0 and $74,000 for
the three and six months ended June 30, 2008, respectively.  See Note
5 for a description of these agreements.





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





As
      of and for the three months ended June 30, 2009Derivatives
      not designated as hedging instruments under SFAS 133Balance
      Sheet
              
              Asset
              
              LiabilityCorn
      derivative instruments, at fair value
              
              $
              ―
              
              
              $
              ―Interest
      rate swaps, at fair value
              
              
              ―
              
              
              
              2,512,004Total
      derivatives not desingated as hedging instruments under SFAS
      133
              
              $
              ―
              
              
              $
              2,512,004
  Statement
      of Operations (Income)/Expense
              
              Location
      of change in fair value recognized in income
              
              Change
      in fair value recognized in income during three months ended June 30,
      2009
              
              
              Change
      in fair value recognized in income during three months ended June 30,
      2008
              
              
              Change
      in fair value recognized in income during six months ended June 30,
      2009
              
              
              Change
      in fair value recognized in income during six months ended June 30,
      2008Corn
      derivative instruments*
              
              Cost
      of Goods Sold
              
              $
              (235,925
              )
              
              $
              (3,148,099
              )
              
              $
              (733,776
              )
              
              $
              (5,330,387
              )Ethanol
      derivative instruments
              
              Revenue
              
              
              ―
              
              
              
              1,451,366
              
              
              
              ―
              
              
              
              3,232,282Interest
      rate swaps
              
              Interest
      Expense
              
              
              (495,115
              )
              
              
              (1,130,582
              )
              
              
              (349,525
              )
              
              
              106,912Total
              
              
              
              $
              (731,040
              )
              
              $
              (2,827,315
              )
              
              $
              (1,083,301
              )
              
              $
              (1,991,193
              )




* The
amount reported in Note 4 to our Quarterly Report on Form 10-Q for the period
ended March 31, 2009 was inadvertently reported incorrectly as only the
unrealized change in fair value of our corn derivative
instruments.  The amount reported was a loss of $133,068 and should
have been a gain of $497,851.  This amount was recorded and reported
properly in our Condensed Statement of Operations.




9


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


4.
INVENTORY




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




Inventory
      values as of:
              
              June
      30,
                2009
              
              
              December
      31,
                2008Raw
      materials, including corn, chemicals and supplies
              
              $
              2,796,976
              
              
              $
              1,636,631Work
      in process
              
              
              594,926
              
              
              
              681,187Finished
      goods, including ethanol and distillers grains
              
              
              1,025,396
              
              
              
              1,035,774Total
      inventory
              
              $
              4,417,298
              
              
              $
              3,353,592
  Statement
      of Operations (Income)/Expense
                
                Location
      of change in fair value recognized in income
                
                Change
      in fair value recognized in income during three months ended June 30,
      2009
                
                
                Change
      in fair value recognized in income during three months ended June 30,
      2008
                
                
                Change
      in fair value recognized in income during six months ended June 30,
      2009
                
                
                Change
      in fair value recognized in income during six months ended June 30,
      2008Corn
      derivative instruments*
                
                Cost
      of Goods Sold
                
                $
                (235,925
                )
                
                $
                (3,148,099
                )
                
                $
                (733,776
                )
                
                $
                (5,330,387
                )Ethanol
      derivative instruments
                
                Revenue
                
                
                ―
                
                
                
                1,451,366
                
                
                
                ―
                
                
                
                3,232,282Interest
      rate swaps
                
                Interest
      Expense
                
                
                (495,115
                )
                
                
                (1,130,582
                )
                
                
                (349,525
                )
                
                
                106,912Total
                
                
                
                $
                (731,040
                )
                
                $
                (2,827,315
                )
                
                $
                (1,083,301
                )
                
                $
                (1,991,193
                )




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 have caused the
contract prices to become higher than market prices in effect at June 30,
2009.  Given the current price of ethanol, upon taking delivery under
these contracts, the Company would incur a loss.  Accordingly the
Company recorded losses on these purchase commitments of approximately $421,000
and $695,000 for the three and six months ended June 30, 2009, respectively and
$0 for both the three and six month periods ended June 30, 2008.  The
loss was recorded in “Loss on firm purchase commitments” on the statement of
operations.  The amount of the loss was determined by applying a
methodology similar to that used in the impairment valuation with respect to
inventory.  Given the uncertainty of future ethanol prices, this loss
may or may not be recovered, and further losses on the outstanding purchase
commitments could be recorded in future periods.




As of
June 30, 2009 and June 30, 2008 the Company recorded an inventory valuation
impairment of $476,000 and $0, respectively, attributable primarily to decreases
in market prices of corn and ethanol.  The inventory valuation
impairment was recorded in “Lower of cost or market adjustment for inventory on
hand” on the statement of operations.




5.
BANK FINANCING




Long-term
debt consists of the following:




As
      of
              
              June
      30,
                2009
              
              
              December
      31,
                2008Notes
      under loan agreement payable to bank, see details below
              
              $
              45,754,177
              
              
              $
              43,436,721Subordinated
      notes payable, see details below
              
              
              5,525,000
              
              
              
              5,525,000Capital
      lease obligations (Note 7)
              
              
              73,820
              
              
              
              101,480Total
      Long-Term Debt
              
              
              51,352,997
              
              
              
              49,063,201Less
      amounts due within one year*
              
              
              51,352,997
              
              
              
              49,063,201Total
      Long-Term Debt Less Amounts Due Within One Year
              
              $
              0
              
              
              $
              0




* - The
Company is out of compliance with certain of its bank covenants as of June 30,
2009.  The Company has projected that it will not meet compliance with
certain of its loan covenants throughout 2009 and it has not been able to secure
a waiver from the bank for violations as of March 31, 2009, June 30, 2009 or the
projected future violations.  While the Bank has reserved its rights
under the Construction Loan Agreement as of August 14, 2009, the Bank has not
declared the Company in default of the Construction Loan Agreement and considers
the Company in good standing.  Due to the current and projected future
covenant violations, however, the Company is required to show all of its debt
subject to those covenant violations as a current liability.  The
Company has shown the scheduled debt maturities below, absent any effects of
possibly being declared in default of the Construction Loan Agreement, taking
into account the terms of the Sixth Amendment and under the assumption that it
will resume its scheduled note payments under the original terms of the
Construction Loan Agreement in October 2009.




10


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


Scheduled
      maturities for the twelve months ended June 30,2010
              
              $
              3,687,2842011
              
              
              10,699,4532012
              
              
              36,926,7622013
              
              
              39,4982014
              
              
              ―Thereafter
              
              
              ―Total
              
              $
              51,352,997


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





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




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





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




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




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




The
Company executed the Sixth Amendment to its Construction Loan Agreement with
FNBO during May 2009.  The Sixth Amendment allows the Company to forgo
two scheduled principal payments (April 16, 2009 and July 16,
2009).  The Company will pay any interest accrued on those
dates.  Terms of the Sixth Amendment include:




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




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




·
            An
      agreement that the Company would take the necessary steps to amend its
      former Member Control Agreement to allow for additional units to be issued
      in the Company without 100% member approval (the Company’s members
      approved an Amended and Restated Member Control Agreement that met the
      requirements of this section at the Company’s 2009 Annual Meeting of
      Members)




11


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


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




·
            An
      agreement that the Company will work on the implementation of the corn
      procurement program discussed in more detail in Note
  2




·
            An
      increase in the excess cash flow provisions of the Construction Loan
      Agreement from 20% to 50%




·
            Certain
      weekly and bi-weekly reporting requirements from
  management




·
            The
      other terms of the Company’s loan agreements remain
    unchanged




Credit
Agreement




In
December 2005, the Company entered into a Credit Agreement with the Bank
providing for a total credit facility of approximately $59,712,000 for the
purpose of funding the construction of the Plant. The Construction Loan
Agreement requires the Company to maintain certain financial ratios and meet
certain non-financial covenants.  The Construction Loan Agreement is
secured by substantially all of the assets of the Company and includes the terms
as described below.  Excluding the write-off of the remaining deferred
financing costs and estimated net settlements on the Company’s interest rate
swaps, which is recorded as interest expense on the statement of operations, the
Company incurred interest expense of approximately $743,000 and $1.3 million for
the three and six months ended June 30, 2009, respectively and $944,000 and $2.1
million for the three and six months ended June 30, 2008,
respectively.




Construction
Loan




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




Fixed Rate
Note




The fixed
rate note (the “Fixed Rate Note”) had a balance outstanding of $24.1 million and
$24.7 million at June 30, 2009 and December 31, 2008,
respectively.  Interest payments are made on a quarterly basis with
interest charged at 3.0% over the three-month LIBOR rate with a minimum rate of
6%.  The interest rate is reset on a quarterly basis.  The
rate was 6% and 5.70875% as of June 30, 2009 and 2008,
respectively.  Remaining quarterly principal payments range from
approximately $530,000 to $650,000, beginning in October 2009, with a final
principal payment of approximately $17.7 million due in April 2012.




Variable Rate
Note




During
December 2007, $10 million of the variable rate note (the “Variable Rate Note”)
was transferred to the December 2007 Fixed Rate Note as part of the fourth
amendment to the loan agreement.  The Variable Rate Note had a balance
of approximately $2.5 million and $3 million at June 30, 2009 and December 31,
2008, respectively.  Interest payments are made on a quarterly basis
with interest charged at 3.4% over the three-month LIBOR rate with a minimum
rate of 6%.  The interest rate is reset on a quarterly
basis.  As of June 30, 2009 and 2008, the rates charged were 6% and
6.10875%, respectively.  Remaining principal payments are to be made
quarterly according to the terms of the Construction Loan Agreement as
amended.  The Construction Loan Agreement calls for quarterly payments
of $634,700 applied first to interest on the long-term revolving note
(“Long-Term Revolving Note”), next to accrued interest on the Variable Rate Note
and finally to principal on the Variable Rate Note.  Based on the
minimum interest rate of 6%, and the current balance of the Long-Term Revolving
Note, the Company estimates that the remaining Variable Rate Note will be paid
off in January 2011.  The Company anticipates the quarterly principal
payments to range from approximately $447,000 per quarter in October 2009 to
approximately $475,000 in January October 2010, with a final payment of
approximately $185,000 in January 2011.




12


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


Long-Term Revolving
Note




The
Long-Term Revolving Note had a balance of $10 million and $6.4 million at June
30, 2009 and December 31, 2008, respectively.  Interest is charged
quarterly at 3.4% over the one-month LIBOR with a minimum rate of
6%.  The interest rate is reset monthly.  As of June 30,
2009 and 2008, the rates charged were 6% and 5.87125%,
respectively.  The maturity date of this note is April
2012.




December 2007 Fixed Rate
Note




The
December 2007 Fixed Rate Note was created by the fourth amendment to the
Construction Loan Agreement as noted above.  As of June 30, 2009 and
December 31, 2008, the balance outstanding on this note was approximately $9.0
million and $9.2 million, respectively.  Interest payments are made on
a quarterly basis and interest is charged at 3.4% over the three-month LIBOR
rate with a minimum rate of 6%.  The interest rate is reset on a
quarterly basis.  As of June 30, 2009 and 2008, the rates charged were
6% and 6.10875%, respectively.  Principal payments are to be made
quarterly according to repayment terms of the Construction Loan Agreement,
ranging from approximately $196,000 to $233,000, from October 2009 to January
2012, with a final principal payment of approximately $6.8 million at
April 2012.




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




Revolving Line of
Credit




In July
2008, the Company renewed its $3,500,000 line of credit agreement with the Bank,
subject to certain borrowing base limitations, through July 17,
2009.  The line of credit has not been renewed as of July 16,
2009.  Interest is payable quarterly and charged on all borrowings at
a rate of 3.4% over the one-month LIBOR rate with a minimum rate of
6%.  As of June 30, 2009 and 2008, the rates charged were 6% and
5.87125%, respectively. The Company had no outstanding borrowings at June 30,
2009 and December 31, 2008.




Interest Rate Swap
Agreements




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




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




Letters of
Credit




The
Construction Loan Agreement provides for up to $137,000 in letters of credit
with the Bank to be used for any future line of credit requested by a supplier
to the Plant. All letters of credit are due and payable at April
2012.  The Construction Loan Agreement requires the Company to pay a
quarterly commitment fee of 2.25% of all outstanding letters of credit. The
balance outstanding on this letter of credit was $137,000 as of June 30, 2009
and December 31, 2008, respectively.




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




Subordinated
Debt




As part
of the Construction Loan Agreement, the Company entered into three separate
subordinated debt agreements totaling approximately $5,525,000 and received
funds from these debt agreements during 2006. Interest is charged at a rate of
2.0% over the Variable Rate Note interest rate (a total of 8% and 8.10875% at
June 30, 2009 and 2008, respectively) and is due and payable subject to approval
by the senior lender, the Bank. Interest is compounding with any unpaid interest
converted to principal. Amounts will be due and payable in full in March
2011.  The balance outstanding on these loans was $5,525,000 as of
June 30, 2009 and December 31, 2008, respectively.




13


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


In
preparing Footnote 5, our disclosure controls detected that the maturity date of
the Subordinated Debt had been incorrectly stated in previous financial
statements as April 2012.  The correct maturity date, as shown above,
is March 2011.  The incorrect maturity date caused amounts for the
Subordinated Debt reported in our scheduled debt maturity tables in previous
financial statements to be shown one year later than the actual maturity
date.  We do not believe this error represents a material misstatement
of our financial statements and it  had no impact on our Balance Sheet
for any prior period as all amounts were correctly classified.




6.
FAIR VALUE MEASUREMENTS





Effective
January 1, 2008, the Company adopted Statement of Financial Accounting Standard
No. 157, Fair Value
Measurements (“SFAS 157”), and Statement of Financial Accounting Standard
No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities (“SFAS
159”).  SFAS 157 defines fair value, outlines a framework for
measuring fair value, and details the required disclosures about fair value
measurements.




Fair
value is defined as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date in the principal or most advantageous market. The Company
uses a fair value hierarchy that has three levels of inputs, both observable and
unobservable, with use of the lowest possible level of input to determine fair
value. Level 1 inputs include quoted market prices in an active market or the
price of an identical asset or liability. Level 2 inputs are market data, other
than Level 1, that are observable either directly or indirectly. Level 2 inputs
include quoted market prices for similar assets or liabilities, quoted market
prices in an inactive market, and other observable information that can be
corroborated by market data. Level 3 inputs are unobservable and corroborated by
little or no market data. The Company uses valuation techniques in a consistent
manner from year-to-year.





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





Carrying
      Amount as of
                June
      30,
              
              
              Fair Value as of June 30,
              
              
              Fair
      Value Measurement Using2009
              
              
              2009
              
              
              Level
      1
              
              
              Level
      2
              
              
              Level
      3AssetsMoney
      market funds
              
              $
              4,991,182
              
              
              $
              4,991,182
              
              
              $
              4,991,182
              
              
              $
              ―
              
              
              $
              ―Total
              
              $
              4,991,182
              
              
              $
              4,991,182
              
              
              $
              4,991,182
              
              
              $
              0
              
              
              $
              0LiabilitiesInterest
      rate swap liability
              
              $
              2,512,004
              
              
              $
              2,512,004
              
              
              $
              ―
              
              
              $
              2,512,004
              
              
              $
              ―Total
              
              $
              2,512,004
              
              
              $
              2,512,004
              
              
              $
              ―
              
              
              $
              2,512,004
              
              
              $
              ―




The fair
value of the money market funds 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 discounting
cash flow analysis on the expected cash flows of each instrument. The analysis
of the interest rate swap reflects the contractual terms of the derivatives,
including the period to maturity and uses observable market-based inputs and
uses the market standard methodology of netting the discounted future fixed cash
receipts and the discounted expected variable cash payments. The variable cash
payments are based on an expectation of future interest rates derived from
observable market interest rate curves.





7. LEASES




The
Company leases equipment under operating and capital leases through 2013. The
Company is generally responsible for maintenance, taxes, and utilities for
leased equipment.  Equipment under operating lease includes a
locomotive and rail cars.  Rent expense for operating leases was
approximately $236,000 and $134,000 for the three and six months ended June 30,
2009, respectively and $84,000 and $92,000 for the three and six months ended
June 30, 2008, respectively.  Equipment under capital leases consists
of office equipment and plant equipment.




14


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


Equipment
under capital leases is as follows at:




June
      30,
                2009
              
              
              December
      31,
                2008Equipment
              
              $
              216,745
              
              
              $
              216,745Accumulated
      amortization
              
              
              57,345
              
              
              
              45,996Net
      equipment under capital lease
              
              $
              159,400
              
              
              $
              170,749




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




Operating
      Leases
              
              
              Capital
      Leases2010
              
              $
              489,660
              
              
              $
              61,7012011
              
              
              489,660
              
              
              
              15,1452012
              
              
              433,675
              
              
              
              6392013
              
              
              242,900
              
              
              
              ―2014
              
              
              ―
              
              
              
              ―Total
      minimum lease commitments
              
              $
              1,655,895
              
              
              
              77,485Less
      amount representing interest
              
              
              
              
              
              
              3,665Present
      value of minimum lease commitments included in the preceding current
      liabilities
              
              
              
              
              
              $
              73,820




8. MEMBERS’ EQUITY




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





9.
EQUITY-BASED COMPENSATION




2006 Equity-Based Incentive
Plan





During
2006, the Company implemented an equity-based incentive plan (the “Plan”) which
provided for the issuance of restricted Units to the Company’s key management
personnel, for the purpose of compensating services rendered. As of June 30,
2009, the personnel covered by the Plan had either left employment or given
notice that they were going to leave employment.  Due to these
circumstances, prior recognized equity-based compensation expense related to
these grants was written off through compensation expense during the three
months ended June 30, 2009.  5,000 units were issued under the terms
of the Plan during June 2009.  During 2007, the Company exercised an
option to repurchase 200,000 Units in association with this
Plan.  185,000 Units are still held in treasury and will not be issued
under the Plan.  While the Company does not have any other
equity-based compensation plans currently in place, these Units could be used
for that purpose in the future.  Equity-based compensation expense was
$5,000 and $-53,334 (approximately $700 of this was shown in interest expense)
for the three and six months ended June 30, 2009, respectively and $5,000 and
$10,000 for the three and six months ended June 30, 2008,
respectively.  As of June 30, 2009, the total equity-based
compensation expense related to nonvested awards not yet recognized was
$0.




10. COMMITMENTS AND
CONTINGENCIES




Design-Build
Agreement




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




15


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


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 June
30, 2009, the Company had various fixed and basis contracts for approximately
1.6 million bushels of corn.  Of the 1.6 million bushels under
contract, only approximately 45,000 were under basis contract and did not have a
fixed price.  Using the stated contract price for the fixed contracts
and using market prices, as of June 30, 2009, to price the basis contracts the
Company had commitments of approximately $6.5 million related to all 1.64
million bushels under contract.




11. RELATED-PARTY
TRANSACTIONS




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




June
      30,
                2009
              
              
              December
      31,
                2008Balance
      SheetAccounts
      receivable
              
              $
              4,384,368
              
              
              $
              2,198,277Accounts
      payable
              
              
              1,255,222
              
              
              
              788,149Notes
      payable
              
              
              1,525,000
              
              
              
              1,525,000
  For
      the three months ended June 30, 2009
              
              
              For
      the three months ended June 30, 2008
              
              
              For
      the six months ended June 30, 2009
              
              
              For
      the six months ended June 30, 2008Statement
      of OperationsRevenues
              
              $
              20,215,469
              
              
              $
              33,308,017
              
              
              $
              37,699,964
              
              
              $
              64,746,619Cost
      of goods sold
              
              
              656,496
              
              
              
              656,828
              
              
              
              1,353,808
              
              
              
              1,348,967General
      and administrative
              
              
              176,968
              
              
              
              389,732
              
              
              
              283,683
              
              
              
              777,740Inventory
      Purchases
              
              $
              1,179,356
              
              
              $
              1,215,628
              
              
              $
              2,692,493
              
              
              $
              2,694,462





16




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




We
prepared the following discussion and analysis to help you better understand our
financial condition, changes in our financial condition, and results of
operations for the three months ended June 30, 2009, compared to the same period
of the prior fiscal year. This discussion should be read in conjunction with our
interim condensed financial statements and notes included in Item 1 of
Part 1 of this Quarterly Report, and the audited condensed financial
statements and notes thereto and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” contained in Item 7 of our Annual
Report on Form 10-K for the fiscal year ended December 31,
2008.




DISCLOSURE
REGARDING FORWARD-LOOKING STATEMENTS





This
Quarterly Report contains forward-looking statements within the meaning of
Section 21E of the Exchange Act. Forward-looking statements are all statements
other than statements of historical fact, including without limitation those
statements that are identified by the words “anticipates,” “believes,”
“continue,” “could,” “estimates,” “expects,” “future,” “hope,” “intends,” “may,”
“plans,” “potential,” “predicts,” “should,” “target,” and similar expressions,
and include statements concerning plans, objectives, goals, strategies, future
events or performance, and underlying assumptions (many of which are based, in
turn, upon further assumptions) and other statements that are other than
statements of historical facts. From time to time, the Company may publish or
otherwise make available forward-looking statements of this nature, including
statements contained within this Management’s Discussion and Analysis of
Financial Condition and Results of Operations.





Forward-looking
statements involve risks and uncertainties, which could cause actual results or
outcomes to differ materially from those expressed. Forward-looking statements
in this Quarterly Report include, but are not limited to, our expectations
regarding future revenues and expenses, the effect of state and federal low
carbon fuel or ethanol blending regulations on our operations and revenues,
Plant downtime, capital expenditures, interest income, receipt of grant income,
receipt of state incentive plan payments, linkage of ethanol and corn prices in
the future, ethanol prices and corn costs, the implementation of our corn
procurement program, the possible installation of corn oil extraction equipment,
hedging strategies, corn usage and ethanol production, general and
administrative costs, chemical and denaturant costs, expected savings from our
coal unloading facility, our profit projections for the rest of
2009,  and our ability to fund our operations and capital expenditures
from cash flows and existing lines of credit.  The Company's
expectations, beliefs and projections are expressed in good faith and are
believed by the Company to have a reasonable basis, including without
limitation, management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties.
Nonetheless, the Company's expectations, beliefs or projections may not be
achieved or accomplished.  Forward-looking statements are subject to
known and unknown risks and uncertainties, including those risks described in
“Item 1A - Risk Factors” of our Annual Report on Form 10-K as updated in
Part II, Item 1A of this Quarterly Report.





Any
forward-looking statement contained in this document speaks only as of the date
on which the statement is made, and the Company undertakes no obligation to
update any forward-looking statement or statements to reflect events or
circumstances that occur after the date on which the statement is made or to
reflect the occurrence of unanticipated events. New factors emerge from time to
time, and it is not possible for management to predict all of the factors, nor
can it assess the effect of each factor on the Company's business or the extent
to which any factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking statement. All
forward-looking statements, whether written or oral and whether made by or on
behalf of the Company, are expressly qualified by the risk factors and
cautionary statements in this Quarterly Report, including statements contained
within “Part II, Item 1A – Risk Factors,” and in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2008, and include:





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




17




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





•
            
            Fluctuations
      in the price and market for ethanol and
DDGs;





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





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





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





•
            
            Costs
      of equipment;





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





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





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





•
            
            Changes
      to infrastructure, including:





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





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





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





•
            
            Increased
      competition in the ethanol and oil
industries;





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





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





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





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




18




•
            
            Our
      liability resulting from
litigation;





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





•
            
            Changes
      and advances in ethanol production
technology;





•
            
            Gains
      or losses from derivative activities, including hedging corn, ethanol and
      other commodities; and•
            
            Competition
      from alternative fuels and alternative fuel
  additives.





Summary




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




Results of
Operations




The
following table shows the results of our operations and the percentages of sales
and revenues, cost of sales, operating expenses and other items to total sales
and revenues in our statements of operations for the three and six months ended
June 30, 2009 and 2008.




Three
      months ended
                June
      30, 2009
                (Unaudited)
              
              
              Three
      months ended
                June
      30, 2008
                (Unaudited)
              
              
              Six
      months ended
                June
      30, 2009
                (Unaudited)
              
              
              Six
      months ended
                June
      30, 2008
                (Unaudited)Amount
              
              
              Percent
              
              
              Amount
              
              
              Percent
              
              
              Amount
              
              
              Percent
              
              
              Amount
              
              
              PercentRevenuesEthanol,
      net of derivative fair value changes
              
              $
              19,462,830
              
              
              
              82.36
              %
              
              $
              30,671,979
              
              
              
              85.93
              %
              
              $
              36,366,832
              
              
              
              81.67
              %
              
              $
              59,168,966
              
              
              
              85.61
              %Distillers
      grains
              
              
              4,170,001
              
              
              
              17.64
              %
              
              
              5,020,336
              
              
              
              14.07
              %
              
              
              8,161,612
              
              
              
              18.33
              %
              
              
              9,943,354
              
              
              
              14.39
              %Total
      Revenue
              
              
              23,632,831
              
              
              
              100.00
              %
              
              
              35,692,315
              
              
              
              100.00
              %
              
              
              44,528,444
              
              
              
              100.00
              %
              
              
              69,112,320
              
              
              
              100.00
              %Cost
      of Goods SoldCost
      of goods sold, net of derivative fair value changes
              
              
              21,659,717
              
              
              
              91.65
              %
              
              
              29,043,731
              
              
              
              81.37
              %
              
              
              40,051,075
              
              
              
              89.94
              %
              
              
              55,295,207
              
              
              
              80.01
              %Loss
      on firm purchase commitments
              
              
              421,000
              
              
              
              1.78
              %
              
              
              ―
              
              
              
              0.00
              %
              
              
              695,000
              
              
              
              1.56
              %
              
              
              ―
              
              
              
              0.00
              %Lower
      of cost or market adjustment for inventory on hand
              
              
              476,000
              
              
              
              2.01
              %
              
              
              ―
              
              
              
              0.00
              %
              
              
              1,243,000
              
              
              
              2.79
              %
              
              
              ―
              
              
              
              0.00
              %Depreciation
              
              
              1,470,664
              
              
              
              6.22
              %
              
              
              1,416,794
              
              
              
              3.97
              %
              
              
              2,940,883
              
              
              
              6.60
              %
              
              
              2,832,540
              
              
              
              4.10
              %Total
      Cost of Goods Sold
              
              
              24,027,381
              
              
              
              101.67
              %
              
              
              30,460,525
              
              
              
              85.34
              %
              
              
              44,929,958
              
              
              
              100.90
              %
              
              
              58,127,747
              
              
              
              84.11
              %Gross
      Margin (Deficit)
              
              
              (394,550
              )
              
              
              -1.67
              %
              
              
              5,231,790
              
              
              
              14.66
              %
              
              
              (401,514
              )
              
              
              -0.90
              %
              
              
              10,984,573
              
              
              
              15.89
              %General
      and Administrative
              
              
              701,337
              
              
              
              2.97
              %
              
              
              919,333
              
              
              
              2.58
              %
              
              
              1,482,346
              
              
              
              3.33
              %
              
              
              1,665,929
              
              
              
              2.41
              %Operating
      Income (Loss)
              
              
              (1,095,887
              )
              
              
              -4.64
              %
              
              
              4,312,457
              
              
              
              12.08
              %
              
              
              (1,883,860
              )
              
              
              -4.23
              %
              
              
              9,318,644
              
              
              
              13.48
              %Interest
      Expense
              
              
              566,216
              
              
              
              2.40
              %
              
              
              (62,661
              )
              
              
              -0.18
              %
              
              
              1,871,438
              
              
              
              4.20
              %
              
              
              2,377,144
              
              
              
              3.44
              %Other
      Income, net
              
              
              402,450
              
              
              
              1.70
              %
              
              
              688,926
              
              
              
              1.93
              %
              
              
              444,671
              
              
              
              1.00
              %
              
              
              858,743
              
              
              
              1.24
              %Net
      Income (Loss)
              
              $
              (1,259,653
              )
              
              
              -5.33
              %
              
              $
              5,064,044
              
              
              
              14.19
              %
              
              $
              (3,310,627
              )
              
              
              -7.43
              %
              
              $
              7,800,243
              
              
              
              11.29
              %




19




Additional
      Data
              
              Three
      Months
                ended
                June
      30, 2009
              
              
              Three
      Months
                ended
                June
      30, 2008
              
              
              Six
      Months
                ended
                June
      30, 2009
              
              
              Six
      Months
                ended
                June
      30, 2008Ethanol
      sold (thousands of gallons)
              
              
              12,689
              
              
              
              13,588
              
              
              
              24,481
              
              
              
              28,122Dried
      distillers grains sold (tons)
              
              
              24,055
              
              
              
              23,592
              
              
              
              39,508
              
              
              
              48,228Modified
      distillers grains sold (tons)
              
              
              22,088
              
              
              
              29,739
              
              
              
              56,688
              
              
              
              64,263Ethanol
      avg price/gallon (net of hedging activity)
              
              $
              1.53
              
              
              $
              2.26
              
              
              $
              1.49
              
              
              $
              2.10Dried
      distillers grains avg price/ton
              
              $
              121.97
              
              
              $
              143.13
              
              
              $
              130.38
              
              
              $
              135.05Modified
      distillers grains avg price/ton
              
              $
              55.88
              
              
              $
              55.03
              
              
              $
              53.02
              
              
              $
              53.12Corn
      costs per bushel (net of hedging activity)
              
              $
              3.98
              
              
              $
              4.96
              
              
              $
              3.98
              
              
              $
              4.47




Results
of Operations for the Three and Six Months Ended June 30, 2009 as Compared to
the Three and Six Months Ended June 30, 2008




Summary




We
recognized a loss of approximately $1.3 million during the three months ended
June 30, 2009 compared to a net income of approximately $5.1 million during the
three months ended June 30, 2008.  For the six months ended June 30,
2009, we recognized a loss of approximately $3.3 million compared to a net
income of approximately $7.8 million for the six months ended June 30,
2008.





The
results for the three months ended June 30, 2009 include a charge of
approximately $897,000 related to lower of cost or market adjustments for
inventory on hand and firm purchase commitments.  Our margins improved
from the first quarter of 2009 as we again were able to operate with near market
priced corn during the second quarter.  As mentioned above, we were
required to make a lower of cost or market adjustment for both our inventory on
hand and for corn contracted under firm purchase commitments.  The
drop in corn price that caused our inventory and contracted corn to become
priced higher than market price was primarily related to the United States
Department of Agriculture (“USDA”) releasing its planting intentions report on
June 30, 2009.  The report indicated substantially more acres of corn
planted than the markets had anticipated which caused the price of corn to drop
$0.30 in that one day.  Ethanol price changes generally had a high
correlation to changes in corn prices during the second quarter of
2009.  Barring any unforeseen, negative state or federal government
regulatory changes (for example having many state governments or the federal
government implement low carbon fuel standard legislation that contains
provisions detrimental to corn based ethanol - similar to the regulation
proposed and recently approved in California), we anticipate that the second
quarter of 2009 represents a reasonable approximation of what our operating
results will be (absent the implementation of the corn procurement discount
program in Note 2 to our financial statements and other potential cost
cutting/revenue enhancing strategies not yet implemented) until such time as the
current oversupply situation in the ethanol industry is
corrected.  Recently, the United States Environmental Protection
Agency opened a public comment period on a request to allow ethanol blends in
gasoline up to 15%.   While this would not be a mandated increase
in the amount of ethanol blended with gasoline, we believe it would have a
positive impact on our margin structure and help to balance the supply and
demand industry wide more quickly than it could happen with the current blends
of up to 10% ethanol.  In the mean time, we continue to pursue several
cost cutting/revenue enhancing measures in an attempt to increase our margins
and enhance the sustainability of our Plant.





During
May 2009, we executed the Sixth Amendment which allowed us to forgo to two
principal payments (April 16, 2009 and July 16, 2009) under the Construction
Loan Agreement with our Bank.





As
reported in our Quarterly Report on Form 10-Q for the period ended March 31,
2009, we did receive a cancellation notice from the surety company that
underwrote our grain warehouse and distilled spirits bonds.  We were
able to secure new bonds in June 2009 without any interruption in our Plant
operations.  As part of issuing the bonds, we were required to issue
irrevocable letter of credits equal to the amount of the bonds and set aside
cash collateral equal to 100% of the amount of the letters of credit which
totaled $750,000.




20





Revenues




Three
Months Ended June 30, 2009 and 2008




Revenues
decreased approximately $12.1 million during the quarter ended June 30, 2009 as
compared to the quarter ended June 30, 2008.  Ethanol revenue
decreased approximately $11.2 million and distillers grains revenue decreased
approximately $800,000.  The decrease was primarily due to lower
prices received for ethanol and distillers grains during 2009 along with lower
volumes of ethanol and distillers grains produced and sold as we operated the
Plant at a lower capacity at various times for different reasons including
weather related corn supply disruptions and the current economic environment in
the industry.





Ethanol
revenue




As
mentioned above, during the second quarter of 2009 we operated the Plant at a
reduced rate compared to the second quarter of 2008.  We sold
approximately 900,000 fewer gallons of ethanol during the second quarter of 2009
as compared to the second quarter of 2008 and we received an average net price
(excluding the effects of changes in ethanol related derivative instruments)
that was $0.83 per gallon lower ($1.53 per gallon vs. $2.36 per
gallon).  Compared to the extreme volatility experienced during the
year ended December 31, 2008, ethanol prices remained fairly steady during the
second quarter of 2009 with forward month Chicago Ethanol Swap closing prices
trading between a low of approximately $1.54 and a high of approximately
$1.79.  Gains and losses related to our ethanol hedging activities are
recorded in revenue.  We did not have any ethanol related hedging
activity during the second quarter of 2009 but we recognized a loss of
approximately $1.5 million related to ethanol hedging activities during the
second quarter of 2008.  Including the effect of our ethanol hedging
activities, our average price per gallon of ethanol sold was $2.26 during the
three months ended June 30, 2008.





Distillers
grains revenue




We sold
approximately 7,700 fewer tons of modified distillers grains (“DMWG”) and we
sold approximately the same number of dried distillers grains with solubles
(“DDGS”) during the three months ended June 30, 2009 as compared to the three
months ended June 30, 2008.  Our sales of distillers grains typically
decrease during the summer months as cattle are moved to pastures but the
decrease in sales of DMWG (compared to the second quarter of 2009) was due, in
part, to the lower production rates but was also related to a decrease in the
number of tons contracted for the contract period of June 2009 – May 2011 as we
implemented a new price index for this product.  We contract all of
our DMWG locally and like to produce a certain amount of this product in order
to most efficiently utilize the steam generated from our boiler for the
production of ethanol, DDGS and DMWG.  By contracting with local
farmers and feedlots for sales of our DMWG we ensure that we have a market for
our product and maintain what we consider to be close to the best mix of
products produced for our operation.  The price of distillers grains
typically increases or decreases with the price of corn which is reflected in
the prices we received during the second quarter of 2009 vs. the second quarter
of 2009.  The price we received for our DDGS product was, on average,
approximately $21.00 per ton lower during the three months ended June 30, 2009
vs. the three months ended June 30, 2008 ($121.97 per ton vs. $143.13 per
ton).  The average price we received for DMWG during the second
quarter of 2009 was slightly higher than the average price we received during
the second quarter of 2008 ($55.88 per ton vs. $55.03 per ton).




Six
Months Ended June 30, 2009 and 2008




Revenues
decreased approximately $24.6 million during the six months ended June 30, 2009
as compared to the six months ended June 30, 2008.  Ethanol revenue
decreased approximately $22.8 million and distillers grains revenue decreased
approximately $1.8 million.  The decrease was primarily due to lower
prices received for ethanol and distillers grains during 2009 along with lower
volumes of ethanol and distillers grains produced and sold as we operated the
Plant at a lower capacity at various times for different reasons including
weather related corn supply disruptions and the current economic environment in
the industry.





Ethanol
revenue




As
mentioned above, at various times we operated the Plant at a reduced rate during
the six months ended June 30, 2009 as compared to the six months ended June 30,
2008.  We sold approximately 3.6 million fewer gallons of ethanol
during this period in 2009 as compared to the same period for 2008 and we
received an average net price (excluding the effects of changes in ethanol
related derivative instruments) that was $0.73 per gallon lower ($1.49 per
gallon vs. $2.22 per gallon).  Gains and losses related to our ethanol
hedging activities are recorded in revenue.  We did not have any
ethanol related hedging activity during 2009 but we recognized a loss of
approximately $3.2 million related to ethanol hedging activities during
2008.  Including the effect of our ethanol hedging activities, our
average price per gallon of ethanol sold was $2.10 during the six months ended
June 30, 2008.




21





Distillers
grains revenue




We sold
approximately 7,600 fewer tons of modified distillers grains (“DMWG”) and 8,700
fewer tons of dried distillers grains with solubles (“DDGS”) during the six
months ended June 30, 2009 as compared to the six months ended June 30,
2008.  The overall decrease in sales of distillers grains is due to
the decrease in production rates during 2009 vs. 2008.  The price of
distillers grains typically increases or decreases with the price of corn which
is reflected in the prices we received during the six months ended June 30, 2009
vs. the same period in 2009.  The price we received for our DDGS
product was, on average, approximately $5.00 per ton lower during the six months
ended June 30, 2009 vs. the six months ended June 30, 2008 ($130.38 per ton vs.
$135.05 per ton).  The average price we received for DMWG was
unchanged between the same periods ($53.02 per ton vs. $53.12 per
ton).





Revenues
– Prospective Information





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





Distillers
grains revenue – distillers grains are also a market driven commodity which
makes the price very hard to predict.  The price of distillers grains,
both DDGS and DMWG, tends to follow the price of corn.  We expect the
average price we receive for our DDGS product to decrease by approximately $15 -
$20 per ton (from our second quarter 2009 average price of approximately $122
per ton) during the July – September time frame based on market corn prices as
of July 24, 2009 and as demand for this product decreases due to cattle being
put out to pasture.  We have completed the process of contracting our
DMWG product for the 2009 – 2010 season and, due to a change in the contract
pricing index, anticipate an increase in our revenue of approximately $3 - $5
per ton compared to our second quarter 2009 average price of approximately $56
assuming corn prices stay comparable to the second quarter of 2009.





Cost
of Sales




While the
price we paid for our main input, corn, was significantly lower during the six
months ended June 30, 2009 compared to the six months ended June 30, 2008, the
margin between our revenue and corn cost decreased by approximately 64% ($0.37
per gallon vs. $0.88 per gallon) as margins tightened across the industry due to
an oversupply of product in the market place.  This tightening of
margins caused approximately 20% of the ethanol production capacity in the
United States to shut down.  Some of this capacity is starting to come
back on line as margins have started to improve.  Some of the other
key components of our costs of goods sold (chemicals, denaturant and coal) also
decreased during the first six months of 2009 vs. the same period in
2008.  These decreases were due, in part to lower prices as well as
the successful implementation of our coal unloading facility.





Three
Months Ended June 30, 2009 and 2008




Our
overall Cost of Goods Sold decreased by approximately $6.4 million during the
three months ended June 30, 2009 as compared to the three months ended June 30,
2008.




·
            Corn
      costs - our corn costs were lower in the second quarter of 2009 compared
      to the second quarter of 2008 as market prices for corn were
      lower.  Our average cost per bushel, net of hedging activities,
      was approximately $3.98 per bushel and $4.96 per bushel for the three
      months ended June 30, 2009 and 2008, respectively.  Similar to
      ethanol prices, corn prices during the second quarter of 2009 remained
      relatively constant when compared to the volatility experienced during
      2008.  The corn that we had under contract at June 30, 2009,
      while very near market prices, was still approximately $.27 per bushel
      higher than market, on average.  This was due, in large part, to
      the USDA planting intentions report released on June 30, 2009 which
      indicated a significantly higher number of corn acres planted than
      anticipated.  This resulted in a write off of $421,000 related
      to corn we had under fixed price contacts and $476,000 related to
      inventory on hand in the second quarter of
2009.




22




·
            Denaturant
      costs - while we did use approximately 19,000 fewer gallons due to our
      reduced production rates and new regulations that limit the amount of
      denaturant we can blend with ethanol, we also experienced a price decrease
      of approximately $1.61 per gallon during the second quarter of 2009 as
      compared to 2008 ($1.48 per gallon vs. $3.09 per gallon).  Some
      of the decrease was related to falling gasoline prices but a portion of
      the decrease is also related to negotiating a price index that resulted in
      a lower price to our Plant.  The decrease in denaturant prices
      and usage resulted in an approximate savings of $525,000 during the second
      quarter of 2009 as compared to the second quarter of
  2008.


·
            Coal
      costs - the successful start up of our coal unloading facility in October
      2008 has improved our cost structure as we experienced a decrease in our
      coal costs of approximately $10.50 per ton in the second quarter of 2009
      compared to the second quarter of 2008 ($41.50 per ton vs. $52.00 per
      ton).  We used approximately 22,000 tons of coal during the
      second quarter of 2009 which amounts to a savings of approximately
      $231,000.


·
            Chemical
      costs – our chemical costs were approximately $250,000 lower for the
      second quarter of 2009 vs. the comparable period in 2008.  The
      lower costs were primarily due to lower chemical prices as many of the
      items we buy are commodities and have decreased in price with most other
      commodities.  Decreased usage of some of the chemicals has also
      contributed to the lower costs as we have been able procure coal with a
      chemical composition that has the effect of lowering certain of the
      emissions from our process which, in turn, decreases the amount of
      chemicals needed to control those
emissions.





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





Six
Months Ended June 30, 2009 and 2008




Our
overall Cost of Goods Sold decreased by approximately $13.2 million during the
six months ended June 30, 2009 as compared to the six months ended June 30,
2008.




·
            Corn
      costs - our corn costs were lower in the second quarter of 2009 compared
      to the second quarter of 2008 as market prices for corn were
      lower.  Our average cost per bushel, net of hedging activities,
      was approximately $3.98 per bushel and $4.47 per bushel for the six months
      ended June 30, 2009 and 2008, respectively.  Similar to ethanol
      prices, corn prices during the first six months of 2009 remained
      relatively constant when compared to the volatility experienced during
      2008.  We recorded a lower of cost or market adjustment related
      to the corn we had under fixed price contracts of $695,000 and $0 for the
      six months ended June 30, 2009 and 2008, respectively.  We
      recorded a lower of cost or market adjustment related to inventory on hand
      of $1,243,000 and $0 for the six months ended June 30, 2009 and 2008,
      respectively.  This was due, in large part, to the USDA planting
      intentions report released on June 30, 2009 which indicated a
      significantly higher number of corn acres planted than
      anticipated.


·
            Denaturant
      costs - while we did use approximately 103,000 fewer gallons due to our
      reduced production rates and new regulations that limit the amount of
      denaturant we can blend with ethanol, we also experienced a price decrease
      of approximately $1.39 per gallon during the six months ended June 30,
      2009 as compared to 2008 ($1.41 per gallon vs. $2.80 per
      gallon).  Some of the decrease was related to falling gasoline
      prices but a portion of the decrease is also related to negotiating a
      price index that resulted in a lower price to our Plant.  The
      decrease in denaturant prices and usage resulted in an approximate savings
      of $1 million during the six months ended June 30, 2009 as compared to the
      six month ended June 30, 2008.


·
            Coal
      costs - the successful start up of our coal unloading facility in October
      2008 has improved our cost structure as we experienced a decrease in our
      coal costs of approximately $11.00 per ton for the six months ended June
      30, 2009 as compared to the six months ended June 30, 2009 ($41.00 per ton
      vs. $52.00 per ton).  We used approximately 42,500 tons of coal
      during the six months ended June 30, 2009 which amounted to a savings of
      approximately $467,500.


·
            Chemical
      costs – our chemical costs were approximately $496,000 lower for the six
      months ended June 30, 2009 vs. the comparable period in
      2008.  The lower costs were primarily due to lower chemical
      prices as many of the items we buy are commodities and have decreased in
      price with most other commodities.  Decreased usage of some of
      the chemicals has also contributed to the lower costs as we have been able
      procure coal with a chemical composition that has the effect of lowering
      certain of the emissions from our process which, in turn, decreases the
      amount of chemicals needed to control those
  emissions.




23




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





Cost
of Sales and Gross Margin – Prospective Information




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





Corn
cost




Because
corn is a market driven commodity, corn prices are very hard to
predict.  We anticipate that, for as long as the current oversupply
situation exists in the ethanol markets, the spread between corn and ethanol
will tend to remain fairly constant over a period of time and allow our Plant to
operate between a small negative and small positive cash flow.  Based
on our corn procurement strategies we anticipate that our corn costs will remain
near market prices.  We expect that our corn prices will tend to be
slightly higher than market prices in a declining corn market and slightly under
market prices in a rising corn market as we do have to enter into fixed price
contracts for at least a portion of our production needs to ensure an adequate
supply of corn to our Plant.  Due to the restrictions placed on our
hedging program by our Bank, we will be evaluating ways to limit the amount of
corn purchased under fixed price contracts.





In an
effort to increase the long-term viability of our Plant we are exploring ways of
partnering with our corn suppliers to purchase corn, at a discount to market
prices, in exchange for repayment of such discounted amounts and payment of
future incentives, to those suppliers that participate in the program, if the
Plant is able to operate with future positive cash flows sufficient enough to
support the payments along with applicable debt service.  We have
received some positive initial feedback to this concept from our corn suppliers
and are working through the details of how the program would work.  If
successful, we anticipate that the program could be in place during the fourth
quarter of 2009.





Energy
and chemical needs




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





Coal
cost




We have a
contract in place for our coal needs in an effort to mitigate potential price
increases.  Our current contract runs through December 31,
2009.  We anticipate negotiating a new coal supply contract with our
coal supplier later this year but cannot predict what the new pricing will be at
this time.  We anticipate that the lower coal costs we experienced
during the first six months of 2009, due to the implementation of our coal
unloading facility, will continue throughout 2009.





Chemical
and Denaturant costs




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




General
and Administrative




Three
Months Ended June 30, 2009 and 2008




General
and administrative costs for the three months ended June 30, 2009 were
approximately $218,000 lower than the comparable period in 2008.  The
decrease is primarily due to a decrease in the variable portion of our
management fees, which is based on our net income, of approximately
$256,000.  The lower costs were offset, in part by legal costs that
were approximately $94,000 higher.   There were many other small
variances within our general and administrative costs but none were
significant.




24





Six
Months Ended June 30, 2009 and 2008




General
and administrative costs for the six months ended June 30, 2009 were
approximately $184,000 lower than the comparable period in 2008.  The
decrease is primarily due to a decrease in the variable portion of our
management fees, which is based on our net income, of approximately $354,000
along with other decreases in our costs resulting from our cost cutting measures
including lower accounting and consulting fees ($80,000 decrease), lower meeting
and travel expenses ($41,000 decrease) and lower office supply expenses ($25,000
decrease).  The lower costs were offset, in part by higher bank fees
related to the Sixth Amendment ($167,000 increase), higher legal costs ($86,000
increase) and higher real estate taxes ($73,000 increase) due to the phase out
of our tax exemption.  There were many other small variances within
our general and administrative costs but none were significant.





General
and Administrative - Prospective




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




Interest
Expense




Three
Months Ended June 30, 2009 and 2008




Our net
interest expense for the three months ended June 30, 2009 and 2008 was
approximately $566,000 and $(63,000), respectively.  Our interest
expense is made up of three components: interest expense on long-term debt,
fluctuations in the market value of our interest rate swaps and amortization of
deferred financing costs.  Interest expense on long-term debt and
amortization of deferred financing costs totaled approximately $1.1 million for
both the three months ended June 30, 2009 and 2008, respectively.  We
recorded gains from the change in market value of our interest rate swaps of
approximately $495,000 and $1.1 million for the three months ended June 30, 2009
and 2008, respectively.




Six
Months Ended June 30, 2009 and 2008




Our net
interest expense for the six months ended June 30, 2009 and 2008 was
approximately $1.9 million and $2.4 million, respectively.  Interest
expense on long-term debt and amortization of deferred financing costs totaled
approximately $2.2 million and $2.3 million for the six months ended June 30,
2009 and 2008, respectively.  The expense for the six months ended
June 30, 2009 includes a write off of the remaining balance of our deferred
financing costs (approximately $517,000) which occurred during the first quarter
of 2009.  The write-off was the result of not receiving a waiver of
the loan covenant violations that existed as of March 31, 2009, management’s
projections indicating projected loan covenant violations for the rest of 2009
and uncertainties regarding the long-term viability of our Credit Agreement with
the Bank.  Our scheduled amortization for both the first and second
quarter of 2009 would have resulted in approximately $50,000 of amortization
expense.  We recorded changes in the market value of our interest rate
swaps of approximately $350,000 and $(106,000) for the six months ended June 30,
2009 and 2008, respectively.  The gain on the interest rate swap in
2009 is due, in part, to to the decrease in the length of time until maturity
and a slight increase in rates between December 31, 2008 and June 30,
2009.  The loss on the interest rate swap in 2008 was primarily caused
by decreasing interest rates.





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





Other
Income (Expense), Net




We
recognized other income of approximately $402,000 and $689,000 during the three
months ended June 30, 2009 and 2008, respectively.  During 2009, our
other income was primarily made up of interest income ($387,000), the vast
majority of which was from interest earned on a sales tax refund received
related to plant construction.  During 2008, our other income was
primarily due to the receipt of a North Dakota ethanol producer incentive
payment of approximately $650,000.  We did not receive any North
Dakota ethanol incentive payments during the three months ended June 30, 2009 as
there were not any funds available to be distributed.





We
recognized other income of approximately $445,000 and $859,000 during the six
months ended June 30, 2009 and 2008, respectively.  During 2009, our
other income was primarily made up of interest income ($428,000), the vast
majority of which was from interest earned on a sales tax refund received
related to plant construction.  During 2008, our other income was
primarily due to the receipt of a North Dakota ethanol producer incentive
payment of approximately $650,000 along with approximately $171,000 of interest
income earned on cash balances.  We did not receive any North Dakota
ethanol incentive payments during the six months ended June 30, 2009 as there
were not any funds available to be distributed.




25





We do not
anticipate receiving any significant interest income during the last six months
of 2009 as our sales tax refund has been completed and the interest rates paid
on cash we have on deposit are very low.  We do anticipate receiving
some funds from the North Dakota Ethanol Incentive program during the rest of
2009 but cannot accurately predict the amount.  We expect that the
amount received will be significantly less than the amount received during 2008
due, in part, to the funding status of the program.  There currently
are no funds available for distribution but we anticipate the program to receive
funds during July 2009.  The amount available for distribution will be
significantly less than last year.




Liquidity
and Capital Resources





Statement
      of Cash Flows
              
              For
      the three
                months
      ended
                June
      30, 2009
              
              
              For
      the three
                months
      ended
                June
      30, 2008
              
              
              For
      the six
                months
      ended
                June
      30, 2009
              
              
              For
      the six
                months
      ended
                June
      30, 2008Cash
      flows provided by operating activities
              
              $
              1,120,365
              
              
              $
              7,288,756
              
              
              $
              2,435,562
              
              
              $
              12,706,894Cash
      flows provided by (used in) investing activities
              
              
              617,168
              
              
              
              (780,337
              )
              
              
              612,665
              
              
              
              (987,800
              )Cash
      flows provided by (used in) financing activities
              
              
              293,802
              
              
              
              (12,290,135
              )
              
              
              1,544,796
              
              
              
              (13,171,074
              )


Cash
Flows





During
the three and six months ended June 30, 2009, the net income before depreciation
and amortization was approximately a break even and not a significant
contributor to cash flows from operating activities.  During the three
and six months ended June 30, 2008, net income before depreciation and
amortization was a significant contributor to cash flows from operating
activities.  The changes in cash flows from operating activities
generally follow the results of operations as discussed in “Results of
Operations for the Three and Six Months Ended June 30, 2009 as Compared to the
Three and Six Months Ended June 30, 2008” and also are affected by changes in
working capital.




Three
Months Ended June 30, 2009 and 2008




Operating
activities




Cash
flows provided by operating activities during the three months ended June 30,
2009 decreased approximately $6.2 million from the comparable period in 2008,
primarily as a result of a net decrease in our net income of approximately $6.3
million.  A net negative change in cash flow between the two periods
from normal changes in working capital items of approximately $600,000 was
partially offset by a net positive change in cash flow between the two periods
related to noncash items of approximately $691,000.




Investing
activities




Cash
flows provided by investing activities increased by approximately $1.4 million
during the three months ended June 30, 2009 as compared to 2008.  The
increase was primarily related to receiving approximately $1.4 million (50% of
which went to offset the cost of our Plant while the other 50% has been accrued
as a payable to Fagen pursuant to the terms of the Design Build Contract) from a
sales tax refund related to our Plant construction during 2009 while we were
expending funds to build our coal unloading facility during 2008.  We
do not anticipate receiving any more funds from the sales tax refund during 2009
as the refund is now complete.




Financing
activities




Cash
flows provided by financing activities increased approximately $13.6 million
from the comparable period in 2008.  The increase is primarily related
to borrowing the remaining $1.1 million of capacity on our Long-Term Revolving
Note and forgoing our quarterly principal payment, due April 16, 2009, in accord
with the terms of the Sixth Amendment during the second quarter of 2009 while we
used excess cash to pay down $9 million on our Long-Term Revolving Note and made
our scheduled quarterly principal payment during the second quarter of
2008.  Also in accord with the terms of the Sixth Amendment, we did
not make our scheduled quarterly principal payment on July 16,
2009.  Partially offsetting the increase was an increase in restricted
cash set aside as collateral for our bonding requirements of
$750,000.




26




Six
Months Ended June 30, 2009 and 2008




Operating
activities




Cash
flows provided by operating activities during the six months ended June 30, 2009
decreased approximately $10.3 million from the comparable period in 2008,
primarily as a result of a net decrease in our net income of approximately $11.1
million along with a net negative change in noncash items of $1.1 million which
was largely offset by a net positive normal change in working capital items of
approximately $1.8 million.




Investing
activities




Cash
flows provided by investing activities increased by approximately $1.6 million
during the six months ended June 30, 2009 as compared to 2008.  The
increase was primarily related to receiving approximately $1.5 million (50% of
which went to offset the cost of our Plant while the other 50% has been accrued
as a payable to Fagen pursuant to the terms of the Design Build Contract) from a
sales tax refund related to our Plant construction during 2009 while we were
expending funds to build our coal unloading facility and make a down payment of
$105,000 on an investment during the six months ended June 30,
2008.  We do not anticipate receiving any more funds from the sales
tax refund during 2009 as the refund is now complete.




Financing
activities




Cash
flows provided by financing activities increased approximately $14.7 million
from the comparable period in 2008.  The increase is primarily related
to borrowing the remaining $3.6 million of capacity on our Long-Term Revolving
Note and forgoing our quarterly principal payment, due April 16, 2009, in accord
with the terms of the Sixth Amendment during the six months ended June 30, 2009
while we used excess cash to pay down $9 million on our Long-Term Revolving Note
and made both of our scheduled quarterly principal payments during the six
months ended June 30, 2008.  Partially offsetting the increase was an
increase in restricted cash set aside as collateral for our bonding requirements
of $750,000.




Capital
Expenditures




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




Capital
Resources




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





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




We have
been notified by FNBO that we were in violation of certain of the covenants in
our loan agreements at June 30, 2009.  These include the covenants
requiring a minimum working capital balance, minimum net worth and a minimum
fixed charge coverage ratio.  The Company has not been granted a
waiver of these violations by the Bank.  While the Bank has reserved
its rights to declare us in default of our loan agreements, as of August 14,
2009, the Company has not been declared in default of its loan agreements and is
still considered in good standing by the Bank.  As previously
mentioned, the Company has executed the Sixth Amendment which allowed it to
forgo two scheduled quarterly principal payments (April 16, 2009 and July 16,
2009).  The Sixth Amendment calls for the Company to make progress in
three areas.  We received notice from the Bank that we have made
sufficient progress to meet the terms of the Sixth Amendment.  For
further information please see the discussion in Note 2 to the Notes of our
unaudited condensed financial statements in this Quarterly Report.




27




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





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




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




As of
August 10, 2009, we had available capital (cash plus borrowing capacity) of
approximately $3.9 million.  Our available capital does not include
$4.9 million that has been aside in conjunction with amounts withheld from
Fagen, Inc. of $3.9 million as described in Note 10 to our Financial Statements
in this Quarterly Report along with $750,000 set aside as cash collateral
related to two letters of credit issued in relation to our grain warehouse and
distilled spirits bonds.  Taking into account the relief provided by
the waiver of our quarterly principal payments for April 2009 and July 2009
under the terms of the Sixth Amendment along with current market conditions we
anticipate that we will have available capital to operate our business through
the end of 2009 and into 2010.  As of July 16, 2009, our short term
line of credit was not renewed.  We had never advanced funds under the
line of credit and project that we would not need to borrow against it through
September 30, 2009 based on current market conditions.





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




We were
successful in having our members adopt an Amended and Restated Member Control
Agreement that eliminated restrictions on the level of membership approval
needed to issue new membership units in our Company.  New units can
now be issued at the discretion of our Board of Governors.  The
Company has begun the process of creating a registration statement for an
intrastate offering of units to be used in conjunction with the corn procurement
program which is also in the process of being developed.  There is no
guarantee we will be successful in any of these ventures.




We
borrowed the remaining approximately $1 million of capacity on our Long-Term
Revolving Note during April 2009.





Short-term
Debt Sources




As of
July 16, 2009, or $3.5 million line of credit was not renewed by the
Bank.  As mentioned above, we had never advanced funds on the line of
credit and do not anticipate that we would have needed to through September 30,
2009, based on current market conditions.  We are in the process of
trying to negotiate an extension of the line of credit for 90 days but there is
no guarantee we will be successful.  Interest is payable quarterly and
charged on all borrowings at a rate of 3.4% over the one-month LIBOR rate with a
minimum of 6%.  The rates charged totaled 6% and 5.87125% at June 30,
2009 and 2008, respectively.  We had no outstanding borrowings on the
line of credit as of June 30, 2009 and December 31, 2008.




Long-Term
Debt Sources




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




28




Contractual Obligations and Commercial
Commitments




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




Contractual
      Obligations
              
              Total
              
              
              Less
      than 1 Yr
              
              
              1-3
      Years
              
              
              3-5
      Years
              
              
              More
      than 5 YrsLong-term
      debt obligations *
              
              $
              61,133,089
              
              
              $
              7,265,894
              
              
              $
              53,825,985
              
              
              $
              41,210
              
              
              $
              ―Capital
      leases
              
              
              77,485
              
              
              
              61,701
              
              
              
              15,145
              
              
              
              639
              
              
              
              ―Operating
      lease obligations
              
              
              1,655,895
              
              
              
              489,660
              
              
              
              923,335
              
              
              
              242,900
              
              
              
              ―Corn
      Purchases **
              
              
              6,516,500
              
              
              
              6,516,500
              
              
              
              ―
              
              
              
              ―
              
              
              
              ―Coal
      purchases
              
              
              644,400
              
              
              
              644,400
              
              
              
              ―
              
              
              
              ―
              
              
              
              ―Water
      purchases
              
              
              2,988,000
              
              
              
              398,400
              
              
              
              796,800
              
              
              
              796,800
              
              
              
              996,000Total
              
              $
              73,015,369
              
              
              $
              15,376,555
              
              
              $
              55,561,265
              
              
              $
              1,081,549
              
              
              $
              996,000


* -
Long-term debt obligations shown in this table are based on the scheduled
payments contained in the Term Notes including the effects of the waiver of
principal and interest rate floor provided for in the Sixth
Amendment.  We used the rates fixed in the interest rate swap
agreements (see “Interest Rate
Swap Agreements” section above) for the Fixed Rate Note and December 2007
Fixed Rate Note, respectively which should account for possible net cash
settlements on the interest rate swaps.  These amounts do not take
into account any effect of possibly being declared in default of our
Construction Loan Agreement.




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




Grants




There has
been no change in the repayment status of our grant from the North Dakota State
Industrial Commission (totaling $275,000) during the second quarter of
2009.  We did not receive any funds during the first quarter of 2009
or 2008 from the Job Service North Dakota grant related to employee
training.




North
Dakota Ethanol Incentive Program




Under the
program, each fiscal quarter, eligible ethanol plants may receive a production
incentive based on the average North Dakota price per bushel of corn received by
farmers during the quarter, as established by the North Dakota agricultural
statistics service, and the average North Dakota rack price per gallon of
ethanol during the quarter, as compiled by AXXIS Petroleum.  The
amount is capped at $1.6 million per plant per year up to a lifetime maximum of
$10 million per plant.  We did not receive any funds from this program
during the six months ended June 30, 2009.  We did receive
approximately $650,000 during the six months ended June 30, 2008.  We
do anticipate receiving some funds during 2009 once the program again receives
funding but we cannot accurately estimate the amount.  The incentive
received is calculated by using the sum arrived at for the corn price average
and for the ethanol price average as calculated below:




Corn
Price




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




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




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




Ethanol
Price




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




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




29




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




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





Critical Accounting
Estimates




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




Off-Balance Sheet
Arrangements




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




ITEM 3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




We are exposed to the impact of market fluctuations associated with
interest rates and commodity prices as discussed below. We have no exposure to
foreign currency risk as all of our business is conducted in United States
dollars. We use derivative financial instruments as part of an overall strategy
to manage market risk. We use cash, futures and option contracts to hedge
changes to the commodity prices of corn and we use ethanol swaps to hedge
changes in the commodity price of ethanol.  We do not enter into these
derivativefinancial instruments for trading or
speculative purposes, nor do we designate these contracts as hedges for
accounting purposes pursuant to the requirements of SFAS 133, “Accounting for
Derivative Instruments and Hedging Activities.”




Interest
Rate Risk




We are
exposed to market risk from changes in interest rates. Exposure to interest rate
risk results primarily from holding a revolving promissory note and construction
term notes which bear variable interest rates. Approximately $17 million of our
outstanding long-term debt is not covered under an interest rate swap and is at
a variable rate as of June 30, 2009.  We anticipate that a
hypothetical 1% change in interest rates, from those in effect on June 30, 2009,
would change our interest expense by approximately $170,000 on an annual
basis.  In order to achieve a fixed interest rate on the construction
loan and reduce our risk to fluctuating interest rates, we entered into an
interest rate swap contract that effectively fixed the interest rate at 8.08% on
approximately $27.6 million of the outstanding principal of the
construction loan.  We entered into a second interest rate swap in
December 2007 and effectively fixed the interest rate at 7.695% on an additional
$10 million of our outstanding long-term debt.  The interest rate
swaps are not designated as either a cash flow or fair value
hedge.  Market value adjustments and net settlements are recorded in
interest expense.  We anticipate that a hypothetical 1% change in
interest rates, from those in effect on June 30, 2009, would change the fair
value of our interest rate swaps by approximately $800,000.




Commodity
Price Risk




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




As part
of executing the Sixth Amendment, our Bank has asked that we no longer engage in
using short positions to offset our long corn position.  In response
to this change in hedging strategy, we are exploring ways to minimize our long
corn position as much as possible and still efficiently operate our Plant and
ensure that we have a sufficient supply of corn to operate the
Plant.




30




As of
June 30, 2009 we had approximately 1.6 million bushels of corn under fixed price
contracts.  We had accrued a loss on firm purchase commitments of
approximately $695,000 related to these bushels as average fixed price of these
contracts was approximately $0.27 above market value.  We would expect
a $0.10 change in the price of corn to have an approximate $160,000 impact on
our net income.




While we
have previously used ethanol swap contracts to lock in a price for a small
portion of our ethanol production, we do not anticipate using these types of
contracts during 2009 but may use them, if we believe it will produce positive
results for the Plant and we receive the approval of our Bank to use these
contracts.  It is the position of RPMG (our ethanol marketing company)
that, under current market conditions, selling ethanol in the spot market will
yield the best price for our ethanol.  RPMG will, from time to time,
contract a portion of the gallons they market with fixed price
contracts.




The
immediate recognition of hedging gains and losses under fair value accounting
can cause net income to be volatile from quarter to quarter due to the timing of
the change in value of the derivative instruments relative to the cost and use
of the commodity being hedged. As of June 30, 2009 and December 31, 2008, we had
investments of $0 and $447,000 in corn derivative instruments,
respectively.  There are several variables that could affect the
extent to which our derivative instruments are impacted by price fluctuations in
the cost of corn or ethanol.  However, it is likely that commodity
cash prices will have the greatest impact on the derivatives instruments with
delivery dates nearest the current cash price.




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




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





ITEM 4. CONTROLS AND
PROCEDURES




Evaluation of
Disclosure Controls and Procedures





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





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





Changes in Internal
Controls





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





Inherent
Limitations on the Effectiveness of Controls





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




31





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





PART II — OTHER
INFORMATION




ITEM 1. LEGAL
PROCEEDINGS




None.




ITEM 1A. RISK
FACTORS




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




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




The
Company has withheld $3.9 million from its Plant design-builder, Fagen,
Inc. (“Fagen”), due to punch list items which are not complete as of August14,
2009 and problems with the coal combustor. The punch list is an item that must
be complete under the terms of the Design-Build Agreement in order for the
Company to sign off on Final Completion and authorize payment of the
$3.9 million.  In addition to a number of other punch list items,
the Design-Build Agreement specified that the coal combustor would operate on
lignite coal; however, the coal combustor did not run consistently on lignite
and the Company has suffered plant shut-downs as a result. The Company continues
to work with Fagen and its subcontractors on these issues; however, there is no
assurance that any potentially agreed upon solution would solve the problems for
$3.9 million or less, if at all. There is also no assurance that Fagen and
its subcontractors will agree on any solution or even agree that the problem is
their responsibility to correct. If Fagen disputes the withholding of the $3.9
million and demands payment, the Company may be forced to pay the
$3.9 million and there would be no assurance that the punch list items
would be completed or that the coal combustor would be able to use lignite
coal.




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




32




We have not been
granted a waiver of loan covenant violations that occurred as of March 31, 2009
or June 30, 2009 which gives the Bank the ability to exercise their rights under
the terms of our Construction Loan Agreement.  We have been
notified that we were in violation of certain of our loan covenants as of March
31, 2009 and June 30, 2009.  The Bank has not granted a waiver of
those covenant violations.  As of August 14, 2009, we have not been
declared in default of our loan agreements and the Bank considers us in good
standing.  Because of our covenant violations, however, the Bank could
call our notes due and payable at any time and could sell all the assets of the
Company to satisfy our outstanding loan obligations.




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




We are in the
process of implementing an intrastate offering of our Units in conjunction with
implementing a corn procurement program and there can be no guarantee that this
will be successful.We are in the process of preparing a
registration statement to be filed with the state of North Dakota relating to an
intrastate offering of additional Class A membership Units in conjunction with
the implementation of a corn procurement program available to members and
non-members of the Company who are North Dakota residents.  In general
terms, the program would allow us to procure corn at a discount today in
exchange for the opportunity, for those that participate in the program, to
receive a future incentive based on our financial performance.  There
is no assurance that the program will be successfully implemented, will be
successful once implemented, or that we will maintain our cash flow even with
the discounted corn under the program.




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




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




None.




ITEM 3. DEFAULTS UPON
SENIOR SECURITIES




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




33




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




Set forth
below is information concerning each matter submitted to a vote at the Annual
Meeting of Members of the Company on May 28, 2009:





Proposal
No. 1:  The members elected the following persons to serve on the
Board of Governors of the Company for a three year term or until his respective
successor is duly elected and qualified.





Governor’s
      Name
            
            Votes
      ForMike
      Appert
            
            24,002,055William
      Price
            
            22,999,185





Nominee
Duane Zent was not elected as a governor at the Annual Meeting.  Mr.
Zent received 12,703,220 votes in favor of his election.  A total of
422,000 votes were cast against the Board’s recommendations and 263,688
abstained.  The following persons’ terms of office continued at the
conclusion of the Annual Meeting:  Jody Hoff, Ronald Aberle, Tim
Meuchel, Frank Kirschenheiter and Sid Mauch.





Proposal
No. 2:  The members approved amending and restating the Company’s
Member Control Agreement in its entirety with the Amended and Restated Member
Control Agreement attached as Exhibit A to the Company’s definitive proxy
statement.





Votes
      For
            
            Votes
      Against
            
            Abstentions27,526,967
            
            2,504,306
            
            163,801





Proposal
No. 3: The members ratified the audit committee’s appointment of Boulay,
Heutmaker, Zibell & Co. PLLP as the Company’s independent public accounting
firm for the fiscal year ending December 31, 2009, with the following
votes:





Votes
      For
            
            Votes
      Against
            
            Abstentions28,250,117
            
            1,900,000
            
            44,957





During
the second quarter of 2009, no other matters were submitted to a vote of the
securities holders of the Company.




ITEM 5. OTHER
INFORMATION




None.





ITEM 6. EXHIBITS




See
Exhibit Index following the signature page of this report.




34


SIGNATURES




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


RED
      TRAIL ENERGY, LLCDate:
      August 14 2009
            
            By:
            
            /s/
      Gerald BachmeierGerald
      BachmeierChief
      Executive OfficerDate:
      August 14, 2009
            
            By:
            
            /s/
      Mark E. KlimpelMark
      E. KlimpelChief
      Financial Officer




35


EXHIBIT INDEX




RED
TRAIL ENERGY, LLC


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


4.2
            
            Amended
      and Restated Member Control Agreement of Red Trail Energy,
      LLC.  Filed as Exhibit 4.2 to our Current Report on Form 8-K on
      June 1, 2009 (000-52033) and incorporated by reference
    herein.10.1
            
            Sixth
      Amendment to the Construction Loan Agreement, effective date April 16,
      2009, by and between Red Trail Energy, LLC and First National Bank of
      Omaha.  Filed as Exhibit 10.1 to our Current Report on Form 8-K
      on June 2, 2009 (000-52033) and incorporated by reference
      herein.31.1*
            
            Certification
      by Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Securities
      Exchange Act of 1934).31.2*
            
            Certification
      by Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Securities
      Exchange Act of 1934).32.1*
            
            Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002.32.2*
            
            Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
      Section 906 of the Sarbanes-Oxley Act of
  2002.







*
            
            Filed
      herewith.




36