RED TRAIL ENERGY, LLC - FORM 10-Q

Attached files

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EX-32.1 - RED TRAIL ENERGY, LLC	v184750_ex32-1.htm
EX-31.1 - RED TRAIL ENERGY, LLC	v184750_ex31-1.htm
EX-32.2 - RED TRAIL ENERGY, LLC	v184750_ex32-2.htm
EX-31.2 - RED TRAIL ENERGY, LLC	v184750_ex31-2.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 000-52033

RED TRAIL ENERGY, LLC

(Exact name of registrant as specified in its charter)

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

P.O. Box 11

3682 Highway 8 South

Richardton, ND 58652

(Address of principal executive offices)

(701) 974-3308

(Registrant’s telephone number, including area code)

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

Yes þ No o

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

o Yes o No

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

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

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

o Yes þ No

As of May 13, 2010, the Company has outstanding 40,193,973 Class A Membership Units.

RED TRAIL ENERGY, LLC

FORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDED

MARCH 31, 2010

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION	1
Item 1. – CONDENSED FINANCIAL STATEMENTS	1
CONDENSED BALANCE SHEETS	1
CONDENSED STATEMENTS OF OPERATIONS	2
CONDENSED STATEMENTS OF CASH FLOWS	3
NOTES TO CONDENSED FINANCIAL STATEMENTS	4
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	15
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS	15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	25
ITEM 4T. CONTROLS AND PROCEDURES	26
PART II — OTHER INFORMATION	27
ITEM 1. LEGAL PROCEEDINGS	27
ITEM 1A. RISK FACTORS	27
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	27
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	28
ITEM 5. OTHER INFORMATION	28
ITEM 6. EXHIBITS	28
SIGNATURES	29
EXHIBIT INDEX	30

PART I — FINANCIAL INFORMATION

Item 1. – CONDENSED FINANCIAL STATEMENTS

RED TRAIL ENERGY, LLC

CONDENSED BALANCE SHEETS

	March 31, 2010
	(Unaudited)		December 31, 2009
ASSETS
Current Assets
Cash and equivalents	$	12,589,232	$	13,214,091
Restricted cash - collateral		750,000		750,000
Restricted cash - margin account		203,612		1,467,013
Accounts receivable		2,248,322		2,635,775
Derivative instruments, at fair value		276,635		129,063
Inventory		6,602,827		6,993,031
Prepaid expenses		206,865		195,639
Total current assets		22,877,493		25,384,612

Property, Plant and Equipment
Land		351,280		351,280
Plant and equipment		79,253,921		79,199,850
Land improvements		3,970,500		3,970,500
Buildings		5,312,995		5,312,995
Construction in progress		41,280		―
		88,929,976		88,834,625

Less accumulated depreciation		18,884,570		17,419,043
Net property, plant and equipment		70,045,406		71,415,582

Other Assets
Investment in RPMG		605,000		605,000
Patronage equity		309,990		192,207
Deposits		80,000		80,000
Total other Assets		994,990		877,207
Total Assets	$	93,917,889	$	97,677,401

LIABILITIES AND MEMBERS' EQUITY
Current Liabilities
Current maturities of long-term debt	$	12,600,000	$	6,500,000
Accounts payable		6,264,272		7,605,302
Accrued expenses		3,331,790		2,634,534
Derivative instruments, at fair value		―		806,490
Accrued loss on firm purchase commitments		102,000		―
Interest rate swaps, at fair value		2,322,867		2,360,686
Total current liabilities		24,620,929		19,907,012

Other Liabilities
Contracts payable		275,000		275,000

Long-Term Debt		32,162,105		43,620,025

Commitments and Contingencies

Members' Equity		36,859,855		33,875,364
Total Liabilities and Members' Equity	$	93,917,889	$	97,677,401

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

RED TRAIL ENERGY, LLC

CONDENSED STATEMENTS OF OPERATIONS

	Three Months Ended March 31, 2010 (Unaudited)		Three Months Ended March 31, 2009 (Unaudited)
Revenues
Ethanol, net of changes in fair value of derivative instruments	$	23,784,165	$	16,904,002
Distillers grains		5,102,726		3,991,611
Total Revenue		28,886,891		20,895,613

Cost of Goods Sold
Cost of goods sold, net of changes in fair value of derivative instruments		23,606,550		18,391,358
Loss on firm purchase commitments		102,000		274,000
Lower of cost or market adjustment for inventory on hand		20,000		767,000
Depreciation		1,450,442		1,470,219
Total Cost of Goods Sold		25,178,992		20,902,577

Gross Margin (Loss)		3,707,899		(6,964	)

General and Administrative		640,155		781,009

Operating Income (Loss)		3,067,744		(787,973	)

Interest Expense		1,088,919		1,305,222

Other Income, net		1,005,667		42,221

Net Income (Loss)	$	2,984,492	$	(2,050,974	)

Wtd Avg Units Outstanding - Basic		40,193,973		40,188,973

Net Income (Loss) Per Unit - Basic	$	0.07	$	(0.05	)

Wtd Avg Units Outstanding - Diluted		40,193,973		40,188,973

Net Income (Loss) Per Unit - Diluted	$	0.07	$	(0.05	)

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

RED TRAIL ENERGY, LLC

CONDENSED STATEMENTS OF CASH FLOWS

	Three months ended March 31, 2010 (Unaudited)			Three months ended March 31, 2009 (Unaudited)
Cash Flows from Operating Activities
Net income (loss)	$	2,984,492		$	(2,050,974	)
Adjustment to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation		1,465,526			1,484,564
Amortization and write-off of debt financing costs		―			567,385
Change in fair value of derivative instruments		(954,062	)		(266,214	)
Unrealized loss on firm purchase commitments		102,000			274,000
Change in fair value of interest rate swap		323,614			165,675
Equity-based compensation		―			5,000
Noncash patronage equity		(117,783	)		―
Changes in assets and liabilities
Restricted cash - margin account		1,263,401			399,281
Accrued loss on firm purchase commitments		―			(1,426,800	)
Accounts receivable		387,453			(114,806	)
Inventory		390,204			(1,567,962	)
Prepaid expenses		(11,226	)		4,329,948
Accounts payable		(1,341,030	)		256,635
Accrued expenses		697,256			(720,448	)
Cash settlements on interest rate swap		(361,433	)		(20,085	)
Net cash provided by operating activities		4,828,412			1,315,199
Cash Flows from Investing Activities
Investment in RPMG		―			(58,181	)
Refund of sales tax on fixed assets		―			55,260
Capital expenditures		(95,351	)		(1,582	)
Net cash used in investing activities		(95,351	)		(4,503	)
Cash Flows from Financing Activities
Debt repayments		(5,357,920	)		(1,249,007	)
Proceeds from long-term debt		―			2,500,000
Net cash provided by (used in) financing activities		(5,357,920	)		1,250,993

Net Increase (Decrease) in Cash and Equivalents		(624,859	)		2,561,689
Cash and Equivalents - Beginning of Period		13,214,091			4,433,839
Cash and Equivalents - End of Period	$	12,589,232		$	6,995,528

Supplemental Disclosure of Cash Flow Information
Interest paid	$	1,153,966		$	917,762

SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES

Write-off of debt issuance costs	$	―		$	517,823
Investment in RPMG included in accounts payable	$	―		$	58,181

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

RED TRAIL ENERGY, LLC

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIODS ENDED MARCH 31, 2010 AND DECEMBER 31, 2009

NOTES TO CONDENSED FINANCIAL STATEMENTS

The accompanying condensed unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as permitted by such rules and regulations. These financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the Company’s audited financial statements for the year ended December 31, 2009, contained in the Company’s Annual Report on Form 10-K.

In the opinion of management, the interim condensed financial statements reflect all adjustments considered necessary for fair presentation. The adjustments made to these statements consist only of normal recurring adjustments. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

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

Accounting Estimates

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

Reclassifications

The presentation of certain items in the financial statements for the three months ended March 31, 2009 have been changed to conform to the classifications used in 2010. These reclassifications had no effect on members’ equity, net income (loss) or operating cash flows as previously reported.

Restricted Cash

The Company is 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 March 31, 2010 and December 31, 2009, the total amount of restricted cash related to these bonds was $750,000. The Company also had cash restricted to meet its hedge account requirements. The total amount of cash restricted in its hedge account was approximately $204,000 and $1.5 million as of March 31, 2010 and December 31, 2009, respectively.

Net Income (Loss) Per Unit

Net income (loss) per unit is calculated on a basic and fully diluted basis using the weighted average units outstanding during the period. No diluted units were outstanding as of March 31, 2010. For the period ended March 31, 2009, 70,000 equivalent units outstanding were not included as they would be anti-dilutive.

RED TRAIL ENERGY, LLC

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIODS ENDED MARCH 31, 2010 AND DECEMBER 31, 2009

Fair Value of Financial Instruments

On January 1, 2008, the Company adopted guidance for accounting for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements on a recurring basis. On January 1, 2009, the Company adopted guidance for fair value measurement related to nonfinancial items that are recognized and disclosed at fair value in the financial statements on a nonrecurring basis. The guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

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

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

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

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

The fair value of the Company’s cash and equivalents, accounts receivable, accounts payable, derivative instruments and other working capital accounts approximate their carrying value due to their short-term nature. The Company evaluated the fair value of its long-term debt at March 31, 2010 and December 31, 2009 and the fair value approximated the carrying value (see Note 6 for additional information).

2. CONCENTRATIONS

Coal

Coal is an important input to our manufacturing process. We entered into a new two year agreement with Westmoreland Coal Sales Company (“Westmoreland”) to supply PRB coal through 2011. Whether the Plant runs long-term on lignite or PRB coal, there can be no assurance that the coal we need will always be delivered as we need it, that we will receive the proper size or quality of coal or that our coal combustor will always work properly with lignite or PRB coal. Any disruption could either force us to reduce our operations or shut down the Plant, both of which would reduce our revenues.

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

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

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

Sales

We are substantially dependent upon RPMG for the purchase, marketing and distribution of our ethanol. RPMG purchases 100% of the ethanol produced at our Plant, all of which is marketed and distributed to its customers. Therefore, we are highly dependent on RPMG for the successful marketing of our ethanol. In the event that our relationship with RPMG is interrupted or terminated for any reason, we believe that we could locate another entity to market the ethanol. However, any interruption or termination of this relationship could temporarily disrupt the sale and production of ethanol and adversely affect our business and operations and potentially result in a higher cost to the Company.

RED TRAIL ENERGY, LLC

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIODS ENDED MARCH 31, 2010 AND DECEMBER 31, 2009

We are substantially dependent on CHS for the purchase, marketing and distribution of our DDGS. CHS purchases 100% of the DDGS produced at the Plant (approximately 13% of our total revenue), all of which are marketed and distributed to its customers. Therefore, we are highly dependent on CHS for the successful marketing of our DDGS. In the event that our relationship with CHS is interrupted or terminated for any reason, we believe that another entity to market the DDGS could be located. However, any interruption or termination of this relationship could temporarily disrupt the sale and production of DDGS and adversely affect our business and 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.

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

As of March 31, 2010, the Company had entered into interest rate swap agreements along with corn and ethanol derivative instruments. The Company records its derivative financial instruments as either assets or liabilities at fair value in the statement of financial position. Derivatives qualify for treatment as hedges when there is a high correlation between the change in fair value of the derivative instrument and the related change in value of the underlying hedged item. Based upon the exposure being hedged, the Company may designate its hedging instruments as a fair value hedge, a cash flow hedge or a hedge against foreign currency exposure. The Company formally documents, designates, and assesses the effectiveness of transactions that receive hedge accounting initially and on an on-going basis. The Company does not currently have any derivative instruments that are designated as effective hedging instruments for accounting purposes.

Commodity Contracts

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

As of:	March 31, 2010					December 31, 2009
Contract Type	# of Contracts	Notional Amount (Qty)		Fair Value		# of Contracts	Notional Amount (Qty)		Fair Value
Corn futures	19	95,000	bushels	$	15,750	82	410,000	bushels	$	129,063
Ethanol swap contracts	52	748,800	gallons		260,885	530	7,632,000	gallons		(806,490	)
Total fair value				$	276,635				$	(677,427	)

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

None of the commodity contracts in place at March 31, 2010 and 2009 were designated as effective hedges for accounting purposes. As such, the change in fair value of the commodity contracts in place at March 31, 2010 and 2009 have been recorded in the results of operations and classified as stated above.

Interest Rate Contracts

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

RED TRAIL ENERGY, LLC

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIODS ENDED MARCH 31, 2010 AND DECEMBER 31, 2009

The Company had approximately $30.1 million and $30.8 million of notional amount outstanding in swap agreements, as of March 31, 2010 and December 31, 2009, respectively that exchange variable interest rates (one-month LIBOR and three-month LIBOR) for fixed interest rates over the terms of the agreements. At March 31, 2010 and December 31, 2009, the fair value of the interest rate swaps totaled approximately $2.3 million and $2.4 million, respectively, 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 $361,000 and $20,000 for the three months ended March 31, 2010 and 2009, respectively. See Note 5 for a description of these agreements.

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

Derivatives not designated as hedging instruments for accounting purposes

Balance Sheet - as of March 31, 2010	Asset		Liability
Derivative instruments, at fair value	$	276,635	$	―
Interest rate swaps, at fair value		―		2,322,867
Total derivatives not designated as hedging instruments for accounting purposes	$	276,635	$	2,322,867

Balance Sheet - as of December 31, 2009	Asset		Liability
Derivative instruments, at fair value	$	129,063	$	806,490
Interest rate swaps, at fair value		―		2,360,686
Total derivatives not designated as hedging instruments for accounting purposes	$	129,063	$	3,167,176

Statement of Operations (Income)/expense	Location of gain (loss) recognized in income	Amount of gain (loss) recognized in income during the three months ended March 31, 2010			Amount of gain (loss) recognized in income during the three months ended March 31, 2009
Corn derivative instruments	Cost of goods sold	$	140,832		$	487,932
Ethanol derivative instruments	Revenues		1,487,829			―
Interest rate swaps	Interest expense		(323,614	)		(165,675	)
Total		$	1,305,047		$	322,257

4. INVENTORY

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

As of	March 31, 2010		December 31, 2009
Raw materials, including corn, chemicals and supplies	$	5,522,134	$	4,921,532
Work in process		603,042		642,701
Finished goods, including ethanol and distillers grains		477,651		1,428,798
Total inventory	$	6,602,827	$	6,993,031

Lower of cost or market adjustments for the three months ended March 31, 2010 and 2009 were as follows:

For the three months ended March 31,	2010		2009
Loss on firm purchase commitments	$	102,000	$	274,000
Lower of cost or market adjustment for inventory on hand		20,000		767,000
Total lower of cost or market adjustments	$	122,000	$	1,041,000

RED TRAIL ENERGY, LLC

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIODS ENDED MARCH 31, 2010 AND DECEMBER 31, 2009

The Company has entered into forward corn purchase contracts under which it is required to take delivery at the contract price. At the time the contracts were created, the price of the contract price approximated market price. Subsequent changes in market conditions could cause the contract prices to become higher or lower than market prices. As of March 31, 2010, the average price of corn purchased under fixed price contracts, that had not yet been delivered, was slightly above market price. Based on this information, the Company accrued an estimated loss of firm purchase commitments of $102,000 for the three months ended March 31, 2010. The Company also recorded a loss on firm purchase commitments of approximately $274,000 for the three month period ended March 31, 2009. The loss is recorded in “Loss on firm purchase commitments” on the statements of operations. The amount of the loss was determined by applying a methodology similar to that used in the impairment valuation with respect to inventory. Given the uncertainty of future ethanol prices, this loss may or may not be recovered, and further losses on the outstanding purchase commitments could be recorded in future periods.

The Company recorded inventory valuation impairments of $20,000 and $767,000 for the three months ended March 31, 2010 and 2009, respectively. The impairments were attributable primarily to decreases in market prices of corn and ethanol. The inventory valuation impairment was recorded in “Lower of cost or market adjustment for inventory on hand” on the statement of operations.

5. BANK FINANCING

Long-term debt consists of the following:

As of	March 31, 2010		December 31, 2009
Notes payable under loan agreement to bank, see details below	$	39,198,555	$	44,541,350
Subordinated notes payable, see details below		5,525,000		5,525,000
Capital lease obligations (Note 7)		38,550		53,675
Total Long-Term Debt		44,762,105		50,120,025
Less amounts due within one year		12,600,000		6,500,000
Total Long-Term Debt Less Amounts Due Within One Year	$	32,162,105	$	43,620,025

Scheduled maturities for the twelve months ended March 31
2011 +			$	12,600,000
2012				5,844,533
2013				26,301,417
2014				15,611
2015				544
Thereafter				―
Total			$	44,762,105

+ - Scheduled current maturities for the twelve months ended March 31, 2010 include the full outstanding balance of our subordinated debt which has a maturity date of March 2011. However, the subordination agreement requires the bank to provide us written consent to make any principal payments to the subordinated debt holders however we have not received such consent as of March 31, 2010.

As of March 31, 2010, the Company was in compliance with all of its debt covenants.

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

RED TRAIL ENERGY, LLC

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIODS ENDED MARCH 31, 2010 AND DECEMBER 31, 2009

•

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.

Credit Agreement

In December 2005, the Company entered into a credit agreement with First National Bank of Omaha 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.

The Company entered into the seventh amendment to its loan agreements (“Seventh Amendment”) in March of 2010 (effective as of December 31, 2009). The Seventh Amendment changed certain definitions and covenant ratios within the financial covenants that allowed the Company to meet those covenants as of December 31, 2009 as well as waived all prior covenant violations. The Seventh Amendment also calls for an additional principal payment that approximates an increase in our interest rate spread to 500 basis points over certain LIBOR rates.

Interest expense as shown on the statement of operations is composed of the following:

Interest Expense	For the three months ended March 31, 2010			For the three months ended March 31, 2009
Interest expense on long-term debt	$	765,305		$	572,163
Amortization/write-off of deferred financing costs		―			567,385
Change in fair value of interest rate swaps		(37,819	)		145,589
Net settlements on interest rate swaps		361,433			20,085
Total interest expense	$	1,088,919		$	1,305,222

Construction Loan

The Company had four long-term notes (collectively the “Term Notes” or each a “Term Note”) in place as of March 31, 2010. 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.

RED TRAIL ENERGY, LLC

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIODS ENDED MARCH 31, 2010 AND DECEMBER 31, 2009

Term Notes - Construction Loan

	Outstanding Balance											Estimated
	(Millions)				Interest Rate						Range of Estimated	Final
	March 31,		December		March 31,			December			Quarterly Principal	Payment
Term Note	2010		31, 2009		2010			31, 2009			Payment Amounts	(millions)		Notes
Fixed Rate Note	$	23.00	$	23.60		6.00	%		6.00	%	$560,000 - $630,000	$	18.30	1, 2, 4
Variable Rate Note		1.60		2.10		6.00	%		6.00	%	$1,600,000		1.60	1, 2, 3, 5
Long-Term Revolving Note		5.88		10.00		6.00	%		6.00	%	$550,000 - $610,000		1.20	1, 2, 6, 7, 8
2007 Fixed Rate Note		8.55		8.80		6.00	%		6.00	%	$200,000 - $235,000		6.80	1, 2, 5

Notes

1 - The scheduled maturity date is April 2012

2 - Range of estimated quarterly principal payments is based on principal balances and interest rates as of March 31, 2010

3 -

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

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

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

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

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

8 - Funds withheld from the plant's design builder (approx $4.1 million) which were previously set aside in a money market account were applied to the Long-Term Revolving Note in March 2010 pursuant to the terms of the 7th Amendment to the Company's Loan Agreement. Accordingly, the payment amounts above take into account the application of those funds which may ultimately be paid to the design builder depending upon the terms of any resolution of the dispute.

Interest Rate Swap Agreements

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

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

Letters of Credit

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

RED TRAIL ENERGY, LLC

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIODS ENDED MARCH 31, 2010 AND DECEMBER 31, 2009

6. FAIR VALUE MEASUREMENTS

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

					Fair Value Measurement Using
	Carrying Amount as of March 31, 2010		Fair Value as of March 31, 2010		Level 1		Level 2		Level 3
Assets
Money market funds	$	901,344	$	901,344	$	901,344	$	―	$	―
Derivative instruments		276,635		276,635		276,635		―		―
Total	$	1,177,979	$	1,177,979	$	1,177,979	$	―	$	―
Liabilities
Interest rate swaps	$	2,322,867	$	2,322,867	$	―	$	2,322,867	$	―
Total	$	2,322,867	$	2,322,867	$	―	$	2,322,867	$	―

					Fair Value Measurement Using
	Carrying Amount as of December 31, 2009		Fair Value as of December 31, 2009		Level 1		Level 2		Level 3
Assets
Money market funds	$	5,010,325	$	5,010,325	$	5,010,325	$	―	$	―
Derivative instruments		129,063		129,063		129,063		―		―
Total	$	5,139,388	$	5,139,388	$	5,139,388	$	―	$	―
Liabilities
Interest rate swaps	$	2,360,686	$	2,360,686	$	―	$	2,360,686	$	―
Derivative instruments		806,490		806,490		806,490		―		―
Total	$	3,167,176	$	3,167,176	$	806,490	$	2,360,686	$	―

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

Financial Instruments Not Measured at Fair Value

The estimated fair value of the Company’s long-term debt, including the short-term portion, at March 31, 2010 approximated the carrying value of $44.6 million. The Company had negotiated an amendment to its loan agreements during 2009 that set an interest rate floor of 6% which was the interest rate in effect at March 31, 2010 and was thought to approximate the market interest rate for this debt. The estimated fair value of the Company’s long-term debt, including the short-term portion, at December 31, 2009 approximated its carrying value of $50 million. Fair value was estimated using estimated market interest rates as of March 31, 2010 and December 31, 2009. The fair values and carrying values consider the terms of the related debt and exclude the impacts of debt discounts and derivative/hedging activity.

RED TRAIL ENERGY, LLC

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIODS ENDED MARCH 31, 2010 AND DECEMBER 31, 2009

7. LEASES

The Company leases equipment under operating and capital leases through 2015. The Company is generally responsible for maintenance, taxes, and utilities for leased equipment. Equipment under operating lease includes a locomotive and rail cars. Rent expense for operating leases was approximately $130,000 and $102,000 for the three months ended March 31, 2010 and 2009, respectively. Equipment under capital leases consists of office equipment and plant equipment.

Equipment under capital leases is as follows at:

As of	March 31, 2010		December 31, 2009
Equipment	$	219,476	$	219,476
Accumulated amortization		69,059		63,248
Net equipment under capital lease	$	150,417	$	156,228

At March 31, 2010, the Company had the following minimum commitments, which at inception had non-cancelable terms of more than one year. Amounts shown below are for the 12 months period ending March 31:

	Operating Leases		Capital Leases
2011	$	505,260	$	30,731
2012		483,190		3,354
2013		378,200		3,354
2014		31,200		3,354
2015		31,200		560
Thereafter		15,600		―
Total minimum lease commitments	$	1,444,650		41,353
Less amount representing interest				2,803
Present value of minimum lease commitments included in the preceding current liabilities			$	38,550

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 Units outstanding as of March 31, 2010 and December 31, 2009, respectively.

On April 8, 2010, the board of governors of Red Trail Energy, LLC announced its intent to engage in a reclassification and reorganization of the Company’s membership units. The proposed transaction will provide for the reclassification of the Company’s membership units into three separate and distinct classes.

If the proposed reclassification is approved by the Company’s members, we expect that each member of record holding 50,000 or more units will receive one Class A unit for each common equity unit held by such unit holder prior to the reclassification; each member of record holding 10,001 to 49,999 units will receive one Class B unit for each common equity unit held by such unit holder immediately prior to the reclassification; and each member of record holding 10,000 or fewer units will receive one Class C unit for each common equity unit held by such unit holder immediately prior to the reclassification.

If the Company’s members approve the proposed amendment to the Company’s operating agreement and member control agreement and the reclassification is implemented, the Company anticipates having fewer than 300 unit holders of record of its common equity units and fewer than 500 unit holders of record of each of the additional classes, which would enable the Company to voluntarily terminate the registration of its units under the Securities and Exchange Act of 1934.

We expect that the classes of units will be distinguished from one another based on voting rights. If the Company’s members approve the proposed amendment to the Company’s operating agreement and member control agreement and the reclassification is implemented, we expect that Class A unit holders would be entitled to vote on all matters for which unit holder approval is required under the Company’s operating agreement, member control agreement or state law; Class B unit holders would be entitled to vote on the election of the Company’s governors and the voluntary dissolution of the Company; and Class C unit holders would be entitled to vote only on the voluntary dissolution of the Company.

RED TRAIL ENERGY, LLC

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIODS ENDED MARCH 31, 2010 AND DECEMBER 31, 2009

The Board intends to have members vote on this proposed transaction at its Annual Meeting. The date of this meeting has yet to be determined but is expected to be held later in 2010 (August – October). This proposed reclassification is subject to the affirmative vote of 2/3 of the Units outstanding. Members may vote their units in person by attending the annual meeting, or by mailing their completed proxy if they are unable or do not wish to attend. The Company is in the process of preparing a preliminary proxy statement regarding the proposed reclassification described above for SEC review and will file a definitive proxy statement upon completion of SEC review. A definitive proxy statement containing detailed information about the proposed reclassification will be sent to the members prior to the special meeting of members.

9. 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 is currently being used to pay down the Company’s Long-Term Revolving Note. The funds may be released upon resolution of this issue pending bank approval.

Firm Purchase Commitments for Corn

To ensure an adequate supply of corn to operate the Plant, the Company enters into contracts to purchase corn from local farmers and elevators. At March 31, 2010 and 2009, the Company had various fixed price and basis contracts for the purchase of approximately 927,000 and 1.9 million bushels of corn, respectively. Using the stated contract price for the fixed price contracts and using market prices as of the respective date for the basis contracts, the Company had commitments of approximately $3.3 million and $7.9 million, respectively, related to the bushels under contract.

RED TRAIL ENERGY, LLC

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIODS ENDED MARCH 31, 2010 AND DECEMBER 31, 2009

10. RELATED-PARTY TRANSACTIONS

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

	March 31, 2010		December 31, 2009
Balance Sheet
Accounts receivable	$	1,611,781	$	2,155,238
Accounts payable		1,386,341		1,164,218
Notes payable		1,525,000		1,525,000

	For the three months ended March 31, 2010		For the three months ended March 31, 2009
Statement of Operations
Revenues	$	22,964,373	$	17,484,495
Cost of goods sold		864,837		697,310
General and administrative		49,898		106,715

Inventory Purchases	$	1,325,545	$	1,513,137

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

We prepared the following discussion and analysis to help you better understand our financial condition, changes in our financial condition, and results of operations for the three months ended March 31, 2010, compared to the same period of the prior fiscal year. This discussion should be read in conjunction with our interim condensed financial statements and notes included in Item 1 of Part 1 of this Quarterly Report, and the audited condensed financial statements and notes thereto contained in Item 8 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

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

Forward-looking statements involve risks and uncertainties, which could cause actual results or outcomes to differ materially from those expressed. Forward-looking statements in this Quarterly Report include, but are not limited to, our expectations regarding future revenues and expenses, the effect of state and federal low carbon fuel or ethanol blending regulations on our operations and revenues, Plant downtime, capital expenditures, our compliance with loan covenants, reinstatement of our line of credit, interest costs, interest income, receipt of grant income, receipt of state incentive plan payments, linkage of ethanol and corn prices in the future, ethanol and distillers grain prices, corn costs, increased yields from production, the implementation of our corn procurement program, the possible installation of corn oil extraction equipment, hedging strategies, corn usage and ethanol production, general and administrative costs, chemical and denaturant costs, expected savings from our coal unloading facility, our profit projections for the rest of 2010, and our ability to fund our operations and capital expenditures from our existing cash flows. The Company's expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including without limitation, management's examination of historical operating trends, data contained in the Company's records and other data available from third parties. Nonetheless, the Company's expectations, beliefs or projections may not be achieved or accomplished. Forward-looking statements are subject to known and unknown risks and uncertainties, including those risks described in “Item 1A - Risk Factors” of our Annual Report on Form 10-K as updated in Part II, Item 1A of this Quarterly Report.

Any forward-looking statement contained in this document speaks only as of the date on which the statement is made, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances that occur after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for management to predict all of the factors, nor can it assess the effect of each factor on the Company's business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. All forward-looking statements, whether written or oral and whether made by or on behalf of the Company, are expressly qualified by the risk factors and cautionary statements in this Quarterly Report, including statements contained within “Part II, Item 1A – Risk Factors,” and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, and include:

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

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

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

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

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

Our ability to continue to meet our loan covenants;

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

Results of our hedging transactions and other risk management strategies;

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

Changes in our business strategy, capital improvements or development plans;

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;

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

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

federal and state 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 that apply to our plant operations and their enforcement; or

reduction or elimination of tariffs on foreign ethanol.

The development of infrastructure related to the sale and distribution of ethanol 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 higher blends of ethanol fuel;

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;

Ongoing disputes with our management consultant and design-build contractor;

Our liability resulting from litigation;

Our ability to retain key employees and maintain labor relations;

Changes and advances in ethanol production technology; and

Competition from alternative fuels and alternative fuel additives.

Summary

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

(the “Plant”).

Results of Operations

The following table shows the results of our operations and the percentages of revenues, cost of goods sold, general and administrative expenses and other items to total sales and revenues in our statements of operations for the three months ended March 31, 2010 and 2009, respectively.

	Three months ended March 31, 2010 (Unaudited)					Three months ended March 31, 2009 (Unaudited)
	Amount		Percent			Amount			Percent
Revenues
Ethanol, net of changes in fair value of derivative instruments	$	23,784,165		82.34	%	$	16,904,002			80.90	%
Distillers grains		5,102,726		17.66	%		3,991,611			19.10	%
Total Revenue		28,886,891		100.00	%		20,895,613			100.00	%
Cost of Goods Sold
Cost of goods sold, net of changes in fair value of derivative instruments		23,606,550		81.72	%		18,391,358			88.02	%
Loss on firm purchase commitments		102,000		0.35	%		274,000			1.31	%
Lower of cost or market adjustment for inventory on hand		20,000		0.07	%		767,000			3.67	%
Depreciation		1,450,442		5.02	%		1,470,219			7.04	%
Total Cost of Goods Sold		25,178,992		87.16	%		20,902,577			100.03	%
Gross Margin (Deficit)		3,707,899		12.84	%		(6,964	)		-0.03	%
General and Administrative		640,155		2.22	%		781,009			3.74	%
Operating Income (Loss)		3,067,744		10.62	%		(787,973	)		-3.77	%
Interest Expense		1,088,919		3.77	%		1,305,222			6.25	%
Other Income, net		1,005,667		3.48	%		42,221			0.20	%
Net Income (Loss)	$	2,984,492		10.33	%	$	(2,050,974	)		-9.82	%

Additional Data	Three Months ended March 31, 2010		Three Months ended March 31, 2009
Ethanol sold (thousands of gallons)		14,249		11,792
Dried distillers grains sold (tons)		34,516		15,453
Modified distillers grains sold (tons)		20,215		34,600
Ethanol avg price/gallon (incl hedging activity)	$	1.67	$	1.43
Dried distillers grains avg price/ton	$	108.78	$	138.28
Modified distillers grains avg price/ton	$	57.52	$	51.20
Corn costs per bushel (incl hedging activity)	$	3.54	$	3.98

Results of Operations for the Three Months Ended March 31, 2010 as Compared to the Three Months Ended March 31, 2009

Summary

Our main revenue sources (ethanol and distillers grains) and our main cost component (corn) are commodities that are subject to a high degree of price volatility but also have at times, historically, maintained a high degree of correlation. Because of this volatility, we may experience large variances in our revenue and cost of goods sold from period to period and year to year. While we do monitor increases and decreases in the price of ethanol and corn and we also monitor our other costs of goods sold very closely, we tend to focus our attention on the spread between ethanol and corn prices as that has the biggest impact on our profitability. Margins decreased during the first quarter of 2010, as compared to December 31, 2009 as ethanol prices decreased in relation to corn prices. The main reason for the decline in ethanol prices and margins appears to be a readily available supply of ethanol as many plants that had been slowed down or shut down early in 2009 came back on line or increased production when margins improved during the last six months of 2009.

Despite the decline in margins from December 2009, our operations were profitable during the first quarter of 2010 with a net income of approximately $3.0 million compared to a net loss of approximately $2.1 million during the first quarter of 2009. Operationally we had a very strong quarter, producing approximately 13.8 million gallons of ethanol. During the first quarter of 2010, our earnings came from three main areas – operations, hedging activity and an insurance settlement. Earnings from operations were approximately $800,000 as margins were still positive in January and declined in February and March. We realized a gain from our hedging activities of approximately $1.2 million (including a loss on firm purchase commitments of $102,000) and we also recognized income of approximately $983,000 from a business interruption insurance claim related to downtime our plant experienced during October 2009.

On April 8, 2010, the Company announced its intent to engage in a reclassification and reorganization of the Company’s membership units. The proposed transaction will provide for the reclassification of the Company’s membership units into three separate and distinct classes.

If the Company’s members approve the proposed amendments to the Company’s operating agreement and member control agreement and the reclassification is implemented, the Company anticipates having fewer than 300 unit holders of record of its common equity units and fewer than 500 unit holders of record of each of the additional classes, which would enable the Company to voluntarily terminate the registration of its units under the Securities and Exchange Act of 1934.

Revenues

Three Months Ended March 31, 2010 and 2009

Revenues increased approximately $8 million during the quarter ended March 31, 2010 as compared to the quarter ended March 31, 2009. Ethanol revenue increased approximately $6.9 million and distillers grains revenue increased approximately $1.1 million. The increase was due, in part, to higher prices received for ethanol and higher volumes sold of both ethanol and distillers grains compared to the first quarter of 2009.

Ethanol revenue

We continued to operate the Plant at normal production rates (approximately 110% of name plate capacity) during the first quarter of 2010. We sold approximately 2.5 million more gallons of ethanol during the first quarter of 2010 compared to the first quarter of 2009 as we operated the Plant at a slower rate during the first quarter of 2009 due to poor margin conditions. The price we received during the first quarter of 2010, including the effects of our hedging activity, was an average of $0.24 per gallon higher than the price received during the first quarter of 2009 ($1.67 per gallon vs. $1.43 per gallon). Gains and losses related to our ethanol hedging activities are recorded in revenue. We recorded gains of approximately $1.5 million and $0 for the three months ended March 31, 2010 and 2009, respectively. Ethanol is a commodity that has maintained a fairly high correlation to corn futures prices. While corn futures prices trended lower during the first quarter of 2010, ethanol futures prices decreased even further (approximately $0.40 per gallon) as the supply of ethanol in the market place exceeded demand.

Distillers grains revenue

Our first quarter 2010 distillers grain sales volumes were roughly split 70-30 between DDGS and DMWG compared to an approximate 40-60 split during the first quarter of 2009. The change in product mix came as we changed the pricing on our DMWG product to more closely match that of DDGS. On a dry matter basis (converting all distillers grains produced to a DDGS equivalent) our overall production of distillers grains increased approximately 25% which is line with the increase in our ethanol production. All of our DMWG product is transported by truck but our DDGS product is transported by both truck and rail. As other ethanol plants located in North Dakota that had been idled for various reasons, resumed production we saw a shift in our shipments of DDGS from truck to rail.

The average price we received for our DDGS product during the first quarter of 2010 declined approximately 22% compared to the first quarter of 2009 ($109 per ton vs. $138 per ton) but our DDGS revenue increased by approximately 70% as we sold more than twice the volume of this product. DDGS prices generally follow the price of corn which was somewhat lower in the first quarter of 2010 compared to 2009. The average price we receive for DDGS was also impacted by the shift from truck transportation to rail transportation noted above. We typically receive a premium of $5 - $10 per ton for product shipped by truck vs. rail.

The average price we received for our DMWG product in 2010 increased approximately 12% compared to the first quarter of 2009 ($58 per ton vs. $51) but our revenue decreased approximately 35%. The decrease in revenue is primarily related to lower production due to the change in product mix noted above. We produced and sold approximately 14,400 fewer tons of DMWG during the first quarter of 2010 compared to 2009. Prices for DMWG also generally follow the price of corn – the increase in our average price compared to last year is primarily due to the pricing change noted above.

Revenues – Prospective Information

Ethanol revenue – because ethanol is a market driven commodity, ethanol prices are very hard to predict. During the first quarter of 2010, ethanol prices declined in relation to corn due to an oversupply of ethanol in the market place. We anticipate that this oversupply situation will be somewhat mitigated, and ethanol prices will improve relative to corn prices, as we move into the summer driving season and demand increases for gasoline. Blending economics are also still very positive so we anticipate the demand from discretionary blending to continue. The industry is also anticipating the United States Environmental Protection Agency (“EPA”) to approve a higher allowable blend of ethanol (up to 15%) later this summer which could also help bolster demand. At this time we are uncertain as to the extent of infrastructure changes that may be required to dispense gasoline blended with 15% ethanol, if any. Outside of these factors, we anticipate the price of ethanol to generally 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 marketplace regarding the impact of negative public perception of the ethanol industry, the possible repeal and/or reduction of federal ethanol supports and the possible enactment, at the state or federal level, of low carbon fuel standards that may negatively impact ethanol. We could face additional negative impacts from low carbon fuel standards since our Plant uses coal as its main fuel source. Based on the low carbon fuel standard regulation proposed and approved by the California Air Resources Board, we believe that ethanol produced at our Plant would not be allowed to be sold in that state without a reduction in our Plant’s carbon footprint. 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. Please see “Item 1A – Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009 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 generally expect the average price we receive for our DDGS product to decrease during the second and third quarters of each year (the summer months) compared to the first and fourth quarters (fall and winter months) as cattle move into pastures and the demand for this product decreases. The price we receive for our DMWG product is more closely indexed to the price of corn due to the nature of how it is marketed so we expect this price to fluctuate in conjunction with corn prices.

Cost of Sales

The price we paid for our main input, corn, was lower during the first quarter of 2010 compared to the first quarter of 2009, which, along with the higher ethanol prices noted above, led to an improvement in the margin between our revenue and corn cost of approximately $0.31 per gallon. Our overall cost of goods sold increased by approximately $4.3 million during the first quarter of 2010 compared to the first quarter of 2009. The increase was primarily due to the increase in production noted above. The per unit cost of many of the key components of our costs of goods sold (other than corn) were mostly unchanged compared to last year although we did experience an increase in our denaturant costs. Our gross profit margin increased by approximately $3.7 million primarily due to improvement in the spread between our ethanol and corn prices.

Three Months Ended March 31, 2010 and 2009

Corn costs - our corn costs per bushel were lower in the first quarter of 2010 compared to the first quarter of 2009 as market prices for corn were lower and we processed corn that was delivered in much closer proximity to when it was contracted (in essence we are not contracting for corn as far out into the future as we had in the past). We also recognized a larger hedging gain during the first quarter of 2010 as compared to the first quarter of 2009 ($488,000 vs. $141,000). During the first quarter of 2009, we processed through some corn that had been contracted for during mid-2008 when corn prices were significantly higher. Our average cost per bushel, net of hedging activities, was approximately $3.54 and $3.98 for the three months ended March 31, 2010 and 2009, respectively.

Loss on firm purchase commitments - the corn that we had under contract at March 31, 2010, while very near market prices, was approximately $0.11 per bushel higher than market, on average. This resulted in the accrual of an estimated loss on firm purchase commitments of $102,000 as of March 31, 2010. This compares to the accrual of an estimated loss of $274,000 ($.20 per bushel) as of March 31, 2009.

Lower of cost or market adjustments related to inventory on hand - we recorded lower of cost or market adjustments related to inventory on hand of $20,000 and $767,000 for the three months ended March 31, 2010 and 2009, respectively.

Denaturant costs – we used approximately 50,000 more gallons of denaturant during the first quarter of 2010 compared to the first quarter of 2009 due to our increased production. We also experienced a price increase of approximately $0.74 per gallon during the same time frame ($2.07 per gallon vs. $1.33 per gallon). The price increase is primarily related to market prices for gasoline during 2010.

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. 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.

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, 2011.

Chemical and denaturant costs

We do not anticipate any significant price increases for chemicals or denaturant during the second quarter of 2010 but anticipate that we may see some price increases in commodity prices such as oil, gasoline and natural gas which could have a negative impact on our chemical costs.

General and Administrative

Three Months Ended March 31, 2010 and 2009

General and administrative costs for the three months ended March 31, 2010 were approximately $141,000 lower than the comparable period in 2009. The decrease is primarily related to lower bank fees as we incurred $150,000 in fees related to the Sixth Amendment to our loan agreement during the first quarter of 2009.

General and Administrative - Prospective

For the rest of 2010, we anticipate that our general and administrative costs may be slightly higher than the comparable prior year period as we expect to incur additional legal and accounting costs associated with mediation proceedings and our deregistration process.

Interest Expense

Our interest expense is made up of the following components:

Interest Expense	For the three months ended March 31, 2010			For the three months ended March 31, 2009
Interest expense on long-term debt	$	765,305		$	572,161
Amortization/write-off of deferred financing costs		―			567,386
Change in fair value of interest rate swaps		(37,819	)		145,590
Net settlements on interest rate swaps		361,433			20,085
Total interest expense	$	1,088,919		$	1,305,222

Three Months Ended March 31, 2010 and 2009

Interest expense on long-term debt - approximately $193,000 higher primarily due to higher interest rates. Our weighted average interest rate for the three months ended March 31, 2010 was approximately 1.25% higher than the comparable period in 2009 while our debt balance was relatively unchanged between the periods. The Sixth Amendment to our loan agreements implemented a minimum interest rate of 6% which is the main reason for the higher interest rates.

Amortization/write-off of deferred financing costs – Due to uncertainties with our loan agreements during the first quarter of 2009, we wrote off the remaining balance of our deferred financing costs which resulted in a charge of approximately $517,000.

Net settlements on interest rate swaps – the replacement rates on our interest rate swaps were significantly lower during the first quarter of 2010 than the comparable period in 2009 causing us to have to make up a larger difference in rates through our net settlements.

Interest Expense - Prospective

We do not feel we can accurately predict future interest rates although we expect that, at some point, they will increase from the current historically low levels. We currently have not received any indication that rates will increase in the near future. At the end of March 2010, funds that had been set aside in a money market account (approximately $4.1 million) related to a dispute with our design builder were applied to our Long-Term Revolving Note as a way to reduce our interest cost. The funds will still be made available pending resolution of the dispute. During April 2010, we paid down the remaining balance (approximately $5.9 million) of our Long-Term Revolver as a better way to temporarily use our excess cash. Depending on how long we are able to maintain the pay down of this debt we would anticipate our interest costs to be lower as a result of our lower debt balance, assuming interest rates remain at their current levels.

We anticipate that an increase in the interest rate used to calculate the value of our interest rate swaps to have a positive impact on our net income while a decrease in those rates would have a negative impact on our net income. We also anticipate that the passage of time will decrease the termination value of our interest rate swap.

Other Income (Expense), Net

We recognized other income of approximately $1 million and $42,000 during the three months ended March 31, 2010 and 2009, respectively. During 2010, we received approximately $983,000 from a business interruption insurance claim related to an unplanned outage at our Plant during October 2009. Our other income for the first quarter of 2009 was made up almost entirely of interest income.

We do not anticipate receiving any significant interest income during the rest of 2010. It is possible that we may receive funds from the North Dakota Ethanol Incentive program during the balance of 2010 but we cannot accurately predict the amount as we don’t know the amount of funds that will be available to distribute nor whether the formula used will allow for a payment.

Liquidity and Capital Resources

Statement of Cash Flows	For the three months ended March 31, 2010			For the three months ended March 31, 2009
Cash flows provided by operating activities	$	4,828,413		$	1,315,199
Cash flows used in investing activities		(95,351	)		(4,503	)
Cash flows provided by (used in) financing activities		(5,357,921	)		1,250,993

Cash Flows

During the three months ended March 31, 2010, the increase in net income before depreciation and amortization as compared to March 31, 2009 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 Months Ended March 31, 2010 as Compared to the Three Months Ended March 31, 2009” and also are affected by changes in working capital.

Three Months Ended March 31, 2010 and 2009

Operating activities

Cash flows provided by operating activities increased by approximately $3.5 million during the three months ended March 31, 2010 from the comparable period in 2009. A net positive change in net income of approximately $5.0 million was offset by a net decrease in non-cash items (primarily related to changes in write-downs of debt financing costs and changes in fair value of derivative instruments) of approximately $1.4 million and a net negative change in working capital items between the periods of approximately $100,000 related to normal working capital changes.

Investing activities

We had minimal investing activities for the periods ended March 31, 2010 and 2009, respectively.

Financing activities

Cash flows used in financing activities increased by approximately $6.6 million during the three months ended March 31, 2010 from the comparable period in 2009. The Company made principal payments of approximately $5.4 million during the first quarter of 2010. These payments consisted of its regularly scheduled note payment of $1.3 million and the application of approximately $4.1 million to the Long-Term Revolving Note that had been set aside related to a dispute with its design builder. This activity compares to a net borrowing of approximately $1.3 million during the first quarter of 2009 as the Company borrowed $2.5 million on its Long-Term Revolving Note which was offset by its regularly scheduled not payment of approximately $1.2 million.

Capital Expenditures

The Company currently has two capital projects in progress that it anticipates will cost a total of approximately $325,000. We anticipate completion of these projects to occur in the late second or early third quarter of 2010. The Company is also evaluating certain other capital projects related to reducing the carbon intensity of its fuel in anticipation of trying to meet the requirements of the California low-carbon fuel standard. The Company is in the early stages of reviewing potential projects and does not currently have any accurate cost estimates. It is possible that such projects will be undertaken during 2010. We anticipate being able to fund our current on-going capital projects from our operating cash flows.

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.

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 March 31, 2010 the Company is in compliance with all of its loan covenants.

As of May 10, 2010, we had available capital (cash plus borrowing capacity) of approximately $10.5 million. Our available capital does not include $750,000 set aside as cash collateral related to two letters of credit issued in relation to our grain warehouse and distilled spirits bonds or approximately $204,000 that is part of our hedging account. Based on our most recent projections we anticipate that we will have enough available capital to operate our business through 2010 and we will maintain compliance with our loan covenants.

Our net worth covenant is particularly sensitive to our earnings. We estimate that we need to record earnings of greater than a net loss of approximately $700,000 for the period April 2010 to December 2010 in order to maintain compliance with this covenant at December 31, 2010.

Short-Term Debt Sources

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

Long-Term Debt Sources

Term Notes - Construction Loan

	Outstanding Balance (Millions)				Interest Rate						Range of Estimated	Estimated Final
Term Note	March 31, 2010		December 31, 2009		March 31, 2010			December 31, 2009			Quarterly Principal Payment Amounts	Payment (millions)		Notes
Fixed Rate Note	$	23.00	$	23.60		6.00	%		6.00	%	$560,000 - $630,000	$	18.30	1, 2, 4
Variable Rate Note		1.60		2.10		6.00	%		6.00	%	$1,600,000		1.60	1, 2, 3, 5
Long-Term Revolving Note		5.88		10.00		6.00	%		6.00	%	$550,000 - $610,000		1.20	1, 2, 6, 7, 8
2007 Fixed Rate Note		8.55		8.80		6.00	%		6.00	%	$200,000 - $235,000		6.80	1, 2, 5

Notes

1 - The scheduled maturity date is April 2012

2 - Range of estimated quarterly principal payments is based on principal balances and interest rates as of March 31, 2010

3 -

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

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

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

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

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

Contractual Obligations and Commercial Commitments

We have the following contractual obligations as of March 31, 2010:

Contractual Obligations	Total		Less than 1 Yr		1-3 Years		3-5 Years		More than 5 Yrs
Long-term debt obligations *+	$	50,538,373	$	15,730,044	$	34,795,679	$	12,650	$	―
Capital leases		41,352		30,731		6,708		3,913		―
Operating lease obligations		1,447,650		505,560		862,590		63,600		15,900
Corn Purchases **		3,345,000		3,345,000		―		―		―
Coal purchases		2,545,875		1,424,700		1,121,175		―		―
Contractual Obligation		176,000		176,000
Management Agreement		300,300		171,600		128,700		―		―
Water purchases		2,743,200		406,400		812,800		812,800		711,200
Total	$	61,137,750	$	21,790,035	$	37,727,652	$	892,963	$	727,100

* - Long-term debt obligations shown in this table are based on remaining balances as of March 31, 2010 and the scheduled payments and interest rates contained in the Term Notes, as amended. Information in this table also assumes permanent repayment of any amounts currently applied to our Long-Term Revolving Note. We used the rates fixed in the interest rate swap agreements (see “Interest Rate Swap Agreements” in Note 5 to our unaudited condensed financial statements in this Quarterly Report.) for the Fixed Rate Note and December 2007 Fixed Rate Note, respectively which should account for possible net cash settlements on the interest rate swaps.

+ - Long-term debt obligations Less than 1 year include the full outstanding balance of our subordinated debt which has a maturity date of March 2011. However, the subordination agreement requires the Bank to provide us written consent to make any principal payments to the subordinated debt holders and we have not received such consent.

** - Amounts determined assuming prices, including freight costs, at which corn had been contracted for cash corn contracts and current market prices as of March 31, 2010 for basis contracts that had not yet been fixed.

Grants

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

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 three months ended March 31, 2010 and 2009, respectively. We cannot predict whether we will receive funds from this program during the remainder of 2010. The incentive received is calculated by using the sum arrived at for the corn price average and for the ethanol price average as calculated below:

Corn Price

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

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

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

Ethanol Price

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

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

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

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

Critical Accounting Estimates

Our most critical accounting policies, which are those that require significant judgment, include policies related to the carrying amount of property, plant and equipment; valuation of derivatives, inventory and purchase commitments of inventory; and analysis of intangibles impairment. An in-depth description of these can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. 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 March 31, 2010.

Off-Balance Sheet Arrangements

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Risk

We are exposed to market risk from changes in interest rates. Exposure to interest rate risk results primarily from holding a revolving promissory note and construction term notes which bear variable interest rates. Approximately $13 million of our outstanding long-term debt is not covered under an interest rate swap and is at a variable rate as of March 31, 2010. We anticipate that a hypothetical 1% change in interest rates, from those in effect on March 31, 2010, would change our interest expense by approximately $130,000 on an annual basis. In order to achieve a fixed interest rate on the construction loan and reduce our risk to fluctuating interest rates, we entered into an interest rate swap contract that effectively fixed the interest rate at 8.08% on approximately $27.6 million of the outstanding principal of the construction loan. We entered into a second interest rate swap in December 2007 and effectively fixed the interest rate at 7.695% on an additional $10 million of our outstanding long-term debt. The interest rate swaps are not designated as either a cash flow or fair value hedge. Market value adjustments and net settlements are recorded in interest expense. We anticipate that a hypothetical 1% change in interest rates, from those in effect on March 31, 2010, would change the fair value of our interest rate swaps by approximately $560,000.

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.

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

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

As of March 31, 2010 we had approximately 926,000 bushels of corn under fixed price contracts. These contracts were priced slightly above current market prices so we accrued a loss on firm purchase commitments of $102,000 related to these contracts. We would expect a sustained $0.10 change in the price of corn to have an approximate $93,000 impact on our net income.

It is the current position of RPMG (our ethanol marketing company) that, under current market conditions, selling ethanol in the spot market will yield the best price for our ethanol. RPMG will, from time to time, contract a portion of the gallons they market with fixed price contracts. We had no fixed price contracts for the sale of physical ethanol outstanding at March 31, 2010 or March 31, 2009.

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 4T. 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 March 31, 2010, have concluded that our disclosure controls and procedures are effective in ensuring that material information required to be disclosed is included in the reports that we file with the SEC.

Changes in Internal Controls

There have been no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the fiscal quarter ended March 31, 2010, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Inherent Limitations on the Effectiveness of Controls

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

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

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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, 2009. “Risk Factors” are conditions that may cause investment in our Company to be speculative or risky. In light of developments during the first quarter of fiscal 2010, we have decided to update our Risk Factors as set forth below. Other than these updates, we are not currently aware of factors other than those set forth in our Annual Report on Form 10-K that would have a foreseeable effect on the level of risk associated with investment in our Company; however, additional risks and uncertainties not currently known to us or that we currently deem to be immaterial might materially adversely affect our actual business, financial condition and/or operating results.

We have withheld $3.9 million from our design-builder, Fagen, related to the coal combustor. We have withheld $3.9 million from our design-builder, Fagen, due to punch list items which are not complete as of May 13, 2010 and problems with the coal combustor. The punch list are items that must be complete under the terms of the Lump Sum Design-Build Agreement between Fagen and us dated August 29, 2005 (the “Design-Build Contract”) in order for us 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 Contract specified that the coal combustor would operate on lignite coal and meet the emissions requirements in our air quality permits; however, numerous plant shutdowns during start up in early 2007 related to using lignite coal forced the Company to switch to PRB coal. While running on lignite coal and subsequently, while running on cleaner burning PRB coal, we have not been able to maintain compliance with our air quality permits. There is no assurance that any potentially agreed upon solution would solve the problems or solve the problems for $3.9 million or less. Any potential fixes could cost significantly more than $3.9 million. 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, we 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.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

See Exhibit Index following the signature page of this report.

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, LLC

Date: May 13, 2010	By:	/s/ Calvin Diehl
		Calvin Diehl
		Chief Executive Officer

Date: May 13, 2010	By:	/s/ Mark E. Klimpel

		Mark E. Klimpel
		Chief Financial Officer

EXHIBIT INDEX

RED TRAIL ENERGY, LLC

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2010

31.1*		Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934).

31.2*		Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934).

32.1*		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith.

+ Confidential treatment requested for portions of this exhibit.

RED TRAIL ENERGY, LLC - FORM 10-Q - May 13, 2010

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RED TRAIL ENERGY, LLC Reports